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Brian Doyle
Linda Kole
Paul Wood
March 8, 2007
Foreign Experience with the Formulation and Discussion of Inflation Objectives1
Almost all of the major foreign central banks have adopted inflation objectives during the past
seventeen years. This note elaborates further on the experience of nine advanced-economy
central banks with these objectives, complementing the background paper for the January 2005
FOMC meeting and a recent update to that paper this past October. The paper focuses on two
broad issues: (1) the formulation of inflation objectives (sections 1 to 4), and (2) how central
banks talk about their objectives and the horizons at which they hope to meet these objectives
(sections 5 and 6). The features of these objectives are presented in Table 1.
To summarize the main points in this note:
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•
•
•
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1
Of the central banks studied, most have inflation objectives that include both a point
target and a range. The ranges are either symmetric around the point target or
asymmetric with the target near the top of the range. At present, the ranges are generally
seen as having soft edges, so that inflation rates just inside and just outside the range are
not treated as sharply different.
For most central banks, the center of the inflation objective is 2 percent or 2½ percent.
The width of the range or tolerance region is typically 2 percentage points.
The targeted price index is nearly universally a CPI, most often an all-items CPI.
However, central banks make heavy use of other price indexes (usually some kind of core
CPI or measure of underlying inflation) when formulating and communicating policy.
Who sets the inflation objective differs across central banks. In most of the six selfdescribed inflation targeters, the central bank and government have some joint role in
setting the target. The three central banks that do not consider themselves inflation
targeters set their own inflation objectives. In many cases, the inflation objective is
reviewed periodically.
Central banks usually refer to their inflation objectives in their press releases or press
conferences aimed at explaining policy moves, especially when policy is being tightened.
Often there is a reference to inflation pressures, inflation expectations, and/or some
discussion of inflation prospects. Some central banks use a similar template every time
they announce a policy decision, even if it results in no policy change, while others
Karen Johnson, Steven Kamin, and Michael Leahy contributed comments to this paper.
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•
•
utilize a shorter announcement when policy remains unchanged. When commodity price
shocks or tax changes lead to temporary surges in measured inflation, most central banks
discuss how they see underlying inflation evolving rather than focusing only on headline
inflation, which tends to be more volatile. Some refer explicitly to their own inflation
forecasts and how they have changed (the Riksbank and the Norges Bank); others are
more qualitative and descriptive (the Reserve Bank of Australia (RBA)).
Almost all of the central banks with inflation objectives make tradeoffs between their
inflation objectives and other goals, such as output stabilization. Most cite output
stabilization in their explanations of policy rate decisions. Those central banks with clear
mandates to stabilize output (such as the RBA or Norges Bank) establish a central role
for it in their communications, while those whose goal of output stabilization is less
explicit at times imply that output stabilization is conditional on meeting the inflation
target. Most central banks discuss developments and prospects for output or employment
as factors behind the likely evolution of inflation.
All of the central banks characterize the horizon at which they hope to meet their
inflation goal, but some do not specify a precise time frame. In the past few years, some
central banks have emphasized that their horizons may be shorter or longer depending on
the shocks hitting the economy and the need to meet other goals.
1. Rates and ranges
Figure 1 shows the evolution of target ranges for most of the central banks in this study (the
Bank of Japan’s is not shown), along with inflation (the black line). Where point targets fall
within these ranges varies across central banks, as does the emphasis given by policymakers to
point targets versus ranges. The objectives that are expressed as ranges or tolerance regions have
over time been changed to or interpreted as having less hard edges than initially. That has served
to reduce the distinction between objectives that are ranges and those that are points.
New Zealand and Australia have target ranges but do not seem to prefer any one point within
their respective ranges to another. The Bank of Canada (BoC) has a target range of 1-to
3 percent, but its communication often emphasizes the midpoint in addition to the range.
The other three inflation targeters have a point target, but with an explicit or implicit range
around the target. The Swedish Riksbank has a target of 2 percent, with a “tolerance” region of
1 percentage point on either side, though it does not usually refer to this region in its press
releases and minutes. The Bank of England (BoE) also has a point target of 2 percent, but if
inflation deviates by more than 1 percentage point from this objective, the Monetary Policy
Committee (MPC) must write an open letter to the Chancellor of the Exchequer describing the
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reasons for the deviation and the steps the MPC will take to bring it back, how these steps are
consistent with other goals, and when the MPC expects inflation to return to target. The MPC
has yet to have to write such a letter. Similarly, the Norges Bank has indicated that “if there are
significant deviations between actual price inflation and the target, the Bank will provide a
thorough assessment in its annual report. Particular emphasis will be placed on any deviations
outside the interval of +/- 1 percentage point.” 2
Two central banks who do not consider themselves inflation targeters, the European Central
Bank (ECB) and the Swiss National Bank (SNB), have asymmetric inflation objectives. The
SNB aims to keep inflation below 2 percent. The ECB aims at an inflation rate below but close
to 2 percent over the medium term. Prior to May 2003, the ECB Governing Council had
specified a simpler objective of inflation below 2 percent. However, it faced considerable
criticism for establishing a target ceiling but no floor, for providing insufficient guidance as to
what average rate to expect, and for lack of clarity about whether inflation rates slightly above
2 percent would be treated fundamentally differently from rates just under 2 percent. In May
2003, the ECB adopted the current formulation, but still was criticized for not providing a clear
definition of “close to 2 percent.”
