IMF on inflation targeting: easier said than done

Before the National Bank of Romania introduces an inflation targeting policy, much remains to be done, such as significant changes in the information collection procedures, in the structure of analyses and in the monetary policy decision-making process, according to a survey by the International Monetary Fund (IMF).

Inflation targeting means that the central bank makes an explicit commitment to conduct policy to meet a publicly announced numerical inflation target within a year, at any risk: significant appreciation/depreciation of the national currency against the euro, trade balance deficit or economic decline.

“In the event of delays, the authorities should consider a postponement in changing the monetary policy frame by shifting to inflation targeting,” the Fund’s experts state. The assessments included in the IMF’s survey are very interesting, considering the record-high July inflation which could upset the official estimates pointing to 9% inflation rate for this year.

The National Bank has said it intends to shift to inflation targeting at the beginning of 2005, one year later than initially estimated in 2002.

Should the preparations be completed in due time, the International Monetary Fund recommends the enforcement of a certain technique that is also employed in other countries that have adhered to inflation targeting: the annual inflation rate must be jointly announced by the National Bank and the Government, for improved co-ordination of the monetary, fiscal and revenue policies and especially to help the target acquire higher credibility.

A technical delegation of the International Monetary Fund, which assessed the National Bank’s preparedness for the new policy, has said that it takes substantial efforts. Among the challenges – the difficulties in estimating the time it takes the interest rate changes to propagate through the economy and at the level of inflation. “Consequently, the National bank of Romania will have to continue to rely on interventions upon the ROL exchange rate in order to control inflation,” the IMF survey shows.
razvan.voican@zf.ro