National Bank to announce shift to direct inflation targeting system

Before the end of the year, the National Bank of Romania will announce the inflation target for 2005, in the new form of a central fixed point included in a variation framework. Also, the central bank will pledge to reach the respective target by using all of the available instruments, Cristian Popa, the National Bank’s vice-governor and one of the main supporters of the project told Ziarul Financiar.

For more credibility, the announcement may be made jointly by the National Bank and the Government, with the latter represented by the Ministry of Public Finances. “This way would be better, to invest the macroeconomic mix with more consistency, but, nonetheless, the central bank will play the decisive role in determining the inflation target, in line with stipulations included in its new Statute,” Cristian Popa stated.

The National Bank will thus mark the gradual shift to a new monetary policy regime, known under the name of “direct inflation targeting.” This is a genuine bet on credibility, which the central bank is using to solidly ground the market’s inflationist expectations and to influence them more directly.

Although the failed attempts at cutting inflation in the first decade after 1989 are affecting this credibility, the National Bank’s new commitment does benefit from the fact that all of the inflation targets set in the past three years have been reached.

“The fixed point announced as the inflation target will be useful as an anchor for the inflation forecasts, whereas the variation framework will deal with the possibility that certain shocks may not allow the precise target to be reached, however without diminishing the credibility of the commitment,” Popa explained.

For transparency, the National Bank will continue to refer to the inflation rate gauged by the consumer price index calculated December-on-December, since the public is already used to this system. In fact, the average annual inflation has a long way to go before reaching the single-digit level. “There is already confidence in the declining inflation trend December/December. Moreover, in the context of sustained disinflation, the annual average has a much too strong inertial component to be quoted as a point of reference,” Cristian Popa stated.

Many of the modifications entailed by the introduction of inflation targeting are about the formal aspects of the way monetary policy decisions are being made. From the outside, the most visible changes will tackle the National Bank’s transparency level and communication with the market. Thus, the bank’s Board will have more monetary policy meetings, which will be preannounced and then followed by press releases detailing the decisions made – to increase, cut or maintain the interest rates. The decision will also be accompanied by a brief motivation, mainly future-oriented. The quarterly meetings will explicitly approach the central bank’s inflation forecast in decision-making and will be shortly followed by a report on inflation. These quarterly reports will include an overview of the previous quarter’s trends and a proactive outlook on the future economic trends impacting on the evolution of aggregate prices, including an identification of risks and related uncertainties.
razvan.voican@zf.ro