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Central banks
OpinionComment
David Brown
David Brown

Macroscope | Central banks mustn’t forget the human cost of their war on inflation

  • Is it right for central banks to be waging all-out war on inflation when it’s hurting ordinary people who didn’t create the problem?
  • Widening interest rate-setting boards to include labour market economists and poverty specialists might produce fairer results for society

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Items for sale at a pawnbroker’s in London on March 8, amid the cost of living crisis in the UK. Photo: Bloomberg
David Brown
Recently, there was a shocking instance of how insensitive central bankers can be to the plight of ordinary folk facing extreme economic difficulties. With consumers still struggling to come to terms with the Covid-19 pandemic and the cost of living crisis, Bank of England chief economist Huw Pill made an unfortunate choice of words when he suggested Britons needed “to accept that they’re worse off” and stop bidding up wages and prices.
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The Goldman Sachs alumnus’ words sounded out of touch with today’s harsh realities for many people. It begs the question of whether central bankers are doing a good job. Is central bank independence still fit for purpose or are reforms needed? Do our monetary mandarins, comprising former civil servants, academics and ex-investment bankers, live in too much of a cosseted bubble? Has inflation targeting lost relevance in a complex, multidimensional world?

It’s taken for granted that central bank independence is sacrosanct and that our monetary custodians are there to promote the right kind of conditions for sustainable, non-inflationary growth consistent with financial stability over the long term. This has generally meant keeping inflation under control at 2 per cent.

But recent history has seen some major failings, with global monetary policymakers falling short on a number of occasions. The central banks were asleep at the wheel leading into the 2008 global crash, then they left interest rates too low and for too long in its aftermath and now they are overreacting with drastic interest rates rises to try to catch up with high inflation.
The recent rapid run-up in interest rates has clearly taken its toll on global economic confidence, with recovery starting to struggle again. After its 10th consecutive rate hike in 14 months, even the US Federal Reserve is beginning to balk, with hints that a pause could be on the cards.

Fed chair Jerome Powell might think a recession in the United States is less likely this year, but with inflation heading lower, the central bank needs to get the economy back on track for sustainable recovery as soon as it can. The Fed may be keen to rebuild its anti-inflation credibility, but not at the cost of the economy slipping back into recession heading into the presidential election in 2024.

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