Central Bank could trigger exoneration clauses

The National Bank (BNR) could trigger exoneration (or non-responsibility) clauses in the coming period, sources close to BNR told Business Standard.

The clauses are included in the inflation targeting system and allow the central bank to decline responsibility for missing the inflation target, while preserving credibility.

According to BNR Governor, Mugur Isarescu, there are five such clauses. The first is related to the possibility of substantially increasing external prices for raw materials, energy and other goods. The second refers to natural disasters with an impact on inflation, including changes on the agriculture products market.

BNR may also decline responsibility for wide currency fluctuations outside the domestic economy bases and monetary policy. The fourth clause is related to major shifts in administered prices, while the final clause refers to the activities of the government.

Thus, changes in the agenda of fiscal policy implementation, of fiscal policy outcomes, or in the income policy exempts the central bank from any responsibility for missing the inflation target.

Amid concerns about inflation exceeding the 4 percent (+/- one percentage point) target established for 2007, the central bank increased the key interest rate at the end of October, up to 7.5 percent from 7 percent. At that time, inflation for the first three quarters had rocketed to 6.03 percent, due to last summer's drought, higher oil prices, and fiscal policies.

Triggering the non-responsibility clauses would be a first in the region. The Czech Republic, Poland and Hungary have established inflation targets and were close to triggering such clauses due to tense relations between central banks and the governments of those countries.

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