In response to the column by John Plender (“Inflation targets have left central banks in a bind”, Markets Insight, March 29) and the follow-up letter from David Green (“Time is ripe for root and branch review of inflation targeting”, March 31), I feel we need to avoid hasty reactions to the obvious failures of many central banks to contain inflation satisfactorily in recent times.
However, I earnestly do not believe that making wholesale changes to inflation targeting or to explicit mandates, are the answer. While the pandemic and the official policy response were unprecedented in scale and scope, the level of stimulus applied was far and above what was required. Lawrence Summers stated that the US fiscal policy injection was three times that of the US Treasury’s Troubled Asset Relief Program during the acute phase of the financial crisis of 2007-2008.
Post-lockdown, the US economy responded very sharply and quickly to the reopening of society and commerce, hence the degree of stimulus was way in excess of what was needed. This also played out with respect to the UK and EU economies to varying degrees; unfortunately, as policymakers were overcommitted and fearful of a prolonged slump, they could not pivot to less stimulus easily, even as the cycle turned.
Disappointingly, the collaboration and communication between the fiscal authorities and the central bankers was insufficient, and even with evidence mounting in late 2021 that a surge of inflation was about to take hold, pre-Ukraine war, the monetary policy response was wholly inadequate.
Interest rates were lifted too tamely, too gradually from a very low base and then along came the commodity price shock from Russia’s indefensible war and illegal invasion, complicating the response still further.
Conclusions ought to focus on the many levers that central banks hold and the co-ordination with the fiscal actors involved for optimal policy implementation. Ideally, it is also worth bolstering accountability — this is especially valid for the European Central Bank yet also extends more generally to others.
If central bankers know ex ante that they will be rigorously and objectively scrutinised for their decisions and that the thought processes are made public, then we would observe a notable upswing in better policy outcomes and by extension, higher adherence to the inflation target — in good times as well as bad!
In sum, targeting has broadly been a success, but it does require constant vigilance, flexibility and responsible decision-making — let’s concentrate on these salient aspects before inventing a new system
Kevin Newman
Dublin, Ireland
