Transcript Slide 1

National Bank
of Romania
NATIONAL
BANK OF ROMANIA
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SUMMARY
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
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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&LT External Debt
10. Public Debt Stock
11. Inflation Rate and Interest Rates
12a. Non-Government Credit
12b. Total Credit and Non-Government Credit
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I. Rationale Behind the Adoption
of Inflation Targeting
 Necessary commitment to disinflation due to forthcoming
European accession
 Weakening relationship between money aggregates
and inflation
 Needed focus on inflation rather than on intermediary
targets
 With capital account liberalization, exchange rate
pegging is not a viable alternative: inflation still high,
Balassa-Samuelson effect would slow down disinflation
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II. Key Features
 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)
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Key Features (2)
 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
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III. International Experience
 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
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IV. Prerequisites
 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
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Prerequisites (2)
 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
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V. Advantages
 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
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VI. Features of NBR’s
Inflation Targeting Strategy
 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)
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Features of NBR’s
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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VII. Exchange Rate Policy
 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
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VIII. Quarterly Forecasting
& 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
& Decision-Making Process (2)
Flow of information in the forecasting process
at the National Bank of Romania
Near-term forecast
Near-term models
(ARMAX)
and Expert forecast
NTF Inflation, GDP, EUR/RON etc.
Assessment of initial
conditions
and medium-term trends
Trends & Gaps
Exogenous variables forecasts
Medium-term
(core)
model
Anticipated
shocks, fiscal
impulse etc.
Tuning
Expert judgement
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Final
medium-term
forecast
Uncertainty
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IX. 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
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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
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X. 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
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XI. The Core Model
Assessing the current position of the economy:
 Initial 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:
 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
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The Core Model (2)
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
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The Core Model (3)
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
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The Core Model (4)
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
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XII. 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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XIII. Communication
 More transparent policy
 Formal announcement of adoption of full-fledged inflation
targeting regime, with details on bandwidth, formalized
exceptions etc.
 Formal announcement of calendar for policy-related
Board meetings
 External communication based on publishing the new quarterly
Inflation Report and on regular press conferences occasioned
by its release
 Press releases on contents of between-forecast meetings
and on the monetary policy decisions
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CHARTS
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60
1. Inflation Rate
Dec./Dec.
60
54.8
target
actual
50
50
40.7
40
40
30.3
30
20
30
20
17.8
14.1
10
10
9.3
35
27
25
22
14
9
7.5
5
0
0
1999
2000
2001
2002
2003
2004
2005t
2006t
August ’05 12-month CPI inflation: 8.9%
Source: National Institute of Statistics, Pre-Accession Economic Programme
*) based
on of
CPI
(60% EUR+40%
USD) of Statistics (NBR calculations)
Source: National
Bank
Romania,
National Institute
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2. Inflation Rate
CPI; percentage change against the same period of previous year
35
30
actual
25
trend
20
15
10
5
Aug.05
Jun.05
Apr.05
Feb.05
Dec.04
Oct.04
Aug.04
Jun.04
Apr.04
Feb.04
Dec.03
Oct.03
Aug.03
Jun.03
Apr.03
Feb.03
Dec.02
Oct.02
Aug.02
Jun.02
Apr.02
Feb.02
Dec.01
0
CPI inflation Jan.- Aug. 2005: 5.2% (7.9% annualized figure)
Source: National Institute of Statistics
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3. Inflation Forecast
14
annual percentage change
Inflation targets (Dec./Dec.)
