Annual Report 2008 Warsaw, 2009 S∏awomir Stanis∏aw Skrzypek President of the National Bank of Poland 2008 This Report summarises the National Bank of Poland’s activity during the second year of my term of office as NBP President. I trust that it will answer most of your questions concerning the operations of the NBP in 2008. Elevated inflation – peaking at 4.8% in July and August 2008 – was the principal challenge facing the National Bank of Poland before the rapid deterioration brought about by the international financial crisis of September 2008. Nevertheless, this rise in inflation was chiefly stimulated by factors that were independent of domestic monetary policy, particularly the high prices of food and oil on global markets. Heightened inflation, predominantly driven by global price shocks, was observed in almost every country in the world in 2008. Against this background, Poland recorded a 1.7 percentage point deviation from the direct inflation target – the lowest in that group of countries whose central banks pursue the same strategy of direct inflation targeting as the NBP. Significant hikes in administered prices exerted upward pressure on inflation in Poland in 2008. This growth was particularly evident in energy prices – specifically gas and electricity and gas – and services related to flat maintenance. The Monetary Policy Council pursued a restrictive monetary policy in this context of elevated current and expected inflation. The MPC raised the interest rates on four occasions prior to June 2008 by a total of 1 percentage point. The unexpected sharp deterioration of the economic climate in the wake of the global financial crisis observed since Q4 2008 required an easing of monetary policy. The Council lowered interest rates by 0.25 percentage points in October and a further 0.75 percentage points in December. In view of financial market turmoil, which rapidly spread to Poland, the National Bank of Poland decided to employ additional instruments to inject liquidity into the banking system. These were designed to stabilise the situation and restore confidence in the banking system. Tension in the interbank market began to gradually subside following the launch of the Confidence Pact in October 2008. At the turn of 2008/2009, the NBP adopted a comprehensive report on the implications of introducing the euro in Poland. The analyses that were conducted indicate that joining the euro area should deliver long-term benefits whose size and scope will depend on being able to continually meet the Maastricht criteria. In this respect, it is essential that structural reforms be implemented, including public finance and labour market reform. The Report further indicated that entering the ERM II mechanism, which would pave the way for the introduction of the euro, should be postponed until the current financial market turmoil abates, due to the risk of a blowout in integration costs. In 2008, the NBP also developed the Strategy for the Management of the National Bank of Poland in the Years 2009–2012, which sets out the long-term objectives of the Bank. Adopting this strategy is a major step for the NBP towards complying with the standards in force at the world’s best managed central banks. The yield on the investments of the official reserves kept by the NBP in 2008 was the highest it has been over recent years. The rate of return was 8.5% in the currency of the instruments. This sound performance reflects the efficiency of the NBP’s long-term strategy of managing the official reserves. NBP financial result developed at zero value in 2008. The NBP’s profit and loss position is encumbered with the expense of having to provide for the risk of zloty exchange rate fluctuations. The aim of this provision is to moderate the prospective negative impact of losses incurred due to zloty exchange rate fluctuations on NBP earnings. The strong exchange rate volatility that has been observed recently is a source of considerable foreign exchange risk for the NBP. To recapitulate, Poland has been able to prevent the destabilisation of its financial system thanks to the anti-crisis measures implemented by the National Bank of Poland. These measures contained the risk of pushing the Polish economy into recession and contributed to Poland achieving the highest GDP growth in the EU during the first six months of 2009. The NBP will continue its endeavours to minimise the adverse impact of the international financial and economic crisis on the Polish economy. S∏awomir Stanis∏aw Skrzypek President of the National Bank of Poland 2008 Contents CONTENTS MONETARY POLICY COUNCIL .........................................................................10 MANAGEMENT BOARD OF THE NATIONAL BANK OF POLAND ..................11 ORGANIZATION CHART OF THE NATIONAL BANK OF POLAND ..................12 SUMMARY ........................................................................................................15 1. GOVERNING BODIES OF THE NBP ...............................................................21 1.1. President of the National Bank of Poland ........................................................................22 1.2. Monetary Policy Council .....................................................................................................22 1.3. Management Board of the National Bank of Poland ......................................................24 1.4. Implementation of the NBP Plan of Activity for the Years 2007–2009 ................................26 2. MONETARY POLICY .....................................................................................27 2.1. Monetary policy strategy in 2008 ......................................................................................28 2.2 Monetary policy in 2008 .....................................................................................................30 2.3. Monetary policy instruments in 2008 ................................................................................39 2.3.1. Liquidity surplus in banking sector .......................................................................................40 2.3.2. Monetary policy tools ..........................................................................................................40 2.3.2.1. Interest rate .....................................................................................................................40 2.3.2.2. Open market operations ..................................................................................................42 2.3.2.3. Reserve requirements .......................................................................................................44 2.3.2.4. Standing facilities .............................................................................................................45 2.3.2.5. Foreign exchange swaps ..................................................................................................46 2.3.2.6. Other operations ..............................................................................................................47 3. ACTIVITIES FOR THE FINANCIAL SYSTEM STABILITY .................................49 3.1. Extension of the NBP’s statutory tasks ..............................................................................50 3.2. Participation in the work of the Financial Stability Committee ......................................50 3.3. Analyses and research for the needs of the financial system ..........................................51 3.4. Activities aimed at preventing disturbances in the interbank market ...........................52 3.5. Cooperation with domestic institutions ............................................................................53 3.6. International cooperation for financial stability ..............................................................53 3.7 The participation of the National Bank of Poland in bank restructuring ......................54 4. THE ISSUE OF CURRENCY ............................................................................55 4.1. Notes and coins in circulation ............................................................................................56 4.2. Issue of collector coins ........................................................................................................56 4.3. Withdrawal of unfit notes and coins ................................................................................57 4.4. Counterfeit Polish currency ................................................................................................57 4.5. Supply of notes and coins to banks ...................................................................................58 4.6. Exchange of currency which ceased to be legal tender ..................................................58 4.7. Work of the Commission for the Strategy of Introducing Euro Notes and Coin .................................................................................58 4 National Bank of Poland Contents 2008 5. MANAGEMENT OF THE OFFICIAL RESERVES .............................................61 5.1. General principles for managing the official reserves .....................................................62 5.2. Financial risk management in the official reserve management process ..........................................................................................................62 5.3. Level of the official reserve assets .....................................................................................64 5.4. Foreign exchange