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Poland - Monetary Policy

The basic objective of the monetary policy is to ensure price stability (i.e., low and stable price inflation), which provides a foundation for economic growth over the long term. In order to achieve this, taking into consideration the increased integration of the Polish economy with the global economy and given the need to anchor inflation expectations at a low level, the MPC's strategy is based on direct inflation targeting, or DIT. In connection with this strategy, the MPC focuses on factors that could jeopardize low inflation and responds to them by adjusting monetary policy accordingly. The NBP influences price growth indirectly, by controlling short-term interest rates and by influencing expectations of the future level of short-term rates, which exert an impact on inflation through the monetary transmission mechanism.

The permanent inflation target, set forth in the Monetary Policy Strategy adopted by the MPC in February 2003, is 2.5 percent with a symmetrical tolerance range for deviations of +/-1 percentage point. The target is defined in terms of annual CPI inflation. Every year the MPC also publishes the Monetary Policy Guidelines, providing an outline for the monetary policy in a shorter, one year perspective. In the most recent publication, released in September 2008, the MPC confirms that direct inflation targeting is an effective method of ensuring price stability. During most of 2007, inflation hovered around the target of 2.5 percent before increasing markedly towards the end of the year, following a substantial increase in food and energy prices in the world markets. Currently inflation still exceeds the target; in December 2008 the annual growth of CPI was 3.3 percent. In MPC statements released in 2008, the MPC underlined that in the short term inflation in Poland will probably remain elevated, but in the medium term, the NBP will aim to keep inflation in a target range of between 2.5 and 3.5 percent.

The MPC pursues the DIT strategy under a floating exchange rate regime, which should be maintained until Poland's accession to the European Exchange Rate Mechanism, or ERM II. Participation in ERM II for a period of two years is a condition of Poland's adoption of the euro.

In 2008, the Government approved the Road Map for Euro Adoption in Poland, or the Road Map, which targeted 2012 for compliance with the Maastricht Criteria and adoption of the euro. In order to complete this goal, the Road Map envisioned entry into ERM II in the second quarter of 2009. However, the recent financial turbulence and sharp deterioration in global economic activity have destabilized the zloty exchange rate and negatively affected the prospects of economic growth in Poland. As entry by a country into ERM II should be preceded by a short period where exchange rate volatility does not significantly exceed the level observed for other entrants into ERM II, current volatility in the zloty exchange rate could postpone entry into ERM II beyond the second quarter of 2009.

In December 2008, the annual rate of growth of broad money supply was 18.6 percent in nominal terms, or 14.8 percent in real terms. Starting from the beginning of the second quarter of 2007 reporting period, the methodology of compiling certain money supply aggregates has been changed. The changes included, amongst others, a modification of the definitions of broad and narrow money aggregates, M3 and Ml, respectively. For the purposes of comparability historical data have been adjusted accordingly. The following table sets out data on monetary aggregates for the periods indicated.

Control over interest rates is the NBP's principal instrument of monetary policy in connection with its strategy to reach predetermined inflation targets. The NBP influences the level of nominal short-term money market rates by determining the yield of open market operations, standing facilities and required reserves.

The NBP's reference rate reflects the general direction of monetary policy. It determines the yield obtainable on main open market operations, which are executed on a regular weekly basis in the form of issues of NBP bills with a 7-day maturity. As a consequence of liquidity surplus in the banking sector, open market operations are used to absorb excess liquidity from the market. Starting from 2008, the basic operations are conducted on a scale enabling the stabilization of the Polish Overnight Index Average, or POLONIA, around the NBP reference rate. The transition from influencing the level of the Warsaw Interbank Offered Rate Spot Week to the POLONIA rate results from the trends in the term structure of the money market and enables the NBP to more effectively affect the economy through the monetary policy transmission mechanism.

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Page last modified: 11-07-2011 03:04:20 ZULU