sofia, 3-4 october 2005
DESCRIPTION
Seminar organised by the Bulgarian National Bank. EMU and the New Member States - a Year After Accession. Towards a New Strategy of Monetary Policy: Inflation Targeting in Romania. Florin Georgescu, PhD First Deputy Governor National Bank of Romania. Sofia, 3-4 October 2005. SUMMARY. - PowerPoint PPT PresentationTRANSCRIPT
National Bank of RomaniaNational Bank of RomaniaNATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA1
National Bank of RomaniaNational Bank of RomaniaNATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA2
A) Inflation Targeting in Romania
I. Rationale Behind the Adoption of Inflation Targeting
II. Key Features
III. International Experience
IV. Prerequisites
V. Advantages
VI. Features of NBR’s Inflation Targeting Strategy
VII. Exchange Rate Policy
VIII. Quarterly Forecasting & Decision-Making Process
IX. Forecast Horizons
X. Forecasting Cycle
XI. The Core Model
XII. The New Inflation Report
XIII. Communication
SUMMARYSUMMARY
National Bank of RomaniaNational Bank of RomaniaNATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA3
B) Charts
1. Inflation Rate (annual data)
2. Inflation Rate (monthly data)
3. Inflation Forecast
4. NBR Policy Rate
5. Financial Intermediation
6. General Government Deficit/GDP
7. Reserves and Debt Indicators
8. Total External Debt
9. M< External Debt
10. Public Debt Stock
11. Inflation Rate and Interest Rates
12a. Non-Government Credit
12b. Total Credit and Non-Government Credit
National Bank of RomaniaNational Bank of RomaniaNATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA4
Necessary commitment to disinflationcommitment to disinflation due to forthcoming European accession
Weakening relationship between money aggregates and inflation
Needed focus on inflationfocus on inflation rather than on intermediary targets
With capital account liberalization, capital account liberalization, exchange rate pegging is not a viable alternative: inflation still high, Balassa-Samuelson effect would slow down disinflation
I. Rationale Behind the Adoption I. Rationale Behind the Adoption of Inflation Targetingof Inflation Targeting
National Bank of RomaniaNational Bank of RomaniaNATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA5
Primary objective of monetary policy: to ensure and maintain the aggregate price stability
Use of the whole range of monetary policy tools for reaching the inflation target
Proactive monetary policy stance (forward-looking behaviour)
II. Key FeaturesII. Key Features
National Bank of RomaniaNational Bank of RomaniaNATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA6
Transparency of the monetary policy strategy
by communicating to the general public the
objectives, the decisions adopted, the rationale behind
monetary policy decisions and the associated risks and
uncertainties
Increased efficiency of monetary policy on medium-term
Key Features (2)Key Features (2)
National Bank of RomaniaNational Bank of RomaniaNATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA7
Central banks of 21 countries adopted inflation targeting strategy
Initially, inflation targeting strategy was adopted only by some developed countries
Subsequently, the strategy proved to be an attractive alternative to emerging countries
Large economic imbalances had been solved prior to the adoption of inflation targeting strategy
III. International ExperienceIII. International Experience
National Bank of RomaniaNational Bank of RomaniaNATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA8
The annual inflation rate is in the single-digit range
The NBR has full operational independence (by its legal Statute)
The financial sector is stable and sound, although financial intermediation is needed to increase
Fiscal dominance is no longer a threat
IV. PrerequisitesIV. Prerequisites
National Bank of RomaniaNational Bank of RomaniaNATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA9
Inflation targets for the coming years have been agreed on together with the government
The central bank has improved its inflation-forecasting capacity
Disinflation progress over the past few years has led to the strengthening of NBR credibility
Prerequisites (2)Prerequisites (2)
National Bank of RomaniaNational Bank of RomaniaNATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA10
Reducing time inconsistency by increasing the responsibility of the central bank for achieving its primary objective, i.e. price stability
Flexible and transparent regime that is operational even under an unstable relation between monetary aggregates and inflation
Disinflation with relative minimisation of costs, a more direct impact on inflation expectations
V. AdvantagesV. Advantages
National Bank of RomaniaNational Bank of RomaniaNATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA11
CPI-based inflation target
Target set as a midpoint within a target band of ±1 percentage point
Annual targets set for a longer time horizon (initially 2 years)
VI. Features of NBR’s VI. Features of NBR’s Inflation Targeting StrategyInflation Targeting Strategy
