Polish economy is preparing for integration with the European structures. This fact will naturally entail efforts to join the euro zone as soon as possible.

In order to participate in the third stage of the economic and currency integration, a country must meet the convergence criteria. At the same time, participating in a common monetary policy requires that standards elaborated by the European System of Central Banks be met.

When joining the Eurosystem, national central banks renounce part of their competences in favour of a central body, the European Central Bank. The decision-making process is thus centralized, while the executive functions remain with the national banks.

As a potential member of this structure, the National Bank of Poland is responsible for harmonizing its operational framework with the models in place in the euro zone. Familiarity with the rules governing the operation of Eurosystem will allow Polish authorities to stake out the best harmonization path.

The "toolkit" which the ECB has at its disposal enables it to react flexibly to all liquidity-related situations in the market - both a under - and overliquidity.

An important instrument of monetary policy is represented by the required reserve system. It contributes to a shortage of liquidity, which strengthens the position of the central bank in its lender-of-last-resort capacity. At the same time, it has a stabilizing effect on interest rate swings. In the euro zone the required reserve stands at 2% and is averaged; interest accrues to deposits according to the refinancing operations rate. In this manner, the instrument does not constitute a quasi-tax for the banks.

The situation of a structural liquidity shortage is accepted as normal in the euro zone. In these conditions, the ECB typically resorts to two types of refinancing operations as elements of its "operational system": the basic refinancing operations, conducted weekly with a two-week maturity and long-term refinancing operations every three months. All financial institutions liable for the required reserve obligation qualify for the operation through a standard tender.

However, the Eurosystem is also equipped with a set of instruments designed to respond to short-term or structural changes in liquidity caused by unexpected factors. To this category belong the fine-tuning operations and structural operations. With respect to these, the ECB reserves the right to restrict participation to selected financial institutions and apply bilateral agreements.

An important instrument of the ECB monetary policy are the standing facilities operations. These consist in offering banks a possibility to place a deposit - or use the marginal lending facility - at the close of the day. This instrument is designed to absorb surplus liquidity or provide liquidity at the end of a banking day, thus creating the band of one-day interest rate fluctuations (EONIA).

The Polish central bank currently operates under conditions totally different from those prevailing in the euro zone, which largely dictates a different instrument range.

Structural overliquidity has been the norm in Poland, which is why the basic NBP toolkit includes the required reserve and liquidity-absorbing bond issues.

Current efforts understandably focus on reducing the sources of liquidity and absorbing some of the excessive liquidity. If they succeed, the central bank will regain its full lender-of-last-resort status and acquire more leverage in liquidity control by applying instruments providing the banking sector with liquidity. This would also create an environment more conducive to the development of technical capabilities and procedures for the operations stipulated by the ECB.

Since 1999, the NBP has taken many steps aimed at limiting the chief source of liquidity creation, i.e. the rise in gross official reserves. This was achieved through a gradual adjustment of the exchange rate policy. The specific steps included: a widening of the zloty exchange rate band; abolition of the fixing mechanism, no future direct interventions in the currency market and finally the flotation of the zloty. Another step towards curbing liquidity was the conversion of non-tradable Treasury liabilities towards the NBP into tradable securities, which in turn will be sold to the banking sector within open market operations.

When the conditions for the monetary policy change as planned, and overliquidity gives way to a liquidity shortage, the structure of the instruments utilised by the central bank will finally be free to change. In consequence, open market operations - providing banks with liquidity - will become a permanent element of NBP activity in the money market. Moreover, the required reserve could be further reduced. The change in the required period during which funds have to be lodged in an NBP account is only a technical one. However, the issue of interest accruing to these funds would require amendments to the Act on the NBP.

As part of the harmonizing process, it would be advisable to introduce standing facilities into the Polish monetary policy toolkit. As of April, the maturity of debt classified as "lombard loan" has been shortened to 1 day (O/N) A possibility for banks to lodge deposits in the central bank at the end of the day is also being considered. This instrument may have a stabilizing effect upon interest rate swings by setting a floor to them.

Such a set of instruments will provide the necessary means for short-term interest rate control in the market. This will happen through the determination of the band of interest rate fluctuations. Thus our operational system will move considerably closer to the euro zone models.