Recently, the topic of increasing interest rates in Poland has been one of the most frequently discussed topics, right next to inflation and rising product prices. So what are interest rates, what do they depend on and how do they affect citizens? You will find out all this after reading the article below.
What is the interest rate and what does it affect?
The interest rate determines two things – firstly, how much we will have to pay for the loan. Secondly, how much can we gain from our savings?
In fact, the level of interest rates affects the entire economy. Not only on the interest rates on mortgage loans, cash loans and credit cards. Although these are the issues that many people think about first.
It determines the value of the zloty and clearly affects inflation. It thus determines how many products we can buy for a specific amount. It makes it easier to keep inflation at a constant level, thanks to which it has a real impact on the stability of the zloty.
Interest rates also coordinate all transactions that take place between banks, and additionally those that take place between the client and the bank. Interest on debts also depends on them.
What are the types of interest rates?
The basic NBP interest rates include:
- reference rate – determines the minimum purchase and sale price of (short-term) securities. As a result, liquidity is restored in the banking sector. In addition, it affects the WIBOR rate, determining the upper limit of loan interest rates. For this reason, it is very important for borrowers,
- Lombard loan rate (or Lombard rate) – interest rate applicable when the central bank grants loans to commercial banks. They are granted on the collateral of securities. It is used to determine the maximum interest rate on loans and credits. The lombard rate is the highest interest rate on the banking market,
- deposit rate – the interest rate on deposits placed by commercial banks at the National Bank of Poland. It affects the profitability of deposits in commercial banks – the higher the rate, the more profitable the deposit. This is the lowest interest rate available on the market,
- bill of exchange rediscount rate (or bill of exchange rediscount rate) – determines the price at which the central bank purchases bills of exchange from commercial banks. They, in turn, obtain them earlier from their clients. The rediscount rate is not often used, but it determines the interest on student loans. It takes the longest time of all indicators,
- bill of exchange discount rate (or bill of exchange discount) – is sometimes determined at the time of acceptance of discounted bills of exchange from commercial banks. It has little significance for monetary policy because bills of exchange are rarely used in Poland.
At this point it is worth clarifying what a bill of exchange is. This is one form of securities. The principle of their operation is that one party is obliged to repay a specific amount of the bill of exchange to the other party. He must do this unconditionally and within the agreed deadline.
Unconditionally means here that the bill of exchange document is not defined by any contract or other legal transactions. A properly prepared document must be signed by hand by the interested parties.
Who regulates interest rates?
The value of interest rates is determined by the Monetary Policy Council.
So what is this advice? This is the decision-making body of the National Bank of Poland, which ensures the proper implementation of monetary policy in the country.
It consists of the Chairman of the Council (who is the President of the NBP) and 9 members. Their term of office is 6 years.
Members are appointed equally by three bodies: the President of the Republic of Poland, the Sejm and the Senate. Equally, i.e. each body appoints the same number of people.
What does the MPC do?
Its main tasks include:
- determining the level of NBP interest rates,
- setting annual monetary policy assumptions,
- approving the financial plan of the National Bank of Poland,
- preparing a report on the implementation of monetary policy assumptions (after the end of a given financial year),
- determining the maximum amounts of liabilities that result from, among others, from loans taken out by the National Bank of Poland.
What influences the decision to change interest rates?
This is most influenced by the level of inflation. In addition, the following factors also play an important role:
- economic growth rate,
- unemployment rate,
- the amount of exchange rates,
- retail sales,
- industrial production.
When might interest rates be raised?
The decision to increase interest rates may be made in several specific situations. This may be, for example, an increase in the level of inflation. Why?
High inflation also causes product prices to increase. As a result, we can buy fewer and fewer goods for a given amount of money. Money that is in circulation has less and less value.
In order to somehow stop the constant increase in prices, the Monetary Policy Council may raise interest rates. As they increase, the price of money also increases. This allows the central bank to lend money to commercial banks. In addition, it will benefit because it can grant loans at a higher price than before. Commercial banks, in turn, may start granting loans with higher interest rates.
The described activities are the so-called restrictive monetary policy. What is it about? In short, apart from an increase in the interest rate, it is based on making transactions using securities on the open market. Additionally, it also benefits from changes in the level of required reserves.
The advantages of restrictive monetary policy include a decline in the GDP growth rate and a subsequent gradual decline in the level of inflation.
However, the effects of such monetary policy are mostly negative and additionally affect many areas of the economy. The level of consumption is decreasing and the issue of investment is similar. This leads to loans becoming too high, which is why few people decide to take them. People are buying less and less because all products are becoming more expensive. This also affects entrepreneurs who are forced to reduce costs and often even lay off employees.
What are open market transactions?
So let’s explain what open market operations mean. The point is that individual transactions take place with commercial banks at the request of the central bank. They include the purchase of securities and the sale (conditional and unconditional) of these financial instruments. This also applies to the issue of the central bank’s own debt securities.
With their help, central banks (i.e. in this case the National Bank of Poland) aim to influence the level of short-term interest rates on the interbank market. To achieve this, they increase or reduce the amount of funds that are on the accounts of individual banks at the central bank.
In the case of the National Bank of Poland, these are most often issues of 7-day money bills, the purpose of which is to absorb excess liquidity occurring in the banking sector. This means that there is more money in circulation than necessary.
When is it possible to lower interest rates?
The possibility of reducing interest rates arises especially when we are dealing with deflation. In the case of deflation, we are talking about a long-term decline in the price level. Moreover, persistent deflation can be as harmful as inflation. From the consumer’s point of view, these are very favorable circumstances, but for the economy it is quite the opposite. Why is this happening?
When the value of money decreases and at the same time the country’s debt increases, the Monetary Policy Council decides to lower interest rates. This is in line with the principles of expansionary policy, which is sometimes called the cheap money policy. In such a situation, low interest rates lead to an increase in the money supply. Credit costs are decreasing, and at the same time consumption and the amount of investments are increasing.
PNN, i.e. Net National Product or simply national income, is growing. Entrepreneurs can invest in businesses again, e.g. by creating new jobs.
Interest rates – influence on the amount of loan installments
As we mentioned earlier, interest rates influence the WIBOR rate. This, in turn, has a significant impact on the interest rates on mortgage loans, cash loans and bank loans.
Not everyone realizes why some financial products (those with variable interest rates) have different installment amounts.
This is due to the changes introduced by the Monetary Policy Council, which result in an increase or decrease in interest rates.
It is quite a simple relationship – when interest rates are raised, the loan interest rate also increases. This means that the monthly loan installments will also be higher than before.
There are also loans with fixed interest rates, but there are not many of them. In this case, interest rate fluctuations do not affect the loan interest rate – it remains unchanged throughout the duration of the contract.
Summary
It can be noted that from the perspective of most people (especially borrowers), the reference rate is the most important of all the mentioned interest rates. Most often, this is due to the fact that it has a direct impact on the interest rate on the loan that may be granted to us by the bank.
Raising and lowering interest rates has certain consequences. Their increase often makes it easier to take control of inflation, especially if it becomes dangerously high.
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