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Monetary policy and global
inflation
Júlia Király
Deputy Governor
Magyar Nemzeti Bank
Based on the joint work of Julia Kiraly - Tóth Máté Barnabás
Outline
1. Global outlook – hiking prices
2. What does happen in the EU new member states
3. A special case study: Hungary – déja vue?
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
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Global inflation
35
35
30
30
25
25
20
20
%
%
15
15
10
10
5
5
0
0
World
Industrial countries
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
How to respond?
(in a small and open economy)
• Temporary spike 
– Accommodate the short run inflationary 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 by engineering exchange rate appreciation
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
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
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
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 unanchored 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
Thank you for your attention!
Oil, food and metals
400
2000=100
2000=100
400
Food
Metals
Oil (U.K. Brent)
Jan-08
Jul-07
Jan-07
Jul-06
50
Jan-06
50
Jul-05
100
Jan-05
100
Jul-04
150
Jan-04
150
Jul-03
200
Jan-03
200
Jul-02
250
Jan-02
250
Jul-01
300
Jan-01
300
Jul-00
350
Jan-00
350
20
20
16
16
12
12
8
8
4
4
0
0
Czech Republic
Hungary
Poland
Slovakia
Apr.08
Jan.08
Oct.07
Jul.07
Apr.07
Jan.07
Oct.06
Jul.06
Apr.06
Jan.06
Oct.05
Jul.05
Apr.05
Jan.05
Oct.04
Jul.04
Apr.04
Jan.04
Inflation in floaters
Romania
Estonia
Lithuania
Bulgaria
Apr.08
Jan.08
Oct.07
Jul.07
Apr.07
Jan.07
Oct.06
Jul.06
Apr.06
Jan.06
Oct.05
Jul.05
Apr.05
Jan.05
Oct.04
Jul.04
Apr.04
Jan.04
Inflation in peggers
20
20
16
16
12
12
8
8
4
4
0
0
Latvia
07:Q3
07:Q1
06:Q3
06:Q1
05:Q3
05:Q1
04:Q3
04:Q1
03:Q3
03:Q1
02:Q3
02:Q1
01:Q3
01:Q1
00:Q3
00:Q1
99:Q3
99:Q1
98:Q3
98:Q1
97:Q3
97:Q1
96:Q3
96:Q1
95:Q3
95:Q1
Per cent of potential GDP
4
4
3
3
2
2
1
1
0
0
-1
-1
-2
-2
-3
-3
Per cent of potential GDP
The range of our output gap estimates
Consumer price index
Core inflation
Jan-08
Per cent
Sep-07
May-07
Jan-07
Sep-06
May-06
Jan-06
Sep-05
May-05
Jan-05
Sep-04
May-04
Jan-04
Sep-03
May-03
Jan-03
Sep-02
May-02
10
Jan-02
Core and headline inflation
Per cent 10
9
9
8
8
7
7
6
6
5
5
4
4
3
3
2
2
1
1
0
0
Our latest inflation forcast and risk scenarios
10
Percent
Percent
10
facts
baseline
higher inflation expectations
10:Q4
10:Q3
10:Q2
10:Q1
09:Q4
0
09:Q3
0
09:Q2
1
09:Q1
1
08:Q4
2
08:Q3
2
08:Q2
3
08:Q1
3
07:Q4
4
07:Q3
4
07:Q2
5
07:Q1
5
06:Q4
6
06:Q3
6
06:Q2
7
06:Q1
7
05:Q4
8
05:Q3
8
05:Q2
9
05:Q1
9
unfavourable external environment