IMF’s first deputy managing director says central banks should maintain tight policies as long as inflation remains high
Central banks must be in the driver’s seat in bringing inflation down to target and anchor inflation expectations, the International Monetary Fund’s (IMF) first deputy managing director Gita Gopinath said Friday.
Her remarks were made at the Jackson Hole Symposium where she said the job of central bankers is much more difficult as a result of the coronavirus pandemic and the Russia-Ukraine war.
She said these two issues are “stress tests” for monetary policy frameworks for nations, along with important lessons for policymakers and highlighted that the pandemic recovery showed the warming of the economy that poses significant inflation risk,even if it is sometimes an appropriate strategy.
“There is good reason for concern that the pandemic and war may lead to an era in which supply shocks are larger, and in which inflation expectations may be less well-anchored,” she said. “These risks are most acute for emerging markets, especially those with high debt levels where fiscal dominance can easily take hold.”
“Central banks must act decisively to ensure that inflation expectations are anchored,” she said.
The way central banks communicate with markets on rising prices is important, said Gopinath, adding that they should indicate that they will “stay the course” and maintain tight policies as long as inflation remains high.
“And if inflation proves unexpectedly persistent, they should underscore their resolve to tighten more aggressively, even if it means a sharp cooling of the economy and rise in unemployment,” she said.