National Bank of Ukraine Presents a Roadmap for the Journey to Inflation Targeting

The National Bank of Ukraine has published a Roadmap for the Journey to Inflation Targeting  covering the next 12-18 months. This Roadmapoutlines an action plan for the implementation of the Monetary Policy Guidelines for  years 2016 – 2020  approved by NBU Board Resolution inAugust 2015.

The NBU will apply an inflation-targeting regime to ensure price stability. To achieve this goal, the NBU’s Monetary Policy Guidelines have set the inflation objectives for the annual increase in consumer price index as follows: by end-December 2016: 12 +/- 3 % YoY; by  end-December 2017: 8 +/- 2 % YoY; by  end-December 2018: 6 +/- 2 % YoY; and by  end-December 2019: 5 +/- 1 % YoY.    Unlike the inflation forecast, which isproduced  through calculations, and therefore is subject to revisions (if actual inflation  deviates from its target level when actual economic developments diverge from projections), the inflation target is constant.
Under an inflation targeting regime, monetary policy is geared toward meeting the inflation objective.   If inflation projections suggest that inflation is set to deviate  from its target, a central bank uses monetary policy instruments to bring inflation back on target.

The NBU has long embarked on the journey to inflation targeting.  At a first stage, back in 2015, the NBU laid  the technical groundwork for the adoption of inflation targeting. In particular, macroeconomic models  have been built and a quarterly forecast cycle has been designed  as part of these efforts.  At a second stage, in the first half of 2015, the NBU laid the institutional groundwork, including by  altering  the monetary policy decision-making process.  The third stage, which is to implement inflation targeting has been in progress since the second half of 2015 up until now. 

As a result of these efforts,   the necessary prerequisites for adopting inflation targeting (IT) are already in place. First, the overriding priority of price stability is  legally entrenched.  Second, the central bank's independence in deciding which instruments to use  monetary policy to achieve this objective has been secured. Third, unlike the previous years, there is no fiscal dominance. “All the necessary prerequisites are already in place, and the NBU de-facto pursues monetary policy in the capacity of an inflation targeter,” said NBU Deputy Governor, Mr Dmytro Sologub. 

The implementation of the Roadmap will enable the NBU to improve other prerequisites that were not critical at the initial stage of the preparations for the adoption of inflation targeting, but are essential to the successful implementation of inflation targeting in the future.   Thus, the NBU is set to take steps to ensure efficient coordination with the NBU Council, the Government, the IMF and the State Statistics Service of Ukraine. The NBU will also press ahead with efforts to bring its instruments, mechanisms, procedures into line with inflation targeting standards.  In particular, the NBU is set to redesign the operational framework of interest rate policy. At the same time, the NBU will enhance an input to the monetary policy decision making process and take measure to  raise public awareness and understanding of the monetary policy pursued by the central bank.

The NBU will also focus its efforts on enhancing the efficiency of monetary policy transmission mechanism. “To achieve this goal, we need to develop the government securities and financial derivatives market, liberalize  FX controls, and reset the banking sector,” said NBU Deputy Governor, Mr Oleh Churii.   These measures will enhance the  NBU’s capacity  will be able to pursue a well-anchored monetary policy focused on inflation control.  

Original