Monetary policy and financial stability: what's ahead for central and eastern Europe

Remarks by Mr Stephen G Cecchetti, Economic Adviser and Head of Monetary and Economic Department of the BIS, prepared for the Oesterreichische Nationalbank Conference on European Economic Integration, Vienna, 15 November 2010.

Abstract

Monetary policy in central and eastern Europe stands at a transition point. Existing monetary policy frameworks served countries in the region well during the crisis, and do not seem to require significant modification to incorporate required financial stability objectives. And, since central banks in this region in fact have considerable experience with the use of macroprudential tools, incorporating them into a new inflation targeting framework should be more or less straightforward. At the same time, central banks need to be prepared to confront the challenges created by capital inflows, asset price inflation and catching-up issues. In doing so, it will be essential to retain focus on traditional monetary policy and financial stability objectives, resisting spillovers from policies pursued by other EMEs. Maintaining exchange rate flexibility - or, in countries with fixed exchange rates, labour market flexibility - will be of key importance. Furthermore, CEE countries need to be encouraged to maintain free capital flows and to continue to pursue domestic financial liberalisation.