National Bank of RomaniaNational Bank of RomaniaNATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA12
Features of NBR’s Features of NBR’s Inflation Targeting Strategy (2)Inflation Targeting Strategy (2)
Flexible interpretation of inflation targeting (mainly its co-existence with the managed floating regime)
Ex ante definition of a narrow set of circumstances which are independent from the monetary policy influence and restrict the NBR’s responsibility for reaching the inflation target (escape clauses)
Joint announcement of inflation targets by the NBR and the government
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Further managed floating regime, with market playing an increasing role in determining the exchange rate
Less frequent interventions by the NBR
Exchange rate unpredictability in the short run, in order to discourage speculative capital inflows following capital account liberalization
VII. Exchange Rate PolicyVII. Exchange Rate Policy
National Bank of RomaniaNational Bank of RomaniaNATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA14
VIII. Quarterly Forecasting VIII. Quarterly Forecasting && Decision-Making Process Decision-Making Process
Task Force – interdepartmental working group: Prepares near- and medium-term forecasts on economic growth
and inflation rate Monitors the main economic and monetary indicators on a monthly basis Draws up the Inflation Report
Monetary Policy Committee: Examines the initial conditions for the core model Assesses the forecasts and recommendations on the monetary policy
measures Analyses the Inflation Report and makes recommendations
NBR Board: Makes the monetary policy decision taking account of the formulated
risks and uncertainties Analyses and adopts the Inflation Report
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Quarterly Forecasting Quarterly Forecasting && Decision-Making Process (2) Decision-Making Process (2)
Near-term models (ARMAX)
and Expert forecastNTF Inflation, GDP, EUR/RON etc.
Assessment of initial conditions
and medium-term trends
Exogenous variables forecasts
Trends & Gaps
Medium-term(core)model
Expert judgement
Finalmedium-term
forecast
Anticipated shocks, fiscal impulse etc.
Near-term forecast
Tuning
Uncertainty
Flow of information in the forecasting process Flow of information in the forecasting process at the National Bank of Romaniaat the National Bank of Romania
National Bank of RomaniaNational Bank of RomaniaNATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA16
IX. Forecast HorizonsIX. Forecast Horizons
Near-term forecast (2 quarters)
ARMAX model for the main CPI components (food, non-food, services)
Expert judgement forecast for CPI components
Useful for determining the starting point of medium-term forecast and for monitoring in between two forecasting cycles
National Bank of RomaniaNational Bank of RomaniaNATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA17
Forecast Horizons (2)Forecast Horizons (2)
Medium-term forecast (8 quarters) Based on a quarterly projection model (QPM) that provides
a description of dynamics of the main macroeconomic variables and their interaction
QPM is used for generating macroeconomic development scenarios, assessing the risks of potential shocks and analysing alternative monetary policy measures
QPM is based on economic theory, assuming modelling of economic agents’ expectations and the convergence of the economy towards long-term equilibrium
QPM is a flexible model allowing the use of additional information and expert opinions provided by specialists of the NBR and of other institutions
National Bank of RomaniaNational Bank of RomaniaNATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA18
X. Forecasting CycleX. Forecasting Cycle
Quarterly cycle relying on frequency of data on GDP
Forecasting process, formulation of monetary policy decisions and drafting of Inflation Report last for about one month
Forecasting cycle does not require quarterly frequency of monetary policy decisions
monetary decisions may also be taken between two forecast meetings based on the developments identified during monitoring
National Bank of RomaniaNational Bank of RomaniaNATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA19
Assessing the current position of the economy:Assessing the current position of the economy:
Initial conditionsInitial conditions for the core model: GDP trend, neutral real interest rate, equilibrium real exchange rate, their medium-term profiles and current gaps
Providing a consistent view on recent economic developments, current inflationary pressures, and real monetary conditions stance
Role:Role:
Integrates information from history, near-term forecasting and expert judgement
Generates endogenous interest rate path which can serve as policy guideline
Used to generate risk scenarios and policy analysis
XI. The Core ModelXI. The Core Model
National Bank of RomaniaNational Bank of RomaniaNATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA20
Characteristics:Characteristics:
Small semi-structural calibrated model
