sergiy nikolaychuk : inflation targeting in emerging economies closing remarks by mr sergiy nikolaychuk, deputy governor of the national bank of ukraine, to the nbu ’ s online workshop on inflation targeting in emerging economies, 26 november 2021. * * * distinguished speakers and participants, ladies and gentlemen, i would like to thank you for joining our virtual workshop and making it possible to have this insightful event, which has exceeded my expectations. while most of us would have liked to gather in person today, i am grateful that we have been able to get together, at least online. since early 2020, the covid - 19 pandemic has affected our lives in unprecedented ways. we have had to adapt ourselves to such irregularities and discover how to perform under these new conditions. the novelty of the pandemic crisis and considerable uncertainty around its further development have made the challenges unique in being considered from different angles. last year, central banks ( cbs ) dealt with acute and persistent volatility on financial markets and together with their governments tried to address deep economic contraction. this year, cbs of emerging markets ( ems ) have been facing new challenges of a multi - speed economic recovery and a simultaneous inflation spike with a high degree of uncertainty. that creates a unique environment that is calling for reshaping our models and updating analytical tools. that is why it is so important to gather for such discussions and look for the solutions in our areas of responsibility. in what follows, i would like to share several of my personal lessons from the recent developments on the sidelines of our workshop. * * * my first lesson concerns a timely and decisive reaction from central banks around the globe to a financial shock and risk aversion to prevent a full - fledged financial crisis. as the financial shock hit during the first weeks of the pandemic, the central bankers were initially focused on adopting measures to restore the orderly functioning of the financial markets. that time the resilience of the ems ’ domestic financial sectors to adverse shocks, along with the liquidity provided by systemically important central banks, proved to be crucial to financial market stabilization. in contrast to a monetary policy response to previous crises when most em cbs increased interest rates to avoid sharp exchange rate depreciations, last year they were able to cut their rates almost immediately. this reflects a higher degree of credibility gained by the central banks, as well as well - anchored inflation expectations. the credibility gained in previous years, sometimes with sizable costs,

growth of employment or the fall in unemployment lead to a rate of increase in pay settlements, or earnings growth, which would subsequently lead to accelerating inflation in goods and services markets ; and • thirdly, what is happening or is likely to happen to the rate of growth of aggregate demand in the economy anyway. now, as i said earlier, there is not a great deal that we – through monetary policy – can do directly to affect the first two of these areas of uncertainty, which relate to the supply - side of the economy. the major challenge for us in these areas is in assessing – or quantifying – their impact. and that ’ s not at all easy because, while the effects gradually become apparent over time, many of the relevant developments cannot be directly observed or measured ; nor therefore can they be predicted with any great confidence. but we are sensitive to the fact that certainly over the past two or three years price pressures in both product and labour markets have been less than we would have expected based on earlier experience, given the strength of demand. you might explain this in terms of more intense competition and lower margins in product markets ; or in terms of an increase in the rate of productivity growth, perhaps related to the application of new technology, such as we have seen in the us ; and you might explain the recent relatively benign real earnings growth in terms of the more flexible functioning of labour markets. but we cannot be sure of the explanation, nor of how large or persistent the relevant effects will prove to be. we are nevertheless sensitive to these possibilities ; we do indeed try to allow for them in our forecasts and in our policy judgements, based upon careful scrutiny of all the latest information that we have. but the process remains necessarily judgmental, and that, of course, leaves us vulnerable to assertions that we don ’ t give sufficient weight to this or that factor. that, some of our critics maintain is why inflation has been below target for much of the past two years. in fact the undershoot has been marginal – given the uncertainties - and can just as well be explained by the unexpected strength of sterling ’ s effective exchange rate, reflecting the weakness of the euro, which has both directly dampened the price level and constrained external demand. we, of course, can and do actually affect the third main area of uncertainty – the nominal demand side of the economy – by setting short - term interest rates. but here, too, we have to rely to a considerable