The global economy could be headed for a new era of volatile inflation, making it even more crucial to anchor expectations for where prices are headed, central bank governors said yesterday.
Policymakers cautioned that hopes for a quick cooling in inflation pressures next year might prove premature.
More than a dozen central bankers gathered in a conference in Bangkok organized by the Bank of Thailand and the Bank for International Settlements.
Climate change, geopolitics and shifting population growth mean prices might remain elevated for longer, they said.
That makes it even more crucial to hammer home a message to households and businesses that prices would be brought to heel.
The danger of allowing inflation expectations to become unanchored would be even more damaging, European Central Bank (ECB) President Christine Lagarde said.
“Given this exceptional uncertainty, what we central bankers have to do is actually deliver monetary policy that anchors expectations so those expectations remain moored to target,” she said on a panel discussion.
“We need to signal to the public, to the observers, to the commentators, that in all scenarios inflation will return to our medium-term target in a timely manner. This is the best we can do in the current environment,” Lagarde said.
All eyes are on the final ECB meeting of the year on Dec. 14, when officials are to decide whether to deliver a third straight interest rate increase of 75 basis points, or moderate the pace to half-point. In Asia, most central banks meeting on rates this month are expected to sustain monetary tightening.
Worries about enduring supply constraints peppered the discussions among officials.
Reserve Bank of Australia Governor Philip Lowe said central banks are facing their first test in a new world of more variable inflation.
“If inflation is going to be even more variable, it makes the credibility of monetary policy more important than ever,” he said. “We really need people to believe and understand that when inflation is away from target, which it will be more often, that it will come back.”
Central banks have aggressively raised interest rates this year in an effort to tame the worst inflation in decades. Prices are expected to ease next year due to slowing demand, falling commodity and food prices and favorable year-on-year comparisons.
“A preemptive, front-loaded and forward-looking interest rate response is very important to bring down inflation expectations,” Bank Indonesia Governor Perry Warjiyo said.
The consensus for price gains in Southeast Asia’s largest economy has cooled “swiftly” to 5.5 percent from almost 7 percent four months ago, thanks to policymakers’ aggressive rate hikes, he said.
“But we have, I would say, never faced such an important increase in global inflation,” Bank for International Settlements general manager Agustin Carstens told the conference. “The simultaneity of it is quite remarkable.”
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