If I may be allowed a short digression, the very recourse to a VAT-adjusted inflation measure in our analysis and communication came under fire. This is by no means different in nature than the Eurostat’s HICP at constant taxes – just more refined, in the sense that we take into account the fact that the pass-through of a VAT change is below 100% for most CPI items. Coming back to the current economic context, it should be pointed out that behind the “perfect storm” of deflationary exogenous shocks (low energy, food and metal prices, successive VAT rate cuts), demand-side inflationary pressures are looming: a positive output gap is emerging, unit labour cost pressures are building up, fiscal policy is taking a strongly expansionary turn. As such, while medium-term prospects appear to call for a tightening bias of monetary policy, the short-term context of deeply negative inflation makes communication with the public rather challenging. Specifically, we have to contend with the idea that the central bank should lower interest rates in response to VAT rate cuts. It proves more difficult than we thought to make people understand that the current negative readings in inflation are just transitory and reflect neither postponed consumption, nor sluggish wage growth one would associate with  2  BIS central bankers’ speeches  negative inflation expectations – these actually remained anchored to the target. Therefore, none of the ingredients which make for a scary deflationary trap are present.
Mugur Isărescu: Transition – how to secure a stronger economic future for the constituency? Speech by Mr Mugur Isărescu, Governor of the National Bank of Romania, in the panel on “Transition: How to Secure a Stronger Economic Future for the Constituency?”, during the annual meeting of the IMF and World Bank Constituency, Kyiv, Ukraine, 4 June 2016. *  *  *  Ladies and Gentlemen, In my address I would like to focus on the challenges in conducting monetary policy in a way that will contribute to securing a stronger economic future for countries in our constituency. Obviously, my account is shaped by Romania’s experience, but I hope it will still keep you interested, as it may be relevant for other small to medium-sized emerging economies. 1. Brief account of monetary policy regimes in Romania  At the time when the National Bank of Romania had to choose a strategy for conducting its monetary policy, i.e. in the early nineties, monetary targeting was actually the only feasible option. Not only did the low forex reserves preclude a fixed exchange rate arrangement, but, even if possible, the alternative was not suitable given the widening external imbalance. However, by the end of the decade, monetary targeting had reached its operational limits given the break in the relation between monetary aggregates and inflation, a phenomenon which matched developments elsewhere in the world. At that point, we took into account pegging the exchange rate, but neither the hard nor the soft version was deemed appropriate.