Inflation: IMF Urges Central Banks to Learn Lessons from Past Crises

•Urges regulators to be more vigilant

Ndubuisi Francis in Abuja

The International Monetary Fund (IMF) has stated that the COVID-19 pandemic and ongoing Ukraine-Russia war had triggered new challenges for central banks across the world, including soaring inflation.

IMF’s First Deputy Managing Director, Gita Gopinath, who urged them to learn lessons from past crises, noted that the pandemic and war had triggered a global inflation surge which abruptly ended decades of moderating price gains.

In an article, Gopinath said: “Now, economists must ask, what lessons does this era offer for monetary policy? We might begin with the lessons from the pandemic and war that are relevant for monetary policy, even if the world eventually moves back to an environment of low interest rates and low inflation.

“Most economists missed the inflation surge, and we need to understand why, and how monetary policy may have to change, going forward.

“But some crisis effects—high inflation, supply chain disruptions, greater trade barriers—may persist much longer, or intensify. That could challenge macroeconomic stability around the world, especially in emerging markets. How can we avoid this?”

She noted that the challenge for central banks would also be compounded if supply shocks become more entrenched, adding that this may occur if countries decide to reduce the risk of supply chain disruptions by raising trade barriers.

“That would expose countries to greater supply shock volatility, in turn posing more difficult trade-offs for monetary policy and making economic stabilisation harder.

“Central banks in emerging markets would be particularly hurt if trade becomes more fragmented and inflation expectations de-anchor.

“These economies are already more vulnerable to external shocks, and could face harder policy trade-offs,” Gopinath said.

According to the IMF chief, central banks must lead the inflation fight, adding that other policies can help.

She admonished that fiscal policy should play a role, with targeted help for the most vulnerable that does not stimulate the economy.

“Policymakers must advance the climate agenda to preserve economic and financial stability. Finally, policies that reduce fragmentation risks in global trade will lower the risk of supply shocks and help boost the world’s potential output,” she noted.

The IMF chief observed that bigger interest rate hikes to contain inflation would cause larger output contractions.

She stated that significant and front-loaded tightening by several central banks over the past year have helped attenuate de-anchoring risks.

Nevertheless, central bankers should remain vigilant, she advised.

“The challenge for central banks would also be compounded if supply shocks become more entrenched. This may occur if countries decide to reduce the risk of supply chain disruptions by raising trade barriers.

“That would expose countries to greater supply shock volatility, in turn posing more difficult trade-offs for monetary policy and making economic stabilization harder.

Central banks in emerging markets would be particularly hurt if trade becomes more fragmented and inflation expectations de-anchor.

“These economies are already more vulnerable to external shocks, and could face harder policy trade-offs,” she stated.