Light inflation targeting in Romania  Drawing the line after more than a decade of inflation targeting, I would say that we have managed to deliver steady disinflation and anchor expectations, even though the frequent occurrence of exogenous shocks led to high volatility in inflation and the occasional missing of annual targets. All central banks are familiar with supply-side shocks related to a surge or fall in commodity prices, but in Romania we have also had to deal with large (and not necessarily predictable) adjustments in administered prices and frequent changes in indirect taxation. Some of the latter were inherent to EU membership (i.e. alignment of some excise  BIS central bankers’ speeches  1  duties), but others were related to an erratic tax legislation. In such an environment, two features of the inflation targeting framework as implemented in Romania appear as particularly relevant: •  First, the focus on the medium-term achievement of the inflation objective, rather than hitting the target all the time. This approach allows for sustainable price stability without incurring the cost of excessive volatility in output and employment. •  Second, the ex-ante definition of a set of escape clauses that limit the central bank’s responsibility in attaining the annual target:  3. 1. Marked increases/decreases in commodity prices  2. Natural disasters and other similar exceptional events that induce cost-push or demand-pull inflationary effects  3.
This level of growth is expected to exceed the growth potential output, giving rise to a positive output gap, particularly in 2015. Other things being equal, this will contribute to higher inflation. GDP growth in 2014–2016 will be driven by domestic demand, both private consumption and investment, and the contribution from net trade will be negative for the entire period. As a consequence, the sizeable current account surplus we have seen in 2013 and 2014 will shrink rapidly next year and give way to a small deficit by 2016. This is cause for concern in and of itself, and we hope that this forecast will not materialise, as Iceland needs to maintain a current account surplus in the next several years as it focuses on putting its external debt onto a more solid footing and building up FX-reserves that are not financed with foreign loans. Economic policy and economic incentives would then have to centre on improving the outlook for the current account balance. According to the forecast, which extends until end-2017, inflation will be at target for the entire forecast horizon, apart for the last quarter of 2015 and the first quarter of 2016. It will average 2.6% for the three-year period from 2014 through 2017, which is well in line with the 2½% inflation target. But the current equilibrium is fragile, the future is highly uncertain, and there are important known risks ranging from the global economy to the liberalisation of Iceland’s capital controls. We will doubtless discuss some of these at this meeting.