Looking further ahead, structural shifts in the economy will produce more upside price risks and may require central banks to refine their strategies, Gopinath said. — Bloomberg
SINTRA (PORTUGAL): The European Central Bank (ECB) and its peers must stay the course in taming inflation, even as rising borrowing costs raise the prospect of recessions, according to Gita Gopinath, the International Monetary Fund’s (IMF) first deputy managing director.
“Inflation is taking too long to get back to target,” she told the ECB’s annual forum in Sintra, Portugal. “This means that central banks, including the ECB, must remain committed to fighting inflation despite risks of weaker economic growth.”
Looking further ahead, structural shifts in the economy will produce more upside price risks and may require central banks to refine their strategies, Gopinath said.
What’s more, financial stresses could generate tensions between price and financial-stability objectives, she said.
ECB officials are meeting as they assess how much further their historic monetary-tightening cycle must run to return inflation to the 2% target.
While the headline rate has fallen after a plunge in energy costs, underlying pressures are proving much more persistent and may have picked up in June.
Much like ECB president Christine Lagarde, Gopinath called on governments to join the fight against inflation instead of adding to troubles with blanket fiscal support. That would allow rate hikes to end sooner and limit some of the consequences.
“Some side-effects of fighting inflation with monetary policy could be reduced by giving fiscal policy a bigger role,” she said. Ultimately though, she argued, “it’s up to central banks to deliver price stability irrespective of fiscal stance.”
They’ve largely stressed their determination to do so. The ECB has all but promised another rate increase in July. The Bank of England remains firmly in hiking mode, even as a mortgage crisis looms.
And in the United States, the Federal Reserve is signalling more rate increases are likely – despite holding fire at its last meeting.
Highlighting recent financial tensions in South Korea, the United Kingdom and the United States, Gopinath said central banks “could tolerate a somewhat slower return to the inflation target to avert systemic stress. Even so, the bar should be high to doing so.”
Structural factors – like the restructuring of global supply chains, geopolitical fragmentation and climate change – also threaten to fuel longer-term inflation, meaning a return to the ultra-low interest rates seen before the pandemic is less likely. — Bloomberg
