To achieve the inflation target, the NBS applies monetary policy instruments based on the analysis of the current economic situation and its outlook and the medium-term inflation projection. The NBS uses its monetary policy instruments to ensure that the inflation target is met and that departures from it are temporary. It is not realistic to expect that current inflation will equal the target at all times. In case of serious shocks, it is not always possible or desirable to return inflation to the target in a short time period, given the lags in the transmission mechanism and the impact this could have on the overall macroeconomic and financial stability. Hence, like other central banks, the NBS allows temporary departures from the target if returning inflation to the target in a short time period calls for changes in monetary policy that could trigger additional macroeconomic instability. In particular, this refers to sudden changes in primary commodity prices or to departures from the planned growth in prices of products that are under direct or indirect impact of the Government’s decisions.
Main monetary policy instrument
The key policy rate is the main monetary policy instrument in the inflation targeting regime. Other monetary policy instruments, including interventions in the foreign exchange market, only have a supporting role. The NBS applies this interest rate in its main open market operations (currently, reverse repo transactions, i.e. repo sale of securities, with one-week transaction maturity). It is the operating target for short-term money market rates. Its role as the operating target is supported by the corridor of interest rates on deposit and lending facilities and other open market operations.
Other monetary policy instruments
Other monetary policy instruments of the NBS have a supporting role, contributing to smooth transmission of the effect of the key policy rate to the market, and to the development of the financial market. These instruments include:
- open market operations,
- required reserves,
- lending and deposit facilities (standing facilities), and
- foreign exchange market interventions
As in the case of more advanced market economies, particularly those pursuing the inflation targeting regime, the NBS uses interest rates in the interbank money market as its operating target and the inflation projection as its intermediate target.