In the first two cases (2001 and 2002) events in international financial markets led to rapid depreciations, unrelated to country fundamentals. In the last case – 2008 – we considered it prudent to build up reserves in a period in which the exchange rate was below fundamentals and global financial markets were under extreme stress. Let me now refer to the interaction between financial and price stability from an ex-post perspective, i.e. once a financial shock (crisis) has hit the economy. From an ex-ante point of view I discussed that there are occasions in which these two objectives may not be completely aligned. From an ex-post perspective, these objectives are in general consistent, which will reinforce the need for strengthening the ex-ante dimension of financial stability. Suppose that a shock in financial markets (of a domestic or external nature; based on fundamentals or simple contagion) hits the economy. This shock will result in an increase in the cost of capital, bringing down investment and aggregate demand. The reduction in aggregate demand reduces output and therefore also reduces inflationary pressures. This example shows that dealing with this “financial shock” is usually – and I will be explicit regarding this conditionality – consistent with pursuing price and output stability. From this ex-post perspective, financial and price stability can be addressed simultaneously. The instruments that monetary policy can use to deal with these financial shocks will depend on the nature of the financial shock.
Following the implementation of inflation targeting, the report will be published quarterly; - a model calibrated by the Bank’s staff is currently being tested and will be used for forecasting purposes. Instead of going into the details related to the Inflation Targeting framework, I will let my fellow speakers tackle the most important issues. Shortly after this, Deputy Governor Ms. Rachel Lomax will present a compelling account of UK’s experience and, may I add, success as a benchmark inflation targeter. After the lunch break, Gill Hammond, Deputy Director of CCBS, will give you an excellent presentation dealing with specific issues and challenges faced by emerging market economies when adopting inflation targeting. Later on, we will have our guests from the Czech National Bank and the National Bank of Hungary giving you a purposeful insight of such challenges and of their countries’ experiences with the IT framework. Mr. Ludek Niedermayer, Deputy Governor of the Czech National Bank, will first explain to you “why and how” inflation targeting was adopted in the Czech Republic – the first country to embrace this regime in our region. Then, it will be for Ms Csermely Agnes, Director with the National Bank of Hungary, to share with us the “Lessons and Challenges” put forth by the Hungarian experience with inflation targeting.