New-Keynesian core (short-term and medium-term non-
neutrality)
Well behaved steady-state
Consistent with achieving multi-period inflation targets
The Core Model (2)The Core Model (2)
National Bank of RomaniaNational Bank of RomaniaNATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA21
Structure:Structure:
Core inflation determined by own persistence, agents’ expectations, output gap, and import price inflation
Output gap determined by own persistence and real monetary conditions
Exchange rate determined according to uncovered interest parity including risk premium
Forward-looking policy interest rate rule reacts to deviations of inflation from target, the output gap and smoothes out interest rate volatility
Agents’ expectations modelled as hybrids of backward-looking (inertial) and forward-looking (“model-consistent”) expectations
The Core Model (3)The Core Model (3)
National Bank of RomaniaNational Bank of RomaniaNATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA22
Features of the transmission mechanism:Features of the transmission mechanism:
Expectations channel quite significant for monetary policy direct influence on inflation
Exchange rate channel also important
direct channel, via pass-through – strongest
indirect channel, through influences on real sector – relatively weaker at present
Interest rate channel relatively weak in the past, steadily strengthening
monetary policy impulses intermediated by relatively sluggish bank deposit and lending rates
The Core Model (4)The Core Model (4)
National Bank of RomaniaNational Bank of RomaniaNATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA23
XII. The New Inflation ReportXII. The New Inflation Report
Main communication tool with the public in order to anchor inflation expectations
Since August 2005 – quarterly Inflation Report
Sections: assessment of current economic developments
rationale behind the monetary policy decisions in the reviewed period
NBR projection on inflation rate developments on eight-quarter time horizon
uncertainties and risks associated with the projection
implications of the context on the monetary policy future stance
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More transparent policyMore transparent policy
Formal announcement of adoption of full-fledged inflation full-fledged inflation targeting regime,targeting regime, with detailsdetails on bandwidth, formalized exceptions etc.
Formal announcement of calendarcalendar for policy-related Board meetings
External communication based on publishing the new quarterly new quarterly Inflation Report Inflation Report and on regular press conferences press conferences occasioned by its releaseoccasioned by its release
Press releasesPress releases on contents of between-forecastbetween-forecast meetingsmeetings and on the monetary policy decisions
XIII. CommunicationXIII. Communication
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CHARTSCHARTS
National Bank of RomaniaNational Bank of RomaniaNATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA26
*) based on CPI (60% EUR+40% USD)Source: National Bank of Romania, National Institute of Statistics (NBR calculations)
Inflation Rate
35 27 25 22 14 9 7.5 5
54.8
40.7
30.3
17.8
14.1
9.3
0
10
20
30
40
50
60
1999 2000 2001 2002 2003 2004 2005t 2006t
Source: National Institute of Statistics, Pre-Accession Economic Programme
Dec./Dec.
0
10
20
30
40
50
60
target actual
August ’05 12-month CPI inflation: 8.9%
1.
National Bank of RomaniaNational Bank of RomaniaNATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA27
Inflation Rate
0
5
10
15
20
25
30
35D
ec.0
1
Feb
.02
Apr
.02
Jun.
02
Aug
.02
Oct
.02
Dec
.02
Feb
.03
Apr
.03
Jun.
03
Aug
.03
Oct
.03
Dec
.03
Feb
.04
Apr
.04
Jun.
04
Aug
.04
Oct
.04
Dec
.04
Feb
.05
Apr
.05
Jun.
05
Aug
.05
Source: National Institute of Statistics
CPI; percentage change against the same period of previous year
actual
trend
CPI inflation Jan.- Aug. 2005: 5.2% (7.9% annualized figure)
2.
National Bank of RomaniaNational Bank of RomaniaNATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA28
Inflation Forecast
2
4
6
8
10
12
14
2004II III IV
2005I II III IV
2006I II III IV
Source: National Institute of Statistics, National Bank of Romania calculations
annual inflation rate (end of period)
target band*
annual inflation target
annual percentage change
Inflation targets (Dec./Dec.) 2005: 7.5% 2006: 5%
*) Note: ±1 percentage point on either side of targeted inflation path
3.
National Bank of RomaniaNational Bank of RomaniaNATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA29
NBR Policy Rate
17.75
21.2520.00
18.75
12.50
8.507.50
16.50
14.50
0
5
10
15
20
25
30
Jan.04 Apr.04 Jul.04 Oct.04 Jan.05 Apr.05 Jul.05
Source: National Bank of Romania
percent per annum
4.
22 Sep. 05
National Bank of RomaniaNational Bank of RomaniaNATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA30
Financial Intermediation*
10.1
11.8
15.9
17.5
21.0
9.3
0
5
10
15
20
25
2000 2001 2002 2003 2004 2005f
Source: National Institute of Statistics, National Bank of Romania
end of period, share of GDP
*) Non-government Credit/GDP
5.
