The National Bank of Ukraine has published a Roadmap for the Journey to Inflation Targeting covering the next 12-18 months. This Roadmap outlines an action plan for the implementation of the Monetary Policy Guidelines for the years 2016 – 2020 approved by NBU Board Resolution in August 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 inflation objectives for annual increases in the consumer price index as follows: by end-December 2016: 12 +/- 3 % y-o-y; by end-December 2017: 8 +/- 2 % y-o-y; by the end of December 2018: 6 +/- 2 % y-o-y; and by the end of December 2019: 5 +/- 1 % y-o-y. Unlike the inflation forecast, which is produced 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 the second stage, in the first half of 2015, the NBU laid the institutional groundwork, including 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 and continues until now.
As a result of these efforts, the necessary prerequisites for adopting inflation targeting are already in place. First, the overriding priority of price stability is legally entrenched. Second, the central bank's independence in deciding which monetary policy instruments to use to achieve this objective has been secured. Third, unlike in 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, and procedures in 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 measures 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 mechanisms. “To achieve this goal, we need to develop the government securities and financial derivatives markets, liberalize FX controls, and reset the banking sector,” said NBU Deputy Governor, Mr Oleh Churii. These measures will enhance the NBU’s capacity to be able to pursue a well-anchored monetary policy focused on inflation control.