2005: 7.5%
2006: 5%
12
10
8
annual inflation rate (end of period)
6
target band*
annual inflation target
4
2
2004
II
III
IV
2005
I
II
III
IV
2006
I
II
III
IV
*) Note: ±1 percentage point on either side of targeted inflation path
Source: National Institute of Statistics, National Bank of Romania calculations
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4. NBR Policy Rate
30
percent per annum
25
21.25
20.00
20
18.75
17.75
16.50
15
14.50
12.50
10
8.50
7.50
5
0
Jan.04
Apr.04
Jul.04
Oct.04
Jan.05
Apr.05
Jul.05
22 Sep. 05
Source: National Bank of Romania
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5. Financial Intermediation*
25
end of period, share of GDP
21.0
20
17.5
15.9
15
11.8
9.3
10.1
2000
2001
10
5
0
2002
Source: National Institute of Statistics, National Bank of Romania
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2003
2004
2005f
*) Non-government Credit/GDP
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6. General Government Deficit /GDP
(IMF methodology)
percent
-1.1
-1.05
2004
2005t
-2.3
-2.6
-3.2
-4.0
2000
2001
2002
2003
Source: Ministry of Public Finance, National Institute of Statistics
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7. Reserves and Debt Indicators
months
12
official foreign exchange reserves - months of goods-and-services imports
10
official reserves - months of goods-and-services imports
public and publicly guaranteed debt - months of goods-and-services exports
8
7.0
6.8
6.4
6.6
6.4
6
5.2
4
5.4
4.1
3.4
2.9
July
2.9
3.5
6.1
4.8
4.2
3.6
5.5
2.1
2
0
2000
2001
2002
2003
2004
2005
28 Sep.
Note: For 2005, calculations based on prospective imports/exports of goods and services
Source: National Bank of Romania, Ministry of Public Finance
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8. Total External Debt
26
M&LT debt
4
24
22
22
20
18
18
16
15
14
18
16
11
14
16
9
12
10
10
9
18
8
7
11
11
4
4
2
16
14
10
22
15
24
20
18
11
8
6
4
2
10
26
5
6
6
8
6
4
2
2001
Jul. 05
2004
2003
2002
2001
2000
*) majority private debt
2000
0
0
Jul. 05
12
12
1
15
1
16
1
28
22
2004
14
public and publicly guaranteed debt
private debt
22
ST debt*
2003
26
EUR billion
EUR billion
2002
28
9. M&LT External Debt
Source: National Bank of Romania, Ministry of Public Finance
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10. Public Debt Stock
(IMF methodology)
percent
percent
40
40
domestic public debt / GDP
35
foreign public and publicly guaranteed debt / GDP
31.6
28.8
30
29
25
30
26.9
9.2
7.9
7.8
6.0
20
25
22.8
6.1
19
5.0
15
10
22.4
20.9
21.2
35
20.9
20
15
10
16.7
14.0
5
5
0
0
2000
2001
2002
2003
2004
2005f
Source: Ministry of Public Finance, National Bank of Romania, National Institute of Statistics
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11. Inflation Rate and Interest Rates
percent
50
40
30
20
10
Jul.05
Jan.05
Jul.04
Jan.04
Jul.03
Jan.03
Jul.02
Jan.02
0
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
Source: National Bank of Romania, National Institute of Statistics
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12a. Non-Government Credit
percent of GDP
25
companies
21.0
households
20
foreign currency
17.5
15.9
ROL
15
14.0
11.8
9.3
10.1
8.8
10
12.5
12.5
10.6
12.0
7.4
6.0
5.5
5
10.4
9.4
8.8
7.1
0
2000
5.0
3.9
7.0
8.5
1.4
0.7
0.5
4.4
4.1
3.8
6.9
2001
2002
2003
2004
2005f
Source: National Bank of Romania
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12b. Total Credit and Non-Government Credit (2)
(in real terms)
deflated by CPI, Dec. '99=100
RON million
RON million
18,000
18,000
16,000
16,000
14,000
14,000
12,000
12,000
10,000
10,000
8,000
8,000
6,000
6,000
4,000
4,000
2,000
2,000
foreign exchange-denominated credit
RON-denominated credit
total credit, net
Jul.05
Jan.05
Jul.04
Jan.04
Jul.03
Jan.03
Jul.02
Jan.02
Jul.01
Jan.01
Jul.00
Jul.05
Jan.00
Jul.04
Jan.05
Jan.04
Jul.03
Jul.02
Jan.03
Jan.02
Jul.01
Jul.00
Jan.01
0
Jan.00
0
to private companies
to households
to state-owned companies
Source: National Bank of Romania, National Institute of Statistics
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