The Bank of Japan (BoJ) during its episode of quantitative easing promulgated an asymmetric
goal of inflation greater than zero. More recently, the BoJ polled the members of its Policy
Board and concluded that their views on the definition of price stability are consistent with a
range from 0-to-2 percent, with most members’ medians near, but on both sides of, 1 percent.
For the central banks that consider themselves inflation targeters, the width of their ranges is
typically 2 percentage points. Australia is the exception in having a relatively narrow range of
1 percentage point, although it could be argued that the RBA interprets its target range as
effectively a “thick point,” in that inflation rates outside the range are tolerated as long as
inflation remains within the range on average over the business cycle.
The structure of inflation objectives has evolved over time for some of the central banks. The
Bank of England has seen the most change. In October 1992 its objective was a range of 1-to
4 percent, with the aim of bringing inflation down to the lower part of the range. In June 1995,
its objective was changed to an asymmetric goal: inflation of 2½ percent or less. In May 1997,
at the creation of the MPC and the granting of BoE independence, the goal became a point target
of 2½ percent on the RPIX with deviations in either direction treated symmetrically. Despite the
aim of the initial target range, the 1-to-4 percent band was perceived by many as a “range of
indifference,” which implied that inflation just outside the range would be viewed as
2
Norges Bank (2001a).
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qualitatively different from inflation just inside the range. Over this period, inflation tended to
stay near the upper border of the range.3 Dissatisfaction with this outcome motivated the
decisions to shift to an inflation ceiling and later to a point target with deviations in either
direction treated symmetrically.
Similarly, the Reserve Bank of New Zealand (RBNZ) initially acted as if its target band had
“hard edges,” with inflation just outside the band treated as qualitatively different from inflation
just inside the band. The combination of a very low target range (0-to-2 percent) and hard edges
made the initial framework perhaps the most aggressive and single-minded approach to
harnessing inflation of those we consider. This framework may have been a response to New
Zealand’s relatively poor record with inflation. As time passed and inflation became better
behaved, this framework came under criticism for creating excessive volatility in interest rates,
exchange rates, and output. In response, the RBNZ not only raised its target range (as discussed
below) but also softened the edges of the range, showing less concern for small short-term
movements outside of the range.4
In Canada, the Governor and the Minister of Finance initially called in early 1991 for a gradual
reduction of the inflation rate—first to 3 percent by the end of 1992, then to 2½ percent by mid
1994, and finally to 2 percent by the end of 1995. In December 1993, with inflation fluctuating
below 2 percent, the Finance Minister and the Governor announced the first of three extensions
of a 1-to-3 percent target range, with a midpoint of 2 percent.
2. Which number?
For central banks that consider themselves inflation targeters, the point target is most frequently
between 2 percent and 2½ percent. Norway has a target of 2½ percent and Australia’s target
range is centered on 2½ percent. The United Kingdom, Sweden, Canada, and New Zealand have
a target or midpoint of 2 percent. The ECB and the Swiss National Bank have a 2 percent
ceiling, with no specified midpoint. The Bank of Japan has chosen not to set an inflation target
but to report indications of the views of individual Policy Board members on medium- to long
term price stability. The BoJ board members have preferences that center around 1 percent, well
below the targets or midpoints of other central banks.
3
Bernanke et al. (1999) describe the conflicts between the Chancellor of the Exchequer, who made monetary policy
decisions at the time, and the Bank of England, which published forecasts and provided advice. Despite a number of
forecasts from the Bank that showed inflation at the top of the range and possibly exceeding it, the Chancellor either
did not tighten or even at one point eased monetary policy in response to concerns about the rate of GDP growth.
4
RBNZ Deputy Governor Murray Sherwin (1999) described this change as moving “in the direction of the
Australian-style ‘thick point.’”
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In addition to the changes to the U.K. and Canadian targets described above, the most significant
changes in the level of an inflation target have been in New Zealand. The RBNZ started with a
range of 0-to-2 percent and subsequently the government raised the range in two steps, first
raising the ceiling to 3 percent and then raising the floor, for a range of 1-to-3 percent. The
RBNZ is the only major inflation-targeting central bank to have had a range that included zero,
which was ultimately abandoned as unsatisfactory.
Reasons that central banks or governments have given for choosing an inflation target that is
above zero include concerns that macroeconomic stabilization would become more complicated
if inflation were near zero because of downward nominal wage rigidity, the zero lower bound for
nominal interest rates, the upward bias in the consumer price index (CPI), and the potential risk
of deflation. In addition, central banks have expressed the belief that the marginal benefits of
very low inflation are likely to be small relative to the costs of achieving it.
Other reasons offered for choosing a particular number for the target are less “rigorous.” When
discussing desirable inflation levels with the government in the late 1980s, RBNZ officials “were
more than a little surprised to see [then Minister of Finance] Mr. Douglas indicate in a television
news interview broadcast on 1 April 1988 that policy was to be directed to reducing inflation to
‘around 0 or 0-to-1 percent’ over the following couple of years.”5 In both Canada and the United
Kingdom, as discussed above, the initial targets were paths for inflation over the next few years.
