Monetary policy and global inflation Júlia Király Deputy Governor Magyar Nemzeti Bank

1. Monetary policy and global inflationJúlia KirályDeputy GovernorMagyar Nemzeti Bank Based on the joint work of Julia Kiraly - Tóth MátéBarnabás

2. Outline 1. Global outlook – hiking prices 2. What does happen in the EU new member states 3. A special case study: Hungary – déja vue?

3. What we see? • Oil, food and commodity price increases are pushing up inflation all over the world • But we are not anywhere near to the inflation rates of the ’70s or ’80s • However, there is no reason for central banks to be complacent

4. Global inflation

5. Three competing stories • Temporary spike in oil/food/commodity prices • Due to bad weather, capacity bottlenecks, speculation etc. • Permanent relative price change, driven by structural factors • increasing demand from China and India, subsidies for bio-fuel production • Global inflationary pressure • monetary conditions are too loose at the global level • commodity prices are leading headline inflation

6. How to respond?(in a small and open economy) • Temporary spike • Accommodate the short runinflationary impact • Ensure that inflation expectations remain well anchored and no second round effects occur • Permanent relative price change • Ensure that it takes place in a low inflationary environment • Exchange rate appreciation and a temporarily negative output gap may be necessary • But keep an eye on potential output and second round effects • Global inflation • Aggregate, nominal phenomenon: no change in relative prices needed • Offset imported inflation byengineering exchange rate appreciation

7. But… • The above three stories are not mutually exclusive… • … and we don’t know which is the most likely one • Policy responses should take this uncertainty into account

8. New member states • Floaters are more able to cope with imported price pressures • A credible inflation target coupled with the appropriate policy response helps • Countries with fixed exchange rate regimes are in trouble • Imported inflation + imported monetary conditions

9. Hungary - déja vu? • The fiscal adjustment measures introduced in 2006 created a very similar environment • Inflationary shock due to one off increases in indirect taxes and regulated prices • Slowdown in activity  negative output gap • Possible decline in potential (or long run trend) output due to intensifying distortive taxation • Monetary policy decided not to offset the short run impact (see story 1)  concentrated on 2nd round effects instead • Lags in the transmission mechanism • The edge of the exchange rate band limited the room for manoeuvre • The output gap will help to disinflate

10. Hungary - déja vu? (2) • Just when the inflationary impact of the fiscal adjustment started to fade the oil/food price shock hit • This time we would be ill advised to accommodate • Risks of second round effects and inflation expectations becoming un-anchored are higher • We are not sure whether we are facing a one-off rise in inflation or something more permanent • We abandoned the exchange rate band • Reaching our medium term target during 2009 is still within reach • Therefore we tightened by 100 basis points in the first half of the year

11. Thank you for your attention!

12. Oil, food and metals

13. Inflation in floaters

14. Inflation in peggers

15. The range of our output gap estimates

16. Core and headline inflation

17. Our latest inflation forcast and risk scenarios