The National Bank of Ukraine (NBU) is currently in a transition phase towards Inflation Targeting (IT). While this fundamental change in its monetary policy strategy is highly commendable, it nevertheless requires significant changes in the governance framework.
In this paper, we try to contribute to this reform process. We highlight two important areas where such changes are needed. First, this relates to the decision-making process, i.e. the way decisions are taken. Second, we look at the best way on how to ensure accountability vis-à-vis the public and its elected representatives. In order to derive policy recommendations, we review international best practices, primarily in inflation targeting banks in both developed and emerging markets.
In terms of proposed changes to the decision-making process at the NBU, we would like to stress the following points:
- Board structure: The current institutional setup with the Council and the Director’s Board is suboptimal, given the unclear division of labor between them. In our view, the Director’s Board should be turned into a smaller Management Board, which implements monetary policy decisions and runs the bank on a daily basis. A separate Monetary Policy Committee (MPC) should be established, which overtakes responsibilities for monetary decision making. The responsibilities of the Council need to be redefined, and subject to further investigation. One possibility would be to shift its role towards a supervisory board.
- Structure of the MPC and its meetings: The committee should consist of around 6-8 people. Meetings should take place regularly (e.g. at monthly frequency) and be scheduled and announced in advance. Each meeting should follow a fixed, preestablished order.
- Strengthening the role of economic research: Sound economic research is a key input for monetary policy decisions in an IT framework. Thus, the role that economic research plays at the NBU needs to be strengthened. The Chief Economist/Head of Economic Research should be given a prominent role in MPC meetings, both in terms of their preparation, and the discussion on the economic situation.
The governance framework under which monetary policy decisions are taken must also ensure a sufficient level of accountability. That means the NBU should be obliged to inform the public about its policy decisions and be able to justify them. In our view, the following issues are important in this regard:
- Reporting: The NBU should in general report to Parliament, rather than to the Government, or the President. The current detailed quarterly reporting requirements to the Government and the President should be slashed. The Annual Report delivered to the Parliament could be also automatically forwarded to the Government/President.
- Transparency: During the early stages of IT introduction, the NBU should concentrate on communicating the new strategy in a clear, coherent and understandable way, i.e. “speak with one voice”. During this phase, further information like the results of the voting mechanism, or the minuets of the meetings, should not be made public. However, this could be considered at a later stage.