The end points or lower ranges of these paths tended to become the inflation target.
Historical continuity has been another reason for choosing a particular level. In Norway, the
Regulation on Monetary Policy specified a goal of 2½ percent for inflation because that rate was
close to the average for inflation in Norway since the beginning of the 1990s.6 For the ECB, the
inflation ceiling of 2 percent was justified mainly on the grounds of continuity—the Bundesbank
had used 2 percent as the rate of inflation on which it based its monetary growth targets, and the
Council of the European Union had, after July 1995, focused in its statements on encouraging
member states to achieve inflation below 2 percent.
In several countries, the level of the inflation target was justified in part by the fact that it was
consistent with target levels chosen in other countries that had enjoyed success with inflation
targeting regimes. In particular, Sweden and Australia used this as a justification for choosing
their respective inflation target levels.7
5
Reddell (1999)
See the Norges Bank’s website, “Monetary Policy in Norway – Objective.” {http://www.norges
bank.no/english/monetary_policy/in_norway.html}
7
As Glenn Stevens (2003) said “To be frank, this was to some extent serendipitous. We were already in that
neighbourhood, with inflation down to about 2 percent by 1992. When we looked around at the best performances
6
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3. Which index?
All of the central banks that we study target increases in a CPI, usually the overall (all-items)
CPI. The Norges Bank is the exception in that it puts particular emphasis on CPI inflation
adjusted for tax changes and excluding energy products (CPI-ATE).
The rationale that central banks give for targeting the overall CPI is that it is broad, familiar to
the public, and the most relevant index for consumers’ cost of living.8 Furthermore, the CPI
generally has the practical advantages of being available monthly, with a short lag, and it is
essentially never revised. In choosing a target index, the Riksbank explicitly recognized a tradeoff between choosing a core versus broad inflation index. The core index would involve fewer
transitory fluctuations and, thus, might be a better indicator of underlying inflationary pressure;
the broad index is familiar to the public and closer to the measure affecting long-run decisionmaking. It chose the broad index, recognizing that this implied the need for more frequent
explanations—explanations that might have to be “technical and focused on details.”9 In
Australia, the choice of the overall CPI rather than alternative measures such as the private
consumption deflator reflected the fact that the CPI had the greatest public recognition.
Central banks generally have sought to avoid targeting an index that includes interest payments.
The BoE, the RBNZ, and the RBA each at one time targeted an inflation measure that excluded
the direct effect of changes in interest rates; all three now target overall inflation because in each
country the definition of overall inflation has been changed to exclude interest payments.
Similarly, euro-area headline inflation excludes mortgage interest payments.
Even as they target overall inflation, the central banks make heavy use of other price indexes
(usually some kind of core CPI) when formulating and communicating policy. For instance, the
Riksbank has reported and discussed several core inflation measures, especially underlying
inflation (the UND1X measure of inflation), in justifying its policy decisions to allow CPI
inflation to deviate from target in the short run, although the citation of other measures has
decreased since adopting a longer policy horizon (see below).10 Swedish inflation as measured
by the CPI has often differed considerably from other potentially relevant measures, and the
Riksbank has stated that no single index gets special attention in justifying the short-run course
on inflation, we saw first that no one had managed to keep inflation within a very narrow band for long, and second,
that the best average performances since World War II were in the ‘two point something’ region, with quite a wide
degree of variation around that average.”
8
It is “most relevant for the cost of living for most Canadians,” Bank of Canada (1991).
9
Heikensten (2000).
10
See, e.g., any of the quarterly inflation reports of the Riksbank. The role of the various indexes is detailed in the
2003:3 Inflation Report. Rosenberg (2004a) provides further discussion on this point with examples.
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of policy. The items that are most often excluded from core are food prices, energy prices, and
the effects of indirect taxes.
The Bank of Canada uses a core measure of inflation to guide policy in the short term, because
such a measure excludes certain components of the CPI that are seen as volatile and subject to
transitory influences requiring no policy response. The core measure used excludes eight
volatile components of the total CPI and the effects of indirect tax changes. This measure is seen
as moving closely on average with total CPI, but in the event of persistent differences between
the two measures, the Bank says it would adjust its desired path for core CPI to meet its target
with respect to total CPI. In Australia, the central bank regularly considers a wide range of
inflation measures, and the index receiving the most emphasis varies over time. Among the
measures the RBA monitors are the CPI excluding volatile items and the price of market goods
and services excluding volatile items.11 The RBA also publishes a weighted median and a
trimmed mean measure of CPI inflation that it considers to be proxies for underlying inflation.12
The ECB has focused its public discussion of policy almost solely on overall inflation rather than
on any measure of core inflation. ECB policymakers have expressed the belief that core inflation
is not a good indicator of future trends in overall inflation (the targeted index); rather they
believe that, in the euro area, when the two inflation measures differ, core inflation has tended to
move towards overall inflation rather than the reverse. That said, ECB policy has not always
responded to changes in energy prices, food prices, and indirect tax changes that were thought to
have transitory effects.
