Disinflation has been pursued successfully in Romania in this decade. Inflation came down from over 40 per cent in 2001 to 4.9 per cent (Dec. on Dec.) in 2006. In 2007, when Romania joined the European Union, inflation went up again (above 6.5 %) owing to adverse internal and external shocks.

The benefits of a low-inflation environment are unquestionable, as price stability is the ultimate objective of monetary policy. In addition, low inflation is a pre-condition for EU accession. There only remains the other critical question, namely, what is the proper strategy to achieve the ultimate objective? Different central banks have adopted different strategies placing a different emphasis on the various pieces of information, or elements of their decision-making process or different aspects of their communication, policies. Inflation targeting (IT) is one of those strategies.

The National Bank of Romania (NBR) introduced IT in 2005. This regime brings a series of benefits for a central bank, including a clear policy focus on inflation. At the same time the Romanian central bank was in need to unburden its monetary policy toachieve further disinflation. But three main contradictory pressures have been likely to arise: First, the requirements imposed by the need to achieve nominal and real convergence with a view to joining the European Union in 2007 and European Monetary Union (EMU) at a later stage push the central bank toward a policy mix that is able to ensure growth and further disinflation simultaneously. Second, under inflation targeting the ‘divine coincidence’ of inflation stabilization and real stabilization objectives can be achieved only in specific economic circumstances. Third, the operational requirements of a ‘hard’ inflation targeting regime have been unlikely to exist under the current monetary transmission conditions.

The central question of this paper is under what circumstances inflation targeting can (could) be implemented in Romania. Section 1 summarizes the recent history of inflation in Romania. Section 2 presents the context of disinflation and dilemmas of monetary policy. Section 3 reviews distinguishing features of the IT monetary policy framework and experience with IT in various countries. Section 4 examines challenges posed by IT implementation in Romania. Section 5 discusses policy choices.

Conclusions highlight also implications of the current turmoil in international financial markets and of changes in the world economy (including the rise of Asia and effects ofclimate change), which would complicate the task of disinflation.

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