The global economy may be headed for a new era of volatile inflation, making it even more crucial to anchor expectations about where prices are headed, top central bank governors meeting in Bangkok warned on Friday.
Hopes for a quick cooling in inflation pressures next year may prove premature, cautioned more than a dozen central bankers who gathered at a conference organised by the Bank of Thailand and the Bank for International Settlements.
Climate change, geopolitics and shifting population growth mean prices may remain elevated for longer, they said.
That makes it even more crucial to hammer home a message to households and businesses that prices must be brought to heel. The danger of allowing inflation expectations to become unanchored would be even more damaging, European Central Bank 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,” she said.
All eyes are on the final ECB meeting of the year on Dec 14 and 15, when officials will 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 widely expected to sustain monetary tightening.
Worries about enduring supply constraints were also on the minds of officials at the Bangkok event.
“Supply constraints have become front and centre and there are grounds for thinking this is not necessarily temporary,” Bank of Thailand Governor Sethaput Suthiwartnarueput said. “We would argue that supply considerations are likely to be at the forefront for some time to come.”
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.”
Climate change should also factor into central bankers’ outlook, not just because it can worsen price pressures but also because it will take a “herculean effort” from authorities to overcome the financial challenges needed to address it, said M Ayhan Kose, chief economist for Equitable Growth, Finance and Institutions at the World Bank.
“The transition might be inflationary and even slightly stagflationary — I stress might, we don’t know yet. But for sure it is more costly if it’s delayed and disorderly,” said Bank of France Governor Francois Villeroy de Galhau.
Central banks have aggressively raised interest rates this year in an effort to tame the worst inflation outbreak in decades. Prices are expected to ease next year due to slowing demand, falling commodity and food prices and favourable year-on-year comparisons.
“A preemptive, front-loaded and forward-looking interest rate response is very important to bring down inflation expectations,” said Bank Indonesia Governor Perry Warjiyo.
The consensus for price gains in Southeast Asia’s largest economy has cooled “swiftly” to 5.5% today from close to 7% four months ago, thanks to policy makers’ aggressive rate hikes, he said.
In China — where prices have been relatively subdued this year amid Covid lockdowns — officials are focused on growth, according to People’s Bank of China Governor Yi Gang.
Speaking via video link, Yi said the central bank has a “pretty accommodative monetary policy in place to help with economic recovery and maximise employment”. He said inflation will likely remain in a “moderate range” in 2023.