A number of central banks have seen changes to the index that they target. Some of these
changes have been relatively minor, such as in the case of New Zealand, where inflation was
redefined to exclude credit services, such as mortgage interest payments. In December 2003, the
Bank of England faced a more substantial change with the switch in its target index from the
Retail Price Index excluding mortgage interest payments to the Consumer Price Index. This
change was not well received, even within the Bank, in part as it excludes any measure of the
price of owner-occupied housing services. Despite these concerns, the change seems to have
occurred with relatively few problems.
11
The volatile items that are excluded are fruits and vegetables, and gasoline. The prices of market goods and
services exclude these as well as prices of goods and services that are set by the public sector, such as for
pharmaceuticals and urban transport.
12
The trimmed mean is calculated by removing a certain proportion of the weight from each tail of the distribution
of price changes, rescaling the remaining weights to sum to one, and calculating the weighted mean of the remaining
distribution. The weighted median is calculated as the weighted price change in the middle of the distribution.
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4. Who sets the target?
Who sets the inflation objective differs across central banks. The three central banks that do not
consider themselves inflation targeters set their own inflation objectives. Of the six selfdescribed inflation targeters, two have targets set by the government together with the central
bank (BoC and Norges Bank), two have targets that were originally set by the government (BoE
and RBNZ), and two have targets initially set by the central bank (Riksbank and RBA). In these
latter cases, there may have been some consultation between the government and the central
bank. In some cases, the responsibility for setting the target appears to have shifted to being
shared to some extent by the government and the central bank, even though such sharing is not
required by law. The RBNZ Act establishes that the government should determine the specific
inflation target and any trade-offs between inflation and output. However, the target is specified
in “Policy Target Agreements” (PTAs), which are described as agreements between the Minister
of Finance and the RBNZ Governor. The RBA originally announced its own inflation target in
1993, and the target was formalized in August 1996 when the government and Governor issued
its first “Statement on the Conduct of Monetary Policy.” In Sweden, although the government
had announced in 1991 that low inflation was an overriding political goal, the Riksbank’s
January 1993 announcement of an explicit inflation objective was unaccompanied by legislative
change.13 Soon thereafter, various changes to the Riksbank’s legislative mandate were proposed.
Many of these were adopted in 1999, when a new Constitution and new Riksbank Act came into
effect.
Some central banks review the numerical inflation objective periodically, sometimes according
to a pre-set schedule. The joint agreements of the Bank of Canada and the Minister of Finance
are renewed every five years, with the most recent agreement adopted in November 2006. The
remits from the Chancellor of the Exchequer to the Bank of England are sent once a year at the
time of the budget in the spring. However, the Chancellor can, in principle, change the inflation
goal at any time. In Japan, the range that describes the Board’s understanding of price stability,
first set in March 2006, will be reviewed annually and so could change as the current Board
members change their views or as the membership of the Policy Board changes.
For the Reserve Banks of New Zealand and Australia, the review of the inflation targets
sometimes occurs with political or staff changes. There is no set frequency for renewal or
revision of the RBNZ’s PTAs. After the initial target was set in March 1990, PTAs were issued
in December 1990 and December 1992. However, the formation of a new government was the
occasion for a new PTA in December 1996; the most recent PTA came at the beginning of the
13
The Riksbank stated an inflation goal accompanied by a two-year startup period, so that the goal was to become
operational in January 1995.
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five-year term for the RBNZ governor in December 2002. Likewise, the Reserve Bank of
Australia has issued joint statements with the government in 2003, when the Governor was
reappointed, and in 2006, when a new Governor was appointed.
Even in other cases where the numerical objective for inflation is not subject to regular review,
central banks do make occasional changes to their inflation objectives, such as the ECB’s
clarification of its objective in May 2003 mentioned above. Likewise, even with pre-announced
times to review the goals, changes have been made at other moments. For example, the
Chancellor of the Exchequer Gordon Brown announced his intention to alter the Bank of
England’s inflation goal, changing the index and lowering the numerical target, in June 2003,
just two months after releasing his latest remit.
5. Discussion of inflation and other objectives
In general, central banks that have set explicit inflation objectives have drawn clear links
between their inflation targets and their policy actions in subsequent communication. Many do
so in press releases or statements at the time a policy change is announced. Some even do so
when policy remains unchanged (RBNZ, BoC). Communication strategies have changed over
time and have tended to give a greater role to the inflation objective. For specific examples,
please see Appendix 1.
Almost all of the central banks with inflation objectives face tradeoffs between their inflation
objectives and other goals. Although some of the early adopters of these inflation objectives
appeared to be single-minded in the pursuit of their inflation goals, usually at a specific horizon,
most have evolved into so-called or self-described “flexible inflation targeters.” By this is meant
that in general, other goals—mainly output stabilization—are cited at times to justify deviations
from price stability in the short run.
As shown in the last row of Table 1, in most cases, central banks with explicit inflation
objectives also have mandated goals (sometimes secondary) to stabilize output or employment.
Some also have goals to manage the value of the exchange rate, interest rates, or to maintain
financial stability. Unlike inflation goals, none of these other goals is characterized with an
explicit numerical target. The relative importance of these goals is not always clear: the
mandates are phrased in different ways and are set down in a variety of documents. Sometimes
the goals are specified in legislation, or in a treaty in the case of the ECB, other times in
directives from the government or in other official documents.
