The National Bank of Romania (NBR) announced yesterday that it was going to maintain the inflation target for 2006 unchanged at 5% plus/minus 1%. This option, however, included a drifting of the inflation towards 6.5%.
“We don”t want to send out a message of monetary policy relaxation because it could increase inflationary expectations. This is why we are keeping the inflationary target for 2006 unchanged at 5%, plus/minus 1%,” Governor Mugur Isarescu said yesterday during the news conference presenting the third report on the inflation targeting regime.
Yet Isarescu himself said 20 minutes later, when answering a question, that a “deviation from the target” up to 6.5% was possible.
Under the circumstances, it is not clear if the inflationary expectations the National Bank is trying to understate are not actually reinforced by the undertaking of a deviation of 1.5% above the target right from the start.
“They were put in the position to choose the lesser of two evils. I think they wanted to convey that their goal is actually 2007, when they will no longer be faced with high rises in controlled prices. Maintaining the 2006 target they stand chances of attaining the 2007 target. If they upped this year”s target and missed it, they would lose even more of their credibility,” said Ionut Dumitru, head of research with Raiffeisen Bank.
Financial analyst Florian Libocor says that the market will indeed use the 6.5% reference, but the NBR had no other choice. “An increase in the target by the NBR would have overlapped with the market”s perception of a slight relaxation/concession, this is exactly what the central bank does not want to convey,” Libocor said.
In other words, the National Bank is aware that it can lose the battle in 2006, but does not say so officially in documents, to prevent “troops” from losing their morale because the war is longer than that.
“Leaving any other assumptions aside, I believe NBR wanted to tell the market how firmly it will tackle the inflation issue,” Libocor added.
The deviation from the target is explained in more technical terms in the summary of the inflation report presented by the NBR yesterday. “Despite the fact that the projected short-term inflationary rate stays above the projected trajectory of disinflation, the deviation from the target in 2006 is seen as temporary, given the firm and proactive action on the part of the monetary policy, supported by the prudence of the wage and fiscal policies.”
At the same time, the NBR maintains its 2007 inflation target, 4%. There are a number of arguments for maintaining the targets, despite a twelve-month inflation that reached 8.9% at the end of January, after an increase in prices of 1.03% that month. They are as follows: the inflationary expectations would otherwise increase, the monetary policy would be perceived as relaxed, the deviation in 2006 is only temporary and the NBR has instruments prepared to reduce the increase in prices.