Polish central banker hails zloty interventions in Covid era

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Interventions to weaken the zloty have helped Poland recover from the coronavirus crisis and such tools should be used by policymakers in emerging markets, central bank governor Adam Glapinski said.

Glapinski said that a mix of unconventional policies, such as quantitative easing, and conventional tools, including foreign exchange interventions, has proven effective for relatively small and open economies like that of Poland during the global pandemic.

With With Poland’s key interest rate at an all-time high of 0.1% since shortly after the onset of the coronavirus, the central bank intervened to weaken the zloty in December – the first of its kind in a decade. Since then, Glapinski has said he is not targeting any specific exchange level.

“We must focus on continuing the recovery – using all possible means,” he said. wrote at the Forum of Official Monetary and Financial Institutions, a think tank on central banks. “If it requires currency intervention to maintain an otherwise unacceptable appreciation of the currency, then that is a legitimate line of defense.”

Glapinski said the purchases of government securities by the National Bank of Poland, which began a year ago, inflated its balance sheet by 50% and amounted to 6% of gross domestic product. Yet they pale in comparison to The European Central Bank’s QE accounts for around a third of the euro area’s GDP.

This means that any potential monetary reaction resulting from Polish easing is overshadowed by the impact of the neighboring ECB, forcing the local central bank to step in and weaken the zloty, according to Glapinski.

“Exorbitant privilege”

“QE weakens the exchange rate of the biggest executing country,” he wrote. “By enjoying a global or regional ‘exorbitant privilege’, major monetary authorities can shift the burden of adjustment onto others.”

Glapinski reiterated that for now inflation “appears to be under control”, in part thanks to a “much more competitive” global economy than in the 1970s, when prices soared.

“The best way forward for Poland and other emerging market economies is to use a mix of conventional and unconventional monetary policies,” he wrote. “This is a key lesson from the crisis that will serve us well in the years to come.”

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