from a monetary targeting framework to an itl framework. when we first began considering adopting an itl framework we had envisaged a prolonged transition period not least in order to provide time for strengthening technical capacity. in late 2009 we began the transition the process of transition by adopting what we called a “ flexible monetary targeting regime ”, which involved the introduction of more regular interventions in the money markets to try and dampen volatility in interbank interest rates, although without targeting a particular interest rate, and a monthly review of the monetary targets with the possibility that they might be revised to take account of changes in the macroeconomy. however the transitional monetary policy regime proved somewhat unsatisfactory in that it did not provide a clear anchor for monetary policy. the flexible aspect of the monetary targeting framework arose because the bou had lost confidence in the efficacy of applying rigid monetary targets, but the framework provided no other monetary policy anchor to replace the monetary targets. as a result, the bou accelerated the transition and adopted an itl framework in july 2011, with the inflation forecast as the anchor for monetary policy. furthermore, our technical capacities bis central bankers ’ speeches have been strengthened by the experience gained from implementing the itl framework ; which has involved substantial “ learning by doing ”. communications policy good communications are integral to an effective itl framework. therefore the bou completely has revamped its communications policy, the main goal of which is to explain to the public and the markets the reasons for our policy interest rate decision and to make public our forecast for core inflation. as communications policy will be the subject of one of this afternoon ’ s sessions, i will not go into the details except to note that we have been pleasantly surprised at how much coverage the bou ’ s monetary policy now receives from the media, both local and international, and the close attention which many of the informed market participants, such as the international banks, pay to our monetary policy statements. bis central bankers ’ speeches

bank, as has occurred in uganda. a second aspect of the institutional arrangements for monetary policy which is critical for the efficacy of an itl framework is the absence of fiscal dominance. what does “ fiscal dominance ” mean in this context? for an inflation targeting central bank it is imperative that the government does not systematically borrow from it to finance the budget, because this risks undermining monetary policy. hence if government is to support the introduction of itl, it must be prepared to fully fund its domestic borrowing from the market, and avoid borrowing from the central bank. preferably there should be constraints on government borrowing from the central bank set out in legislation. in uganda we have such an agreement in principle to this effect with the ministry of finance, but in practice it has not always been fully complied with. bis central bankers ’ speeches policy objectives the monetary policy anchor in an itl framework is a publicly announced inflation target. consequently inflation must be the primary objective of monetary policy if the anchor is to play a meaningful role in monetary policy and to ensure that monetary policy has credibility with the public. our primary objective in uganda is to hold annual core inflation to an average of 5 percent over the medium term, which we interpret as being over a period of 1 – 2 years. having inflation as the primary objective of monetary policy means that controlling inflation must take precedence over any other objectives, but it does not rule out the central bank having secondary objectives for its monetary policy, provided that the secondary objectives are subordinate to the primary objectives. the secondary objective of the bou ’ s monetary policy is to align real output as close as possible with the estimated potential output of the economy, although there are practical difficulties with estimating potential output. why does the bou target core inflation, a measure of inflation derived from a basket which excludes food crops, fuel, energy and utilities, instead of headline inflation which includes all of the items in the consumer basket? of course, the consumer cares more about headline inflation than core inflation. the reason why we target core inflation is that we have potentially better control over core inflation than headline inflation. the goods and services whose prices are excluded from core inflation are generally more volatile and more subject to supply price shocks than are other prices in the consumer basket. because the prices of food crops and fuel are mainly determined by developments on the supply side of the market, such as the abundance of the harvest, they are largely outside of the control of monetary policy. this was articulated very succi