Some central banks have relatively clear mandates for an output or employment goal. For
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example, Norway’s Regulation on Monetary Policy declares that the objective of monetary
policy is to maintain the domestic and international value of the krone with the operational target
of 2½ percent inflation, but the regulation also states that monetary policy should contribute to
stable developments in output and employment. In Australia, the Reserve Bank Act requires the
RBA’s Board to stabilize the currency, maintain full employment, and contribute to the
economic prosperity and welfare of the people of Australia. In New Zealand, the 1999 PTA for
the first time included the statement that “[i]n pursuing its price stability objective, the Bank
shall . . . seek to avoid unnecessary instability in output, interest rates and the exchange rate.”
In contrast, other central banks have mandated objectives for output or employment that appear
to be in some way secondary to inflation. However, many central banks in practice appear to be
balancing output and inflation stabilization. For example, the Riksbank Act specifies two goals
for monetary policy: maintaining price stability and a safe and efficient payments system. Other
official documents indicate that the Riksbank also should support the goal of full employment, so
long as achieving it does not conflict with attaining price stability.14 However, Riksbank
officials publicly speak of balancing deviations of inflation from target against deviations of
output and employment from potential.15 The treaty under which the ECB was established sets
price stability as its primary objective, but also provides that “without prejudice to the objective
of price stability,” the ECB will also support “high level of employment” and “sustainable and
non-inflationary growth.” The Bank of England Act states that the goal of the MPC is “[to]
maintain price stability and, subject to that, to support the economic policies of Her Majesty’s
Government, including its objectives for growth and employment.” Some MPC members seem
to have interpreted “subject to that” to mean, strictly, that they should not deliberately allow any
short-run deviation of inflation from the target to pursue other objectives. Others argue for a
more flexible interpretation.16 Former MPC member Charles Goodhart (2004) argues that
ultimately the MPC will be shown to be a flexible inflation targeter, trading off inflation and
growth in the short run in a manner similar to other central banks.
When explaining policy actions, central banks often cite output or employment in their
reasoning, but how they talk about these goals varies. In general, central banks with clearer
mandates to stabilize output treat this goal independently in their official statements at the time
of monetary policy decisions. For example, in April 2001, the RBNZ stated, “The main reason
14
Bäckström (2001).
Deputy Governor Rosenberg (2004b): “Simplified, one can say that the Riksbank’s task is to keep actual output
as close to potential output as possible. The higher the long-term sustainable growth rate, the higher the actual
growth rate can be without resource utilisation becoming so high that inflation takes off and the Riksbank is forced
to intervene to subdue demand.” Also, then-Deputy Governor Heikensten (2000): “the Riksbank considers
developments in the real economy and tries, when making decisions, to avoid unnecessary disturbances and
fluctuations in growth and employment.”
16
Bean (2000), King (2002).
15
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for cutting the OCR again is slowing growth in New Zealand’s main trading partners. This
slowdown in global growth will have an adverse impact on demand for our exports, and is likely
to reduce inflationary pressures . . . .” In December 2001, the RBA lowered its policy rate
saying that it would “. . . support growth in domestic demand, at a time when international
conditions are weak, and will be consistent with achieving the inflation target over the medium
term.” The Norges Bank, in December 2003, lowered rates and said that it “weighed the
objective of bringing inflation back to target and stabilising inflation expectations on the one
hand against the risk that output growth may gradually become too strong on the other.”
In cases where the role of the output stabilization goals is less clear, central banks often cite
output developments to explain what will happen to inflation or imply that output stabilization is
conditional on also meeting the inflation target. For example, the Bank of Canada in May 2001
noted that lowering its policy rate “will support aggregate demand in the economy consistent
with keeping inflation close to the Bank’s inflation-control target of 2 per cent over the medium
term.” In the United Kingdom in August 2005, the MPC eased policy stating that “. . . in the
Committee’s view, the slackening in the pressure of demand on supply capacity should lead to
some moderation in inflation . . . . a decrease . . . in the repo rate . . . was necessary to keep CPI
inflation on track to meet the 2% target in the medium term.” The ECB lowered rates in August
2001, noting that “. . . there are clear signals of lower inflationary pressures from the demand
side . . . . over time, the expected decline in consumer price inflation, to which the strengthening
of the exchange rate has contributed, should support the growth of domestic demand.” Finally,
the Swiss National Bank in December 2001 noted that “economic outlook has . . . continued to
deteriorate around the globe. In Switzerland, there are no signs that price stability might be
jeopardised in the medium term. This development makes it possible to reduce rates again.”
6. Horizon at which inflation is brought back to the target
Another aspect of the trade-off faced by central banks with explicit numerical inflation
objectives is at what horizon to bring inflation back to its target. A more distant horizon may
allow for greater consideration of other policy goals, such as output stabilization. One
implication of the evolution of many central banks into flexible inflation targeters is that inflation
objectives are currently treated as medium-term targets.
