NOTES HOW TO How to Design and Review Inflation Targets in Emerging Market and Developing Economies Thomas J. Carter, Gunes Kamber, and Julia Otten HTN/2026/04 HOW-TO NOTE How to Design and Review Inflation Targets in Emerging Market and Developing Economies Thomas J. Carter, Gunes Kamber, and Julia Otten How-To Notes offer practical advice from IMF staff members to policymakers on important issues. The views expressed in How to Notes are those of the author(s) and do not necessarily represent the views of ...

Economic Indicators - The US February ADP employment change increased by +63,000, surpassing expectations of +50,000 [2] - The US February ISM services index unexpectedly rose by +2.3 to 56.1, better than the anticipated decline to 53.5, marking the strongest pace of expansion in 3.5 years [3] - The Eurozone January PPI rose by +0.7% month-over-month and fell by -2.1% year-over-year, stronger than expectations of +0.2% month-over-month and -2.6% year-over-year [5] - The Eurozone January unemployment rate fell by -0.2 to a record low of 6.1%, better than expectations of 6.2% [6] Currency Movements - The dollar index (DXY00) is down by -0.13%, pressured by a rally in stocks following a report on potential discussions to end the war involving Iranian operatives [1] - The EUR/USD is up by +0.16%, supported by the weakness in the dollar and positive Eurozone economic reports [5] - The USD/JPY is down by -0.30%, with the yen strengthening due to a rise in Japan's February consumer confidence index to a 6.75-year high [7] Central Bank Outlook - The FOMC is expected to cut interest rates by about -37 basis points in 2026, while the Bank of Japan (BOJ) is anticipated to raise rates by +25 basis points in the same year [4] - Swaps markets are discounting a 0% chance of a -25 basis point rate cut by the European Central Bank (ECB) at its next policy meeting on March 19 [6]

Summary of Key Points from the Conference Call Industry Overview - The conference primarily discusses the Eurozone economy and the European Central Bank (ECB) monetary policy, particularly in light of recent economic data and geopolitical tensions. Core Points and Arguments 1. **Euro Area Membership Expansion**: Bulgaria is set to join the euro area on January 1, 2026, highlighting the attractiveness of the euro and European integration [2] 2. **Interest Rates**: The ECB has decided to keep the three key interest rates unchanged, reaffirming a commitment to stabilize inflation at the 2% target in the medium term [2][11] 3. **Economic Growth**: The Eurozone economy grew by 0.3% in Q4 2025, driven mainly by the services sector, particularly information and communication [4] 4. **Labor Market**: Unemployment decreased to 6.2% in December from 6.3% in November, indicating a resilient labor market despite cooling demand for labor [4] 5. **Inflation Trends**: Inflation fell to 1.7% in January from 2% in December, with energy prices contributing to this decline. Food price inflation increased to 2.7% [6] 6. **Investment Outlook**: Business investment is expected to strengthen, with firms increasingly investing in digital technologies. Government spending on defense and infrastructure is anticipated to bolster domestic demand [5] 7. **Geopolitical Risks**: Ongoing geopolitical tensions, particularly related to Russia's actions in Ukraine, pose significant risks to the Eurozone economy [7] 8. **Monetary Policy Approach**: The ECB will adopt a data-dependent approach to monetary policy, assessing inflation outlooks and risks on a meeting-by-meeting basis [3][11] 9. **Credit Market Conditions**: Bank lending rates for firms increased slightly to 3.6% in December, with lending to firms growing by 3% year-on-year [10] 10. **Global Trade Environment**: The external environment remains challenging due to higher tariffs and a stronger euro, which could impact demand for Eurozone exports [5] Additional Important Insights 1. **Exchange Rate Monitoring**: The ECB does not target exchange rates but acknowledges their importance for growth and inflation. The euro has appreciated against the dollar, which is being monitored for its potential impact [16][17] 2. **Global Role of the Euro**: The ECB emphasizes the need for the euro to play a stronger global role, which requires a reliable environment and strategic investments [26][27] 3. **AI and Investment**: There is a notable increase in investment related to AI and digital technologies, which is expected to enhance productivity in the Eurozone [54][55] 4. **Future Projections**: The ECB anticipates inflation to stabilize around the 2% target in the medium term, despite current fluctuations in inflation data [34][40] This summary encapsulates the key discussions and insights from the conference, focusing on the Eurozone's economic outlook, monetary policy, and the implications of geopolitical factors.

