Press Release No. 14/435

Press Release: The IMF and Banque de France Hold the First IMF Central Bank Forum for Developing Markets: The Road to Inflation Targeting and Transitional Monetary Arrangements

September 24, 2014

The International Monetary Fund's (IMF) Monetary and Capital Markets Department and Banque de France (BdF) organized the first IMF Central Bank Forum for Developing Markets, in Paris from September 9-10, 2014. Discussions at the Forum focused on The Road to Inflation Targeting and Transitional Monetary Arrangements. The Forum was intended as a platform for countries with developing financial sectors that seek to modernize their monetary frameworks. The Forum was attended by Governors, Deputy Governors, or member of decision making bodies from 20 central banks representing 33 countries. The Bank for International Settlements (BIS) was also represented.¹

In their opening remarks, Governor of the BdF Banque Christian Noyer and IMF First Deputy Managing Director David Lipton emphasized the timeliness of the event and topic in view of the growing interest in many developing and emerging markets to move towards an inflation targeting regime (IT). They also noted that the journey to inflation targeting in many countries has been "easier said than done" as they face particular challenges due to constraints in policy implementation, less than favorable macro and financial environments, and, in the post-crisis world, coordinating policies to achieve monetary and financial stability objectives. All of this supports transitional monetary arrangements during the Journey to IT. They noted that the Forum offered a unique opportunity for policymakers to discuss those challenges and how they are going about meeting them.

During the Forum, policymakers engaged in interactive discussions in sharing the experience of their respective countries, some having completed the transition to IT, others at different levels in the transition. While circumstances across countries vary, the motivations for the transition to inflation targeting also vary. Nonetheless, views converged on a number of key issues; including:

• While IT remains appropriate, it should be implemented with some flexibility and has certainly become more complex because of the stabilization goals that may need to be pursued in the short-term. Furthermore, there is a need for transitional monetary arrangements along the road to IT, in particular effective and simple operational frameworks which enhance the role of interest rates thereby strengthening the interest rate transmission channel and supporting financial market development. During the transition particular attention needs to be devoted to strengthening internal analytical and operational capacity.

• It was noted that not all pre-conditions needed to be met before the beginning of the transition. However, a clear commitment to full implementation was required, as well as a sound legal framework to underpin central bank independence, clarity of the mandate, and transparency. Outreach was also vital to ensure sustained support for IT, which would be achieved through communication of how IT contributes to the broader public policy goals.

• Flexibility of the exchange rate is critical, whilst recognizing that some countries had faced large swings in capital flows over recent years. Presentations by countries that have implemented full IT had noted that the fear of letting the exchange rate move can be exaggerated and in many cases it appears that greater exchange rate flexibility has led to a lower pass through.

Upon closing the event, participants expressed their appreciation for the initiative, noting that the Forum provided an opportunity for countries with developing financial markets to share experiences, and were looking forward for future discussions of issues of common interest.

¹ Central banks represented at the Forum were from Algeria, Angola, Armenia, Brazil, the Central African Monetary and Economic Community (CEMAC), Colombia, Egypt, Jamaica, Mauritius, Morocco, Mozambique, Paraguay, Peru, the Philippines, Poland, Romania, South Africa, Thailand, Tunisia, and the West Africa Monetary and Economic Union (WAEMU).