At least in a conceptual sense, all central banks characterize the horizon at which they hope to
meet their inflation goals. As Table 1 shows, however, some of these characterizations are not
specific. In New Zealand, the 2002 Price Target Agreement stated that the target should be met
“on average over the medium term.” Previously the horizon had been taken to be one year
ahead. Some banks who adopted inflation objectives later, such as the Reserve Bank of
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Australia and the European Central Bank, also adopted similar horizons at which to meet their
objectives; the RBA says that it tries to hit its inflation objective “on average over the cycle.”
Other central banks stipulate a particular period over which they will try to bring inflation back
to target. These specific intervals range from six to eight quarters at the Bank of Canada to three
years at the Swiss National Bank, with the median interval at two years. In most cases, these
periods are articulated solely by the central bank rather than stipulated by the government or as
part of a joint agreement.
Recently a number of the central banks that specify a particular time frame have emphasized that
their horizons may be nearer or more distant depending on the shocks hitting the economy and
the need to meet other goals. In July 2004, the Norges Bank changed its target period from
“about two years” to one-to-three years. In March 2005, the Riksbank pointed out that “Under
very special circumstances, when inflation deviates substantially from target, there may be
justification for allowing inflation to return to target beyond the normal two-year horizon.”17
Likewise, in November 2006 the Bank of Canada noted that “specific occasions may arise in
which a somewhat shorter or longer time horizon might be appropriate.”18
For a couple of these banks, these shocks include, but are not limited to, the effects of
movements in asset prices. The Bank of Canada further noted in its inflation target renewal that
“. . . the longer-lasting nature of some shocks, such as large asset-price movements could, in
some instances, suggest a longer horizon.” In September 2006, a Riskbank official said that
concerns over the rate of increase in house prices played a role at the February 2006 policy
meeting, when the committee tightened policy “despite the fact that the forecasted inflation path
showed the rate as being at the lower edge of the target margin two years ahead, and low for the
majority of the forecast period.”19
17
Sveriges Riksbank (2006).
Bank of Canada (2006)
19
Rosenberg (2006).
18
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References
Bäckström, Urban (2001), “What Shall Guide Monetary Policy,” Speech, April 17.
Bank of Canada (1991), “Background Note on the Targets,” Bank of Canada Review, March, pp.
9-15.
Bank of Canada (various dates), Press releases concerning monetary policy actions.
Bank of Canada (2006), Renewal of the Inflation-Control Target: Background Information,
November, Ottawa, Canada.
Bank of England (various dates), Press releases concerning monetary policy actions.
Bank of Japan (various dates), Press releases concerning monetary policy actions.
Bean, Charles (2000), Testimony before the House of Commons Treasury Select Committee,
October 30.
Bernanke, Ben, Thomas Laubach, Frederic Mishkin, and Adam Posen (1999), Inflation
Targeting: Lessons from the International Experience, Princeton University Press, Princeton,
NJ.
Doyle, Brian, Jon Faust, Linda Kole, Mike Leahy and Paul Wood (2005), “The Foreign
Experience with Explicit Numerical Price Objectives,” a background paper prepared for the
January 2005 FOMC meeting.
Doyle, Brian (2006), “Update on the Explicit Numerical Price Objective Project,” a
memorandum sent to the FOMC, October 12.
European Central Bank (various dates), Transcripts of the press conferences.
Goodhart, Charles (2004), “The Monetary Policy Committee’s Reaction Function: An Exercise
in Estimation,” manuscript, LSE, December.
Government of Australia (1959), The Reserve Bank Act, Office of Legislative Drafting,
Attorney-General’s Department, Canberra, Australia
Government of Sweden (2007), The Sveriges Riksbank Act.
Heikensten, Lars (2000), “Six Monetary Policy Issues,” Speech, November 7.
King, Mervyn (1997), “The Inflation Target Five Years On,” Speech delivered at the London
School of Economics, October 29.
King, Mervyn (2002), “The Inflation Target Ten Years On,” Speech delivered at the London
Page 13 of 19
Authorized for public release by the FOMC Secretariat on 04/15/2016
School of Economics, November 19.
Norges Bank (various dates), Press releases concerning monetary policy actions.
Norges Bank (2001a), “Guidelines for Monetary Policy,” letter to Ministry of Finance, March
27.
Norges Bank (2001b), “Regulation on Monetary Policy,” March 29.
Reddell, Michael (1999), “Origins and Early Development of the Inflation Target,” Reserve
Bank of New Zealand Bulletin, 62, 3.
Reserve Bank of Australia (various dates), Press releases concerning monetary policy actions.
Reserve Bank of Australia (2006), “Third Statement on the Conduct of Monetary Policy,”
September 18.
Reserve Bank of New Zealand (1999), “New Policy Targets Agreement”, press release,
December 16.
Reserve Bank of New Zealand (various dates), Press releases concerning monetary policy
actions.
Rosenberg, Irma (2004a), “The Inflation Target and the CPI,” speech, May 4.
Rosenberg, Irma (2004b), “Monetary Policy and the Conditions for Growth,” speech, November
1.
Rosenberg, Irma (2006), “Monetary Policy in Sweden,” a speech given at the Swedibank on
September 18.
Sherwin, Murray, (1999), “Strategic Choices in Inflation Targeting: the New Zealand
Experience,” Reserve Bank of New Zealand Bulletin, 62, 2.
