cut is scheduled for 2017. currently, the annual inflation rate stands at – 3. 25 percent, the most negative value in the eu. excluding the first - round effects of the vat cuts in mid - 2015 and early 2016, headline inflation would have hovered around + 1 percent. consequently, the negative inflation we are dealing with now is not at all a condition brought about by a persistent lack of demand, as economic activity, employment and wages are actually buoyant. this is just a transitory development, induced by the aforementioned indirect tax cuts. the textbook policy choice would be to accommodate the temporary deviation from the inflation target and focus on the vat - adjusted inflation developments – especially since the latter paint a quite different picture. if i may be allowed a short digression, the very recourse to a vat - adjusted inflation measure in our analysis and communication came under fire. this is by no means different in nature than the eurostat ’ s hicp at constant taxes – just more refined, in the sense that we take into account the fact that the pass - through of a vat change is below 100 % for most cpi items. coming back to the current economic context, it should be pointed out that behind the “ perfect storm ” of deflationary exogenous shocks ( low energy, food and metal prices, successive vat rate cuts ), demand - side inflationary pressures are looming : a positive output gap is emerging, unit labour cost pressures are building up, fiscal policy is taking a strongly expansionary turn. as such, while medium - term prospects appear to call for a tightening bias of monetary policy, the short - term context of deeply negative inflation makes communication with the public rather challenging. specifically, we have to contend with the idea that the central bank should lower interest rates in response to vat rate cuts. it proves more difficult than we thought to make people understand that the current negative readings in inflation are just transitory and reflect neither postponed consumption, nor sluggish wage growth one would associate with bis central bankers ’ speeches negative inflation expectations – these actually remained anchored to the target. therefore, none of the ingredients which make for a scary deflationary trap are present. frankly, i understand that the general public is not familiar with concepts like overheating or positive output gap, but i believe that annual growth rates to the tune of 20 % for retail sales and in excess of 10 % for wages are more than self - explanatory

smooth out excessive volatility, with inflation targeting as a monetary policy strategy and an active pursuit of measures to limit the degree of currency mismatches in the economy. as a matter of fact, in an imf paper published in 2003, the light version of inflation targeting is found to be widely spread among emerging economies, where fiscal dominance continues to weigh and monetary policy cannot set aside concerns over financial stability and external equilibria. 2. light inflation targeting in romania drawing the line after more than a decade of inflation targeting, i would say that we have managed to deliver steady disinflation and anchor expectations, even though the frequent occurrence of exogenous shocks led to high volatility in inflation and the occasional missing of annual targets. all central banks are familiar with supply - side shocks related to a surge or fall in commodity prices, but in romania we have also had to deal with large ( and not necessarily predictable ) adjustments in administered prices and frequent changes in indirect taxation. some of the latter were inherent to eu membership ( i. e. alignment of some excise bis central bankers ’ speeches duties ), but others were related to an erratic tax legislation. in such an environment, two features of the inflation targeting framework as implemented in romania appear as particularly relevant : • first, the focus on the medium - term achievement of the inflation objective, rather than hitting the target all the time. this approach allows for sustainable price stability without incurring the cost of excessive volatility in output and employment. • second, the ex - ante definition of a set of escape clauses that limit the central bank ’ s responsibility in attaining the annual target : 3. 1. marked increases / decreases in commodity prices 2. natural disasters and other similar exceptional events that induce cost - push or demand - pull inflationary effects 3. large fluctuations of the exchange rate of the leu that are decoupled from domestic economic fundamentals, as well as from the monetary policy pursued by the national bank of romania 4. major deviations from the administered price adjustment programme announced by the government, in terms of both magnitude and proposed calendar 5. divergence of the fiscal and income policies, in terms of implementation and outcomes, from the programmed coordinates case in point : monetary policy under a string of vat changes to give you a flavour of the environment the monetary policy has had to operate in lately, we had three vat rate cuts from 2013 to 2016, after a hike in 2010, and another