How is it that in the main newspapers in Romania today there is nothing about the NBR interest rate decision? My humble opinion is that in a country where current inflation is always higher than expected and only forecast-ed inflation is lower than target a day like today should get the utmost coverage. We should be on the edge of our seat waiting to see what are the next moves in the fight against inflation. Nobody cares anymore.
Wait a second. Are we in such a place that monetary policy does not matter anymore? True, the decision today, whatever it would be, does not matter a whole lot. Still, what does matter is the way NBR views inflation and how it signals the next moves. So far it has viewed inflation as merely a nuisance that will go away by itself. A mosquito if you will that after sucking most of your blood will get bored and leave. Unfortunately reality shows otherwise. In fact if we compare ourselves with the EM countries Romania does not look good. The average inflation for those countries was 6.6% in 2010 and expected to be 6.5% in 2011. Romania had an inflation of 8% in 2010 and can be anything between 5% and 8% at the end of 2011. The weird thing is that better outcome for inflation does not depend on better monetary policy implementation but on a good agriculture year. Or lower raw materials prices or metals.
It seems from all these, and others, that NBR has managed to make monetary policy obsolete. Apparently the view is that not doing anything is the best strategy. But could that really be the case? As I said the outcome for this year’s inflation is anyone’s guess with a very nice spread. I am not a Harvard professor but from what I remember volatile prices are a direct result of ineffective monetary policy. And you do not need to be that erudite to know this. Just think that monetary policy is supposed to steer the key rate in order to eliminate deviations of inflation from a target (or an accepted inflation level). If central bank does nothing but in the market there are permanent price shocks then no one will know where the prices will go. They could go really high than really low and then even higher. You get the picture. Similar to what we experience in Romania. The point is that inflation in the absence of monetary policy is volatile.
And there is more. Also, some smart guys at Harvard, Chicago etc have shown that economies with volatile prices have volatile rates of growth. Which is expected as economic systems are complex systems. Once volatility is introduced and not controlled it will distort all previous equilibrium.
The implications for the rest of the economy are that in such systems forecasting is useless. Effects of fiscal policies, adjustments of trade agreements, currency movements are unpredictable. They can have short term positive effect with long term damage or the other way around. Prices left on their own will become a virus that will corrupt the entire system and render it uncontrollable.
The NBR has pushed monetary policy into the inactivity corner. I am not sure how it got here. But what we have is not sustainable. Something will have to give.
To be continued … (written on August 3rd)