Stevens, Glenn (2003), “Inflation Targeting: A Decade of Australian Experience,” speech to the
South Australian Centre for Economic Studies, April 10.
Sveriges Riksbank (various dates), Press releases concerning monetary policy actions.
Sveriges Riksbank (2006), “What Factors Influence an Interest Rate Decision,” June 29, posted
on Sveriges Riksbank website.
Swiss National Bank (various dates), Press releases concerning monetary policy actions.
Wood, Paul (2006), “The Bank of Japan's Survey of Board Members' Views on Price Stability,”
a memorandum sent to the FOMC, November 3.
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Appendix 1: Recent Communications by Major Foreign Central Banks
The RBNZ tends to focus on inflation pressures with an occasional reference to the inflation
target band in its statements explaining policy moves. For example, when increasing its official
cash rate in October 2005, the Bank noted that “we see no prospect of easing in the foreseeable
future if inflation is to be kept within the 1 per cent to 3 per cent target range on average over the
medium term.” The Reserve Bank also talks about its inflation goal in its quarterly Monetary
Policy Statements, which include its inflation forecast, and in press conferences. For instance, in
August 2001, the RBNZ left its official cash rate unchanged, but at the release of the August
monetary policy statement, Governor Brash said “reasonable estimates suggest that so far the
‘underlying trend in prices’ remains well within the target range and, on present assumptions, the
CPI should track back to somewhere near the middle of our inflation target by mid next year.”
Recent statements by the Bank of Canada also focus on the inflation target. At its latest policy
meeting on January 16, the Bank kept its target for the overnight rate at 4¼ percent and stated,
“The Bank judges that at the end of 2006, the Canadian economy was operating at, or just above
its production capacity . . . . [The outlook for CPI inflation is projected to] average just above
1 percent in the first half of 2007, returning to the 2 percent inflation target in early 2008. Core
inflation should return to 2 percent in the first half of 2007 and remain there . . . . In line with the
Bank’s outlook, the current level of the target for the overnight rate is judged, at this time, to be
consistent with achieving the inflation target over the medium term.”
The Bank of England usually mentions where inflation stands relative to the 2 percent target
and also provides some indication of the direction inflation is expected to go over the medium
term in justifying its rate changes. For example, the latest rate hike on January 11, 2007 was
accompanied by the following statement: “Sterling has risen and oil prices have fallen back. But
the margin of spare capacity in the economy appears limited, adding to domestic pricing
pressures. CPI inflation was 2.7% in November. It is likely that inflation will rise further above
the target in the near term, but then fall back as energy and import price inflation abate . . . . the
risks to inflation now appear more to the upside . . . . an increase in the Bank Rate . . . was
necessary to bring CPI inflation back to the target in the medium term.” When it does not
change rates, the MPC does not provide any explanation in its statement. However, a fuller
description of the Committee’s thinking is provided in the minutes released around two weeks
after the policy meeting. These descriptions usually make reference to the inflation target. For
example, at the February meeting, some members argued that “a further rise in interest rates was
required to return inflation to target.”
The Riksbank’s early press releases emphasized that inflation expectations were evolving
favorably towards its price stability objective, indicated by periodic surveys or declines in longPage 15 of 19
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term interest rates. The inflation target itself was not mentioned in early press releases when the
Riksbank was easing, but it was mentioned whenever policy rates were increased. Press releases
at the time of the quarterly inflation reports always indicated whether inflation was expected to
meet the target. Over time, policy statements have lengthened, providing more details on the
Riksbank’s outlook for growth, inflation, and interest rates. Like the BoE, the Riksbank also
issues minutes that provide rationales for policy moves in terms of the inflation goal.
When the RBA changes its target for interest rates, its statements almost always mention the 2
to-3 percent target range. For example, on November 6, 2006, after deciding to increase policy
rates, Governor Glenn Stevens announced, “The Board judged this to be an environment in
which the risks of inflation exceeding 2-3 per cent over the medium term remained significant . .
. . the Board’s judgement yesterday was that a somewhat more restrictive stance of monetary
policy was required in order to moderate inflation over time, and thereby to secure sustainable
growth.” The RBA issues statements only when it changes rates.
Since October 2003, Norges Bank has released detailed statements explaining its decisions and
its economic outlook. The most recent statement did not focus on the inflation target, chiefly
because inflation has been undershooting it for some time, despite capacity and labor market
pressures that convinced the Bank to hike rates in January 2007. Prior to October 2003, the
Norges Bank issued statements that were relatively short and focused on the balance of risks to
inflation. For example, in December 2001, Governor Gjedrem announced a rate cut and said that
“according to Norges Bank’s assessment, the probability that inflation two years ahead will be
lower than 2½ percent is greater than the probability that it will be higher.”
The ECB issues a short press release following each of the Governing Council’s policy decisions
and the President holds a press conference where he makes an introductory statement before
taking questions. The statement summarizes the policy decision and the reasons underlying it,
such as prospective economic growth, inflation and its risks, and money growth, as well as other
topics. For many years, the euro-area inflation rate exceeded the ECB’s objective of 2 percent,
so the Governor needed to explain forces that were likely to bring inflation down.
