During a speech at the Adam Smith Business School of the University of Glasgow, Bank of England (BoE) Monetary Policy Committee (MPC) member Megan Greenebroke away from “tradiitional” policy planning rhetoric, warning that global central banks need to pivot into a different perspective on managing supply shocks that have become the norm rather than the exception.
Greene argued that central banks will now need to pay more attention to supply-side dynamics, not just “look through” supply chain and demand shocks, which has been the traditional central bank view of economic disruptions.
Using the recent COVID-19 pandemic and the ongoing war in Ukraine, Greene highlighted that supply shocks can frequently become persistent and interrelated, making them difficult to differentiate in real-time. Greene suggests that central banks may need to adapt their policy frameworks for an era where supply chain disruptions are not only more frequent but also structurally significant.
Greene suggests that central banks may need to adapt their policy frameworks for an era where supply chain disruptions are not only more frequent but also structurally significant.
Key highlights
A restrictive stance could mean skipping rate cuts.
When there is uncertainty around intrinsic inflation persistence, as there currently is, a monetary policymaker should respond to inflation.
It’s appropriate that the response to the uncertainty and risks we are currently facing should involve a cautious approach to rate cuts going forward.
I am not in favour of policy reversals by central banks.
Inflation may respond to monetary policy more quickly than output when inflation has exceeded the target for an extended period.
Negative supply shocks are likely to continue.
I’m less concerned about the rapid labour market decline.
The risk to the inflation outlook has shifted to the upside.
The hazards of weaker demand have not disappeared, but to my mind they have diminished.
A cautious approach to rate cuts is required.
Disinflation process is slowing, and caution is needed.
The neutral rate of interest has increased.
It is not clear whether policy is meaningfully restrictive.
