murray sherwin : institutional frameworks for inflation targeting speech by mr murray sherwin, deputy governor of the reserve bank of new zealand, to the bank of thailand symposium “ practical experiences on inflation targeting ”, held in bangkok, on 20 october 2000. * * * introduction governor, distinguished guests, fellow central bankers, ladies and gentlemen. it is always a pleasure to find an opportunity to visit thailand and this is no exception. thank you, governor, for the invitation. it is also a considerable honour to be invited to address this symposium on the subject of inflation targeting. the subject of today ’ s deliberations is an important one and i applaud the bank of thailand ’ s decision to convene this public symposium to air the issues. that decision is in the best traditions of transparency which characterises inflation targeting central banks. i have been asked to discuss institutional frameworks for inflation targeting. inflation targeting has attracted increasing attention around the world over recent years. we have seen this approach to monetary policy spread from the small, open, oecd economies to a number of the emerging economies - in eastern europe, latin america and now in asia. the concept first emerged in my own country, new zealand, in the late 1980s. in our case, it gained a formal institutional structure with the passage of a new charter for the reserve bank of new zealand in 1989. inflation targeting arose in new zealand in an environment that will seem rather familiar to many of our asian friends - at least in some important respects. it was developed in a very small, open economy that was adjusting to a newly - opened capital account, a newly - floated exchange rate, and newly - deregulated financial markets. it was developed with the recognition that a more traditional structure for monetary policy, perhaps one focused on targeting particular definitions of money supply, was likely to prove inadequate in this newly deregulated and rapidly evolving environment. while many other countries have now adopted inflation targeting, each country brings its own history, traditions and institutions to these decisions. for that reason, we find a variety of institutional structures are utilised. my comments today obviously will draw heavily on the new zealand regime. and while i will attempt to generalise the lessons we have learned, and to draw from the experience and structures of other inflation targeting central banks, it is important to highlight up front that there are few fixed points for the architects of a new inflation targeting regime to fasten on. we are still learning and adapting as we go

##ary risks and further policy rate cuts by the ecb have faded and focus is beginning to shift towards a normalisation of policy in the future. indeed, as the governing council has recalled recently, if the euro area economy recovers and inflation proceeds further on its path towards the ecb ’ s inflation aim in a sustained manner, a discussion on policy normalisation becomes warranted in the future. any such discussion should, of course, take place in a structured, orderly and appropriately prudent manner and the governing council is convinced of the need to continue an accommodative monetary policy stance without deviation from the announced measures under implementation to be expected. but we could examine the interaction of our different policy measures and their functioning in a new environment of balanced prospects as opposed to the environment of deflationary risks that prevailed when they were first introduced. as has been stated, our forward guidance needs to be aligned with an evolving assessment to underpin both the consistency and credibility of our communication. prospects for the banking system in this context, it is imperative that the banking sector is well - positioned to foster sustainable growth in the coming years as the exceptional levels of monetary policy support will be adjusted in line with the progress towards our policy objective. a well - functioning, profitable and resilient financial sector is vital for the long - term economic prospects of the euro area. allow me, then, to make three remarks on this topic. my first remark relates to bank profitability. as i have just discussed, the ecb ’ s unconventional monetary policy measures have been successful in fulfilling their intended purpose. but that is not to say that they did not have any side effects. they have drawn criticism for their 2 / 5 bis central bankers'speeches negative effects on financial sector profitability. i believe such criticism is somewhat unbalanced. in the absence of the recovery generated by these unconventional measures, unemployment would have been higher, credit growth lower and a greater proportion of loans would have been non - performing. all of these things would have weighed on banking sector profitability. moreover, while acknowledging that banks face a charge because of the negative rates policy, internal data show that this burden is alleviated by the benefits gained in wholesale funding markets. between january and march 2017, on average, two thirds of overnight unsecured funding was raised at an average rate of around – 46 basis points, essentially through counterparties having no access to the ecb facilities. similar developments were observed in the secured markets for