Central bankers seek new role in brave new world

In this news, we discuss the Central bankers seek new role in brave new world.

FRANKFURT (Reuters) – Taking a break from tackling the coronavirus crisis, the world’s largest central bankers will attempt to address the existential questions of their profession this week by tapping into the European Central Bank’s annual policy symposium.

Having struggled for years to raise sluggish inflation, officials including the leaders of the ECB, the US Federal Reserve and the Bank of England, will try to figure out why monetary policy is not working as before and what new role they must play in a changed world – be it the fight against inequalities or climate change.

For now, the only consensus is that the economic order is changing.

Globalization, climate change, digitization, aging populations, rising inequalities and the coronavirus pandemic are changing consumption habits, limiting prices and lowering, sometimes below zero, the interest rate necessary to maintain stable inflation.

“Regardless of the structural factors behind the observed decline in natural interest rates, the downward trend poses significant challenges to existing monetary policy frameworks,” wrote Klaus Adam, professor at the University of Mannheim. , in an article to be presented at the symposium.

The inability of central banks to achieve their goals is beginning to question a key tenet of monetary theory: inflation is always a factor in their policy and that prices rise with falling unemployment.

Indeed, the ECB and the Bank of Japan have both kept their rates in negative territory for years, reversing the common practice of effectively rewarding banks for their borrowing.

More worryingly for some, the two have more than doubled their balance sheets since 2015 to almost $ 15 trillion, moving ever closer to direct government funding – a traditional red line.

Yet inflation barely increased even before the pandemic and is now negative in the euro area.

While the Fed has achieved its own goal, it has never been successful in normalizing its policy and with the pandemic plunging the world into yet another recession, it is also testing the limits of policy by sucking up public debt.

NEW ROLES

After pushing policy into uncharted territory, even at the cost of some legal challenges, with oversized bond purchases and negative rates, central bankers are now planning to do even more.

The Fed is now talking openly about wanting to help low-income families, while the ECB is calling for a bigger role in the fight against climate change.

This raises questions about the real role of unelected bureaucrats with loosely defined mandates.

Experts say tackling climate change will transform the economy, impact both income and spending, change business patterns and capital flows, and thus pose a risk to the financial sector for both the companies involved and their host governments.

“Central banks are therefore rightly concerned about global warming adversely affecting the stability of the financial system,” said Frederick van der Ploeg, professor at the University of Oxford.

Add to that the pandemic, which will hit the poor harder and leave the world permanently altered.

“All the indications so far indicate that this recession has a much greater impact on the economic well-being of poor households than on that of rich households,” Pol Antràs, professor at Harvard University, said in a report. article.

While the pandemic itself will not reverse globalization, a decline in face-to-face interactions, including travel, is likely to persist and companies are required to relocate activities in ways that reduce the need for long-distance travel, a argues Antràs.

But new roles raise new dangers. Central banks are supposed to be independent, but buying more and more debt, in part to cope with these new tasks, is eroding that very independence, some argue.

The more debt central banks hold, the more governments will rely on them to keep rates low in order to keep debt sustainable, making it difficult to raise interest rates if necessary.

This type of creeping public funding will then reduce the ability of central banks to fulfill their core mandate and may therefore erode confidence.

“If agents are increasingly convinced that the gap is not short-lived, inflation could accelerate,” said Bundesbank President Jens Weidmann, one of the most conservative policymakers in the ECB, in a speech last week. “The drift of beliefs might hardly be detectable at first, but might gain momentum later and appear to an outside observer to have come out of nowhere.”

Report by Balazs Koranyi and Francesco Canepa; Edited by Susan Fenton

Original © Thomson Reuters

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