Poland: Half a Decade of Soaring Inflation. Part 1 of 2.
- Mikołaj Miernik
- Sep 13
- 6 min read
The Polish economy is a tangible example of the economic miracle of the 21st century. Yet it has been struggling with inflation that has remained above the National Bank of Poland’s (NBP) 3.5% upper bound of its target for most of half a decade. Throughout this time, the problem has been frequently raised by different political parties as an indicator of the irresponsible policy conducted by both the government and the NBP. In recent times, it has been associated with a series of parliamentary, European, or presidential elections. Is there indeed someone to blame, or is the observed high inflation motivated solely by supply-side factors arising outside the control of the fiscal and monetary authorities?
The First Glance
By looking solely at the time series of the Harmonized Index of Consumer Prices (HICP) inflation rates and at the dynamics of the National Bank of Poland and European Central Bank interest rates, one can reach a certain conclusion. The NBP reactions were quicker and sharper than those of the ECB. This alone suggests the rather good conduct of contractionary monetary policy by the Monetary Policy Council (RPP), the decision-making body of the NBP, led by the Chairman of the NBP, Adam Glapiński, right?
HICP Annual Inflation Rates in Poland and the Eurozone (01/2015-08/2025)
In reality, however, it is extremely difficult to compare the effectiveness of monetary policy between the NBP and the ECB. One reason is that demand factors, like the general government deficit of independent governments, may differently affect inflation rates across EU countries. Another is the supply factors, such as exposure to volatile prices of energy, food and beverages, which also may vary in different economies. Considering the above, this article is not intended to compare NBP and ECB policies. The objective is to focus exclusively on the less pronounced shortcomings in NBP operations instead. These shortcomings are therefore (mostly) outside the sphere of interest rate regulation.
Structured Open Market Operations
With the beginning of the COVID-19 pandemic, the NBP indirectly financed government expenditures. These expenditures included so-called “anti-crisis shields” aimed at supporting businesses and households in unfavourable economic positions, as well as certain expenditures reportedly not accounted for in the general government budget. In March 2020, the NBP started purchasing securities guaranteed by the government to finance the aforementioned programmes outside the general government budget. Allegedly, the NBP purchased both bonds issued by the National Development Bank and Polish Development Fund directly, as well as those issued by the Ministry of Finance indirectly — through the banking system, primarily from the banks with considerable state ownership. This process continued despite the inflation rate surpassing the upper bound of the inflation target in April 2021. As a result, until November 2021, the NBP conducted a total of 29 so-called structural open market operations, with a total value of at least PLN 144 billion, which accounted for approximately 5.5% of Poland’s GDP at the time. Considering the process of monetary policy transmission and the fact that these operations continued even six months after the upper limit of the inflation target was exceeded, one can see this as a deviation from the primary objective of the NBP. That objective is to maintain a stable price level, defined as an annual Consumer Price Index (CPI) inflation of 2.5% with a possible deviation of 1 percentage point. It is not to support the economic policy of the government if such action undermines the primary objective.
Forex Interventions
Beyond open market operations, the NBP also intervened in currency markets. More specifically, in December 2020, the NBP conducted a currency intervention to depreciate the Polish złoty. The official objective of the intervention, as communicated by Adam Glapiński, was to stimulate a rebound in Polish GDP growth and maintain export dynamics. However, apart from the lack of transparency, outlined by the International Monetary Fund, this intervention was likely contrary to the objectives of the monetary policy. It was undertaken during a period marked by rising inflation risks as the pandemic worsened unexpectedly. Since the depreciation of the home currency implies increased prices of imported goods, at least in the short term, it can both directly and indirectly negatively impact the domestic price level. However, in this aspect, it is worth noting the general optimistic spirit regarding the development of the COVID-19 pandemic. The prospects for the appreciation of the Polish currency in December 2020 were not only forecasted by the NBP but also appeared in other reports, such as Credit Agricole’s macro map. In view of the above, this action may indeed have been justified.
Pre-Election Interest Rate Regulation: Political Business Cycle?
During the period of high inflation, the RPP held two votes, on the 4th of October 2023 and on the 6th of September 2023, where it was decided to lower the NBP’s interest rates by a total of 100 percentage points. Given annual CPI inflation, which in August and September 2023 stood at 10.1% and 8.2% respectively, despite its favourable dynamics, the public questioned whether the above decisions were taken with the intention of meeting the NBP's primary objective. This argument is supported by the prospect of parliamentary elections held on the 15th of October 2023, combined with the clearly politicised behaviour of the Chairmen of the NBP through the parliamentary campaign. Each time, the Chairman of the NBP voted on the motion to reduce interest rates, unlike three of the nine RPP members elected by the Upper House of Parliament. Those three members were elected by the votes of the senators of the opposition to the Law and Justice party, which, at the time, formed a government, and from which then President Andrzej Duda originated. In addition, one of these three members had already criticised, a year earlier, what she considered to be restrictions on, among other things, the possibility of consulting with NBP experts on monetary policy issues.
Politicisation of the National Bank of Poland
According to the Polish Constitution, the NBP is an apolitical institution, a consequence of which is the commonly interpreted order of apolitical behaviour by the three main NBP bodies — the Management Board, the Monetary Policy Council, and the Chairman of the NBP. However, the broad conduct of the Chairman of the NBP puts into question the apolitical nature of the NBP at the time. Some examples of the unilateral involvement of the Chair of the NBP in political disputes include the apparent subordination of economic decisions to the political business cycle, repeated comical statements concerning both inflation prospects and planned monetary policy, and implementation of inappropriate personnel policies in the NBP. Moreover, throughout his term, the Chairman of the NBP commented on numerous topics that fall beyond the NBP's remit, including but not limited to foreign affairs or national defence. Needless to say, the politicised image of the NBP is further linked with the anticipated lower reliability of the information on plans for changes in monetary policy, which delays the process of adjustment even before it occurs, hence reducing the effectiveness of the NBP’s forward guidance.
As the new government took over in December 2023, there was hope for more anti-inflation – as well as more responsible – conduct of fiscal policy, which would help to bring down inflation to its target level. However, those hopes eventually perished. In 2024, Donald Tusk’s government adopted the draft budget act for 2025, which sets a budget deficit of PLN 289 billion, i.e. over 45% of the planned revenues. In 2025, the same government adopted the draft budget act for 2026, which sets a budget deficit of PLN 271 billion, i.e. over 40% of the planned revenues. According to commentators and media, both budgets are far from pursuing anti-inflationary, fiscal policy. On the other hand, the National Bank of Poland (NBP) continues to maintain relatively high interest rates, with the reference rate at 5.00%. For comparison, prior to the pandemic, the reference rate remained at 1.50% for the five years prior. Despite borrowers' concerns, at least since the change of government, the NBP has remained steadfast in its pursuit of inflation stabilisation. Despite this, after the change of government, CPI inflation continued to exceed the upper bound of the inflation target until July 2025, with the exception of the period from February to June 2024. Additionally, the most recent presidential election was won by Karol Nawrocki, a candidate backed by the current opposition Law and Justice party, who, in the future, will appoint members of the RPP and participate in the legislative process. All of this casts doubt on the effectiveness of coordinating fiscal and monetary policy in Poland in the near future and raises the question: Is Poland capable of permanently "curing" high inflation after all?