Central banks are on the way to winning their war against inflation, but they must remain on alert to face the new normal of the global economy, more complex and more uncertain than ever.
Two central bankers, the governor of the Bank of Canada, Tiff Macklem, and the president of the German Federal Bank, Joachim Nagel, presented the lessons they learned from the most recent inflationary episode on Wednesday at the Montreal Conference.
The first lesson is that inflation hurts. “This is something we already knew, but many experienced inflation for the first time,” said Tiff Macklem. Inflation is our common enemy. »
If the governor of the Bank of Canada has not had it easy over the past two years, his German counterpart has had an even more difficult experience.
Joachim Nagel took office in January 2022, when inflation was considered “transient” by central banks. A month later, Russia invaded Ukraine, sending energy prices soaring. The inflation rate peaked at over 10% in the eurozone in 2022.
Like his Canadian counterpart, Joachim Nagel believes that restoring price stability is what central banks can do best for an economy. The task of the European Central Bank (ECB) is very complicated, he recalled. “There are 20 countries and 26 people around the table” (counting the ECB leaders).
The American Federal Reserve, struggling with stubborn inflation, decided on Wednesday to maintain its rate and only plans one reduction by the end of the year.
Inflation is stubborn and its future trajectory is impossible to predict, admitted Joachim Nagel. “It’s still too early to know,” he said. More research is needed and to dispel the uncertainty, the war in Ukraine would especially need to end. »
Since the recent European elections, with the rise of the far right, the sources of uncertainty are even greater, according to the President of the Bundesbank. Government fiscal policies, in Europe as elsewhere, can thwart the work of monetary policy, he said.
Both in Europe and in Canada, central banks will not be able to claim victory. “The work is not done,” Tiff Macklem said. “We are not on autopilot,” added his German counterpart.
Interest rates should continue to fall, but much less quickly than they have increased, repeated the governor of the Bank of Canada. Above all, no one should expect rates to return to the very low pre-pandemic level.
Above all, we will have to learn to tolerate more uncertainty, particularly because of wars and climate change. We must not remain paralyzed and wait for the uncertainty to disappear, because that will not happen, believes Tiff Macklem.