The SNB also holds a press conference after some of its policy meetings, but it is unique in that
it releases an inflation forecast with each meeting. These forecasts include a graph of the
inflation forecast and the previous projection, as well as the reasons behind any rate change and a
qualitative assessment of the future direction of monetary policy. However, the SNB usually
does not make explicit reference to its numerical inflation objective.
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During the period that the Bank of Japan maintained a policy of quantitative easing from March
2001 to March 2006, the Bank made reference to its attempt “to prevent a continuous decline in
prices” or “to overcome deflation.” When the BoJ terminated quantitative easing in March,
Governor Fukui laid out a new framework for the conduct of monetary policy, including
clarifying Policy Board members’ understanding of price stability. On two occasions since then,
when its target for the overnight call rate was raised 25 basis points last July and this February,
the BoJ has made reference to this new framework in explaining its actions. The statements
presented the change, the vote of each Policy Board member, the Policy Board’s outlook for
economic activity, and an assessment of inflation. A much shorter press release is used when
policy is unchanged and no explanation is provided.
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Table 1: Features of Monetary Policy Frameworks with Explicit Numerical Inflation Objectives
New Zealand
Canada
United Kingdom
Sweden
Australia
Norway
ECB
Switzerland
Japan
Date first issued
March 1990
February 1991
October 1992
January 1993
April 1993
March 2001
January 1999
January 2000
March 2001
Current target
1-3%
1-3% with 2%
midpoint
2%
2% +/- 1%
2-3%
2.5%
Less than but close
to 2%
Less than 2%
See “other
features” below
Inflation measure
CPI
CPI; operational
objective is CPI
excl. 8 volatile
components and
indirect taxes
CPI (HICP)
CPI
CPI
CPI excluding
energy and real
taxes
Euro-area CPI
(HICP)
CPI
CPI excluding
fresh food
Policy horizon
Medium term
Usually
6 to 8 quarters
Informal 2-year
Usually 2 years
On average over
the cycle
1 to 3 years
Medium term
3 years
Other features
Governor could
be dismissed if
inflation
performance
inadequate;
explicit escape
clause
Persistent
deviations outside
range require
additional
discussion in
Monetary Policy
Report
Deviations of more
than 1 percentage
point lead to open
letter to Chancellor
If outside
range,
additional
communication
required
Current target
duration
Up to 2007
To end of 2011
1997 onward,
reviewed yearly
1995 onward
Indefinite (with
periodic review)
2001 onward
January 1999
onward
January 1999
onward
Reviewed yearly
Government
involvement in
establishment of
ENPO
Originated with
the government
Jointly announced
by bank and
government
Originated with the
government. Later
codified into law
Originated by
bank. Later
codified into
law.
Initiated by
bank. Later
formalized by
agreement
between the
Treasurer and
the bank
Established by
Royal Decree.
Later modified
slightly by bank
Originated by bank
Originated by
bank
Originated by bank
Target set by
Minister of
Finance
Minister of
Finance &
Governor of Bank
of Canada
Chancellor of the
Exchequer
Riksbank
Reserve Bank of
Australia
Norges Bank &
Government of
Norway
European Central
Bank
Swiss National
Bank
Bank of Japan
Mandate
Price stability,
avoiding
unnecessary
instability in
output, interest
rates and
exchange rates
To promote the
economic and
financial welfare
Price stability and,
subject to that,
growth and
employment
Price stability
and financial
stability
Stability of the
currency,
maintenance of
full employment,
economic
prosperity and
welfare
Maintain the
domestic and
exchange value of
the krone, low and
stable inflation,
stable output and
employment
Price stability
and without
prejudice to that, a
high level of
employment and
sustainable growth
Price stability,
while taking
into account
the economic
situation
Price stability
Deviations of more
than 1 percentage
point to be
explained in Bank=s
annual report
Page 18 of 19
Medium to long
term
0-2% is consistent
with the
distribution of
Board members'
understanding of
medium to longterm price
stability.
Authorized for public release by the FOMC Secretariat on 04/15/2016
Figure 1
Targeted Inflation and Foreign Central Banks’ Inflation Objectives
New Zealand
Canada
Percent, 4-quarter rate*
Percent, 12-month rate
7
7
Target range
Point target or ceiling
1990
1995
2000
2005
5
5
3
3
1
1
-1
1990
1995
2000
2005
-1
*Underlying measure until 1997Q3, then CPIX until 1999Q3, and
CPI measure thereafter.
United Kingdom
Sweden
Percent, 12-month rate*
1990
1995
2000
2005
Percent, 12-month rate
6
6
4
4
2
2
0
0
-2
1990
1995
2000
2005
-2
*RPIX measure prior to December 2003 and CPI measure thereafter.
Australia
Norway
Percent, 4-quarter rate
1990
1995
2000
2005
Percent, 12-month rate*
7
7
5
5
3
3
1
1
-1
1990
1995
2000
2005
-1
*CPI measure excluding energy and real taxes.
Euro Area
Switzerland
Percent, 12-month rate
1990
1995
2000
2005
Percent, 12-month rate
6
6
4
4
2
2
0
0
-2
1990
Page 19 of 19
1995
2000
2005
-2
@FedFRASER