Group 1 - The European Central Bank (ECB) decided to keep the three key interest rates unchanged, aligning with market expectations [1] - The deposit facility rate, main refinancing rate, and marginal lending rate remain at 2.00%, 2.15%, and 2.40% respectively [1] - The ECB's latest assessment indicates that inflation is expected to stabilize around the target level of 2% in the medium term [1]

Market Overview - Wall Street's three main equity benchmarks closed mixed, with Advanced Micro Devices (AMD) dropping over -17% after disappointing Q1 revenue guidance, while Super Micro Computer (SMCI) surged more than +13% following strong FQ2 results and an increased full-year revenue outlook [2] - The ADP National Employment report indicated that U.S. private nonfarm payrolls rose by +22K in January, below the expected +46K, while the ISM services index remained unchanged at 53.8, exceeding expectations [6] - U.S. rate futures show an 88.0% probability of no rate change and a 12.0% chance of a 25 basis point rate cut at the upcoming Fed meeting [8] Corporate Earnings - The fourth-quarter corporate earnings season is ongoing, with S&P 500 companies expected to report an average +8.4% increase in quarterly earnings for Q4 compared to the previous year [9] - Notable companies reporting earnings include Amazon.com (AMZN), ConocoPhillips (COP), and Bristol-Myers Squibb Company (BMY) [9] Economic Data - Investors are focused on upcoming U.S. Initial Jobless Claims data, expected to be 212K, and JOLTs Job Openings figures anticipated at 7.200 million [10] - Germany's December Factory Orders rose +7.8% m/m, while France's Industrial Production fell -0.7% m/m, and Eurozone's Retail Sales decreased -0.5% m/m [14] International Markets - The Euro Stoxx 50 Index is down -0.15% as investors await monetary policy decisions from the Bank of England and the European Central Bank [13] - Asian stock markets closed lower, with China's Shanghai Composite Index down -0.64% and Japan's Nikkei 225 down -0.88%, primarily due to weakness in technology stocks [15][17]

Core Viewpoint - The Federal Reserve Bank of Chicago President Austan Goolsbee indicated that the potential for further interest rate cuts could arise if economic indicators continue on their current positive trajectories, particularly regarding inflation data [1][2]. Economic Indicators - Goolsbee highlighted the positive aspects of the recent Consumer Price Index (CPI) report, noting a 0.2% increase over two months from September to November and a year-over-year rise of 2.7%, which was below economists' expectations of a 0.3% monthly increase and a 3.1% year-over-year rise [2][4]. - The CPI report reflects a delayed reporting window due to a recent government shutdown, which did not include the standard one-month change from October to November [2]. Interest Rate Decisions - The Federal Reserve recently announced its third interest rate cut of the year, reducing the benchmark federal funds rate by 25 basis points to a range of 3.5% to 3.75%, following similar cuts in September and October [4]. - Goolsbee expressed discomfort with preemptively front-loading rate cuts before confirming a return to the 2% inflation target, suggesting that rates could be lowered significantly if full employment and stable inflation are achieved [5][8]. Labor Market Concerns - In response to concerns about the U.S. job market and rising unemployment rates, Goolsbee noted that most job market measures, aside from payroll employment, have shown steady but mild cooling [6][7]. - He emphasized the need for assurance that inflationary spikes are transitory and not indicative of a longer-term trend before considering further rate reductions [8].

