Poland’s central bank is caught in a political tussle that risks unnerving investors. e front, tensions between Prime Minister Donald Tusk and National Bank of Poland Governor Adam Glapinski are coming to a head. Glapinski, who is an ally of the former ruling nationalists, could be suspended if parliament decides in November that he should appear before a special tribunal for alleged misconduct — accusations he denies.

At the same time, Tusk and opposition-aligned President Karol Nawrocki are engaged in a standoff that has halted appointments to the central bank’s management board, raising doubts over the institution’s ability to carry out key functions, such as potential interventions to support the zloty.

The timing couldn’t be worse. While Poland was once a darling of investors thanks to rapid economic growth, it recently suffered its first credit-rating downgrade in a decade, in part because its budget deficit has become one of the widest in the European Union.

Their dispute dates back to at least 2023 when, just weeks before a parliamentary election, the central bank unexpectedly slashed interest rates despite inflation being in the double digits. The steep rate cut was widely seen as a last-ditch effort to try to help the then-nationalist government secure reelection by downplaying inflationary pressures.

Tusk accused Glapinski of politicizing the central bank and vowed to remove the governor if he was elected prime minister. He didn’t follow through after winning the 2023 contest, but with the next general election due to take place in late 2027 and the nationalist opposition performing strongly in opinion polls, Tusk appears to be redoubling his efforts.

A parliamentary probe into Glapinski’s actions picked up steam after he joined forces with Euroskeptic Nawrocki to propose selling central bank gold reserves to fund defense spending in lieu of Tusk’s preferred option of low-interest loans from the EU.

Following a two-year inquiry, a parliamentary committee in October endorsed all eight accusations leveled against Glapinski by lawmakers from the ruling coalition. That includes allegations that the pre-election rate cut in 2023 breached the central bank’s political neutrality, that the central bank indirectly financed the budget deficit through bond purchases during the Covid-19 pandemic, and that it intervened in the zloty market without proper authorization.

Glapinski, who is currently due to end his second and final term as the central bank’s governor in 2028, has repeatedly denied any wrongdoing and dismissed the parliamentary inquiry as baseless, warning it could hurt Poland’s international reputation. He refused to participate in the probe.

Glapinski asserts that lawmakers don’t have the right to put him on trial in the State Tribunal, a rarely used court where high-level officials can be tried.

Poland’s top court, the Constitutional Tribunal, raised the threshold needed to put the central bank governor on trial from a majority of votes in the lower house of parliament to 60% of seats. Tusk’s coalition alone can’t meet that higher bar, but it’s unclear if he will abide by the court’s decision. The Constitutional Tribunal is dominated by judges appointed by the former ruling nationalists and Tusk has been trying to reverse the politicization that ran afoul of the EU’s standards on judicial independence and impartiality.

Ruling-party lawmakers have said this would lead to Glapinski being suspended from his role as the chair and public face of the 10-member Monetary Policy Council (MPC), which sets interest rates, as well as the head of the management board, which runs the central bank’s day-to-day operations.

That view runs contrary to a 2024 ruling from the Constitutional Tribunal, which said the central bank governor can’t be suspended under parliament’s current rules. Przemyslaw Litwiniuk, a lawyer and member of the MPC, said it’s impossible to suspend the governor “under either Polish or EU law,” and that there are no legal procedures for such a process.

In theory, a move to suspend or oust Glapinski could prompt an intervention by the European Central Bank, if it deems this undermines the independence of the National Bank of Poland and, by extension, the ECB General Council on which all heads of EU national central banks sit. However, when queried about the case in 2023, ECB President Christine Lagarde said Glapinski could refer any potential action to suspend him to the EU’s top court, signaling a reluctance to take sides in the dispute.

It’s part of a broader standoff between Tusk and Nawrocki that has been escalating since the latter was elected president last year. Nawrocki has effectively gutted the government’s agenda by repeatedly using his presidential veto to block legislation.

The feud now threatens to paralyze the central bank. Members of the central bank’s management board are nominated for six-year terms by the president at the request of the governor, but their appointment requires the prime minister’s approval. Four candidates are awaiting Tusk’s sign-off. Pressure is building to resolve the deadlock before the term of board member Adam Lipinski expires on Nov. 4. If this vacancy isn’t filled, the number of people on the panel — excluding the governor — will drop below the legal minimum of six.

The law doesn’t specify what happens if the board loses its quorum. Maciej Gutowski, a law professor at Adam Mickiewicz University in Poznan, said that, in theory, an incomplete management board can function and carry out all its duties, including supervising open market operations, implementing exchange rate policy, and preparing draft resolutions and materials for the MPC. “However, I have no doubt that such decisions can later be challenged for political reasons,” he said.

If the vacancies go unfilled for an extended period or are used for political purposes, this may draw scrutiny from the ECB. The ECB could conduct an assessment “within the scope of its authority regarding the independence and functioning of national central banks,” said Patrycja Zawadzka, a law professor who helped draft the National Bank of Poland Act, the legal framework that governs the country’s central bank.

While there’s no investor panic, the tensions have raised concerns about the central bank’s autonomy and its ability to respond to economic stress.

Poland’s economy remains one of the EU’s few bright spots — only Poland and Slovenia are expected to top 3% growth this year, according to the International Monetary Fund’s forecast. But with the fiscal deficit having bulged to around 7% of gross domestic product and borrowing costs on the rise, the country has few buffers remaining in a crisis scenario.

The extra yield demanded by investors to hold Poland’s benchmark government bonds instead of German Bunds has already jumped by nearly a third since August to around 300 basis points. Meanwhile, the zloty hit a three-year low against the euro in October and has underperformed regional peers including the Czech koruna and Hungarian forint this year.

Poland is vulnerable to external shocks given its dependence on energy imports and proximity to Russia’s war in Ukraine. Any action that reduces the central bank’s ability to shore up local markets could be an own-goal for the $1 trillion economy.