National Bank of RomaniaNational Bank of RomaniaNATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA31
-4.0
-3.2
-2.6-2.3
-1.1 -1.05
2000 2001 2002 2003 2004 2005t
Source: Ministry of Public Finance, National Institute of Statistics
General Government Deficit /GDP
percent(IMF methodology)
6.
National Bank of RomaniaNational Bank of RomaniaNATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA32
Reserves and Debt Indicators
2.1
2.93.5 3.4
2.9
3.64.1
5.2
6.8 7.06.4 6.4
4.8
6.16.6
4.2
5.5 5.4
0
2
4
6
8
10
12
2000 2001 2002 2003 2004 200528 Sep.
Source: National Bank of Romania, Ministry of Public Finance
official foreign exchange reserves - months of goods-and-services imports
official reserves - months of goods-and-services imports
public and publicly guaranteed debt - months of goods-and-services exports
months
Note: For 2005, calculations based on prospective imports/exports of goods and services
July
7.
National Bank of RomaniaNational Bank of RomaniaNATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA33
Source: National Bank of Romania, Ministry of Public Finance
M< External Debt
4 5 6 68
11
7
99 10
10
11
0
2
4
6
8
10
12
14
16
18
20
22
24
26
28
2000
2001
2002
2003
2004
Jul.
05
public and publicly guaranteed debt
private debt
EUR billion
11
18
1615
14
22
Total External Debt
1114
15 1618
221
11
2
4
4
0
2
4
6
8
10
12
14
16
18
20
22
24
26
282000
2001
2002
2003
2004
Jul.
05
*) majority private debt
M< debt ST debt*
EUR billion
12
1516
18
22
26
8. 9.
National Bank of RomaniaNational Bank of RomaniaNATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA34
Public Debt Stock
22.4 20.9 21.2 20.916.7
14.0
9.27.9 7.8
6.0
6.1
5.0
0
5
10
15
20
25
30
35
40
2000 2001 2002 2003 2004 2005f
Source: Ministry of Public Finance, National Bank of Romania, National Institute of Statistics
0
5
10
15
20
25
30
35
40
domestic public debt / GDP
foreign public and publicly guaranteed debt / GDP
percent (IMF methodology) percent
19
22.8
26.92928.8
31.6
10.
National Bank of RomaniaNational Bank of RomaniaNATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA35
Inflation Rate and Interest Rates
0
10
20
30
40
50Ja
n.0
2
Jul.0
2
Jan.0
3
Jul.0
3
Jan.0
4
Jul.0
4
Jan.0
5
Jul.0
5
Source: National Bank of Romania, National Institute of Statistics
percent
inflation rate (percentage change against the same year-earlier period)
average interest rate on RON-denominated loans of non-gov't, non-bank clients (% p.a.)
deposit rate (time deposits; % p.a.)
NBR's policy rate: 7.5% starting with 22 September 2005
11.
National Bank of RomaniaNational Bank of RomaniaNATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA36
12a. Non-Government Credit
3.8 4.1 4.4 3.9
7.15.0
6.9 7.08.8
5.59.4
10.4
7.4
12.0
8.8 12.510.6
14.012.5
1.40.70.5
8.5
6.0
0
5
10
15
20
25
2000 2001 2002 2003 2004 2005f
percent of GDP
companies
households
foreign currency
ROL
Source: National Bank of Romania
9.3 10.1
11.8
15.917.5
21.0
National Bank of RomaniaNational Bank of RomaniaNATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA37
Total Credit and Non-Government Credit (2)
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
Jan.0
0
Jul.0
0
Jan.0
1
Jul.0
1
Jan.0
2
Jul.0
2
Jan.0
3
Jul.0
3
Jan.0
4
Jul.0
4
Jan.0
5
Jul.0
5
Source: National Bank of Romania, National Institute of Statistics
foreign exchange-denominated creditRON-denominated credittotal credit, net
defla
ted b
y C
PI,
Dec.
'99=100
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
Jan.0
0
Jul.0
0
Jan.0
1
Jul.0
1
Jan.0
2
Jul.0
2
Jan.0
3
Jul.0
3
Jan.0
4
Jul.0
4
Jan.0
5
Jul.0
5
RON million
to private companiesto householdsto state-owned companies
(in real terms)RON million
12b.