Core Viewpoint - The European Central Bank (ECB) has maintained interest rates at 2% for the fourth consecutive meeting, reflecting stable inflation around the target level and resilience in the euro zone against global economic shocks [1] Economic Outlook - The ECB's decision was accompanied by new forecasts indicating stronger economic growth and an expectation for inflation to return to 2% by 2028, after being below this level in the next two years [1]

Core Insights - The conforming loan limit for one-unit properties in the U.S. will increase to $832,750 in 2026, up from $806,500 in 2025, reflecting a rise of $26,250 [1][4] - The increase in the conforming loan limit is in line with the 3.26% rise in average U.S. home prices reported by the FHFA [4][5] - High-cost areas will see higher loan limits, with a ceiling of $1,249,125 for one-unit properties, and specific limits for Alaska, Hawaii, Guam, and the U.S. Virgin Islands [5][6] Conforming Loan Limits - The new baseline conforming loan limit for 2026 is set at $832,750, which is a significant adjustment based on the average home price increase [3][4] - The FHFA's House Price Index indicates a 3.26% increase in home values over the past year, justifying the rise in loan limits [4][10] - For high-cost areas, the conforming loan limit will be higher than the baseline, with a ceiling limit established at 150% of the baseline [5][6] Market Trends - The mortgage market is experiencing shifts due to changing economic conditions, with consumer confidence dropping to a seven-month low [9][10] - Retail sales showed a modest increase of 0.2% in September, indicating a cautious consumer spending environment [10][15] - The bond market has seen rallies, with Treasury yields dipping as investors react to economic data and consumer sentiment [12][14] Compliance and Regulatory Changes - Credit unions are facing evolving compliance expectations, emphasizing the importance of risk reduction and long-term trust [2][3] - A webinar is scheduled to address compliance challenges and opportunities for credit unions, focusing on regulatory pressures and operational demands [2][3] Industry Initiatives - Symmetry Lending has introduced enhancements to its HELOC products, including lower FICO score requirements and new tax return policies for self-employed borrowers [2] - Spring EQ is launching a charitable initiative, "Giving TWO-SDAY," to support veterans and children battling cancer, linking business activities to social causes [2]

Core Points - New Zealand has appointed Anna Breman as the new central bank governor, marking the first time a woman has held this position [1][4] - Breman is currently the First Deputy Governor of Sweden's central bank, the Riksbank, and will assume her role at the Reserve Bank of New Zealand (RBNZ) on December 1 [1][2] - The appointment follows a significant shakeup at the RBNZ amid criticism regarding its economic management [1] Group 1 - Anna Breman brings a strong blend of technical skills and organizational leadership experience to the RBNZ [2][3] - The RBNZ board conducted a global search identifying 300 potential candidates before nominating Breman [3] - Breman has extensive experience in monetary policy, financial stability, and payments systems from her time at the Riksbank [4] Group 2 - Breman is the first foreign national to be appointed as the RBNZ governor in its modern history [4][5] - New Zealand has a historical significance in women's rights, being the first self-governing country to grant women the vote [5] - The previous governor, Christian Hawkesby, will step down after a brief tenure following the resignation of Adrian Orr [6]

Economic Overview - The U.S. economy has demonstrated resilience amid significant changes in economic policy, with the labor market near maximum employment and inflation decreasing from post-pandemic highs [2][4] - The unemployment rate has increased by almost one percentage point, a trend typically associated with recessions, while the labor market remains balanced [4][11] - GDP growth has slowed to 1.2% in the first half of the year, down from 2.5% in 2024, primarily due to a decline in consumer spending [12] Labor Market Dynamics - Payroll job growth has slowed to an average of 35,000 per month over the past three months, a significant drop from 168,000 per month in 2024 [8] - The unemployment rate stands at a historically low level of 4.2%, indicating a stable labor market despite the slowdown in job growth [8][10] - Labor supply has softened, with a notable decrease in labor force growth attributed to tighter immigration policies [10][11] Inflation Trends - Total PCE prices rose by 2.6% over the 12 months ending in July, with core PCE prices increasing by 2.9% [13] - Higher tariffs are contributing to price increases in certain goods, with expectations that these effects will accumulate over time [15][16] - Inflation expectations remain well anchored, consistent with the Federal Reserve's long-term target of 2% [19][48] Monetary Policy Framework - The Federal Reserve's monetary policy framework is designed to promote maximum employment and stable prices across various economic conditions [22][36] - The revised consensus statement emphasizes the importance of well-anchored inflation expectations and the need for flexibility in monetary policy [38][48] - The Federal Reserve will continue to conduct public reviews of its monetary policy framework approximately every five years to adapt to changing economic conditions [50]