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MNI INTERVIEW: Polish National Bank Wary Of Enduring Inflation

The National Bank of Poland is watching high inflation but sees little macro impact from a potential loss of EU funds.

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The potential loss of billions of euros in aid money due to Poland's dispute with the European Union would have little effect on the country's macroeconomic outlook, the First Deputy Governor of the National Bank of Poland told MNI, noting that NBP was wary of enduring inflation as it withdrew monetary stimulus.

At present, the NBP still expects Recovery and Resilience Facility funds to be spent, though not as quickly as assumed in July's macroeconomic projection, Marta Kightley said in emailed responses to questions. Poland is eligible to receive almost EUR 24 billion in RRF grants, as well as EUR34 billion in loans which can help finance government deficits.

"RRF funds may be expected to provide some boost to GDP growth in the upcoming years, but they would not change the macroeconomic outlook dramatically," Kightley said.

The first deputy governor also minimised the impact on monetary policy of potential falls in the value of Polish banks' sovereign bond portfolios as rates rise.

Polish 10-year yields have reached their highest level since May 2019, but Kightley noted that higher rates would boost net interest margins, while 40% of banks' bond holdings are valued at amortised cost and another significant share are variable rate.

"Polish banks generally exhibit strong capital surpluses that would allow them to cover a significant range of possible losses on bond valuation," she said, "Consequently, I would say that monetary policy is not constrained by this factor, and more generally that monetary policy should be primarily geared towards meeting its objectives, that is medium-term price stability and balanced economic growth."

FX LOANS

A recent NBP study showed that a 15% decline in the value of government bonds could lead to breaches in capital buffers in some institutions, but Kightley said that such a price move would be extreme.

A greater threat to the Polish banking sector comes from legal disputes over home loans issued in foreign currencies - often Swiss francs, after thousands of Poles were left unable to keep up mortgage payments after the 2008 financial crisis, and in the wake of the Swiss National Bank's 2015 decision to abandon its euro peg. While massive losses for exposed banks are possible, Kightley said, the sector as a whole has large capital buffers.

The NBP raised its reference rate from 0.1% to 0.5% earlier this month in response to September's annual inflation rate of 5.8%.

Poland has been caught in the same inflationary spike as much of the globe, and has been additionally affected by hikes in electricity prices due to EU-related climate policies and waste disposal charges, Kightley said.

"The impact of current shocks on prices might prove more durable than previously expected," she said.

As part of its monetary toolkit, the NBP retains its option of intervening in foreign exchange markets, as it last did in December in response to appreciation of the zloty, she said. Asked whether sustained zloty weakness might weigh on Polish risk assets, Kightley said the NBP has no role in counteracting volatility in market price adjustments but that correlations between the exchange rate and Polish stocks since the outbreak of Covid-19 pandemic have been low.