Adam Glapiński: Don't be Alarmed by the End of QE

2017-05-27 IMI

This article appears in OMFIF's fourth annual Global Public Investor. Adam Glapiński is Governor of the National Bank of Poland. With the US Federal Reserve's tightening process under way and the European Central Bank probably preparing to follow suit, I am looking forward to an exit from unconventional monetary policies. Poland, and the złoty, have nothing to fear. The purchase of assets seem to have delivered, to some extent, the desired results: credit growth is getting stronger and the threat of deflation has receded. The ECB surpassed everyone's expectations in the help it offered to the euro area economy. That is why it seems wise to reverse the policy, not only because it has reached its limits, but because continuing the purchase of assets may test the patience of Germany. Poland may not always agree with Germany but remaining deaf to its objections would be unwise, and could lead to the largest euro area member becoming isolated within Europe. Another reason to be optimistic about a return to more normal policies is that no one needs to be haunted by the 2013 'taper tantrum' – the bond market sell-off after the Fed suggested that it might reduce asset purchases. The mistakes in central bank communication with financial markets have been amended. As a result, the Fed's last two interest rate rises caused hardly any upheaval. The taper tantrum was preceded by a buying spree of emerging market assets in the wake of the quantitative easing. High interest rates in some emerging market countries engineered such inflows that their volume confused both the investors and domestic issuers. As the taper kicked in, unrealistic valuations started to be perceived as unsustainable. Little wonder that for those market participants the taper ended in a tantrum. The złoty, along with other non-euro currencies in central and eastern Europe, has hardly benefited from the ECB purchase of assets. The disparity in interest rates in the EU is far smaller than that between the US and selected EM economies prior to the taper tantrum. Right now, the złoty is at competitive levels, even more so than in 2013. Indeed, almost every gauge of real value points to its undervaluation. For these reasons, the złoty will prove resilient to any tapering. Both the negative interest rate policy and QE are nightmares for asset managers, including those working for central banks. Little wonder that many central banks – under pressure from their governments to generate higher profits – start to flirt more with equities. I admire their boldness but it's not a policy I consider appropriate for the National Bank of Poland. It's a consolation that Germany is resisting that path, too. In the relentless pursuit of higher growth, we underestimate the damage to the financial system caused by the negative interest rate policy. I do not see public opinion backing more help for the banking system if it gets into trouble again. So it makes sense to stop providing banks with incentives that may result in another crisis. Unconventional monetary policies have been around for too long. I do not want to deny their positive effects but we are talking about policies that distort the basic mechanism of resource allocation with all the negative consequences. They not only discourage values such as thrift but they stimulate moral hazard. That is why ending them may be far more beneficial than expected. If 2017 is to be marked by further exit from unconventional monetary policies, it should not be a reason to lose sleep. Even those who have benefited from unconventional monetary policy should be able to find something positive in the months ahead.

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Adam Glapiński: Don't be Alarmed by the End of QE

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