NBU and Inflation Targeting: Monetary Policy Rules for the Road Ahead

By Alex Nikolsko-Rzhevskyy (Lehigh University, USA)

On July 3, 2014, in her speech at the conference titled “Ukraine’s European Vector: Impact on Business,” the National Bank of Ukraine’s (NBU) newly appointed governor, Valeriia Gontareva (Valeriya Hontaryeva in another transcription), underscored her commitment to targeting inflation. The current end-of-year inflation rate currently anticipated nearly 19% will likely prompt an aggressive tightening of monetary policy, thereby lowering inflation to more acceptable levels with the intent to then keep it under control. A reasonable inflation target could perhaps be in the vicinity of 4%, which though exceeding the more common long-term inflation targets of 2.0-2.5% exhibit by developed economies such as the U.S. and Canada, is nevertheless in the ballpark of peer and aspiring developing countries such as Poland and Hungary. As such, what exactly should the Ukrainian public and its economy expect to happen in the middle to long run? Putting yet-unresolved structural issues aside and assuming that immediate threats, including aggressive speculative attacks on the hryvnia, are defused, let us discuss the mechanics of the process of reducing inflation and various ways to mitigate the painful transition, using past international experiences as examples.