Central Banks Urged to Reassess Interest Rate Setting to Curb Inflation
The Bank for International Settlements (BIS) has called on central banks, including the Federal Reserve and the European Central Bank, to revise their interest rate setting approaches. This move is aimed at addressing the collective failures that led to soaring inflation following the COVID-19 pandemic.
In a recent speech, outgoing BIS chief Agustin Carstens highlighted the need for "policy framework reviews" in both the U.S. and the eurozone. He emphasized that central banks must prioritize addressing inflation risks in the wake of the pandemic.
Carstens suggested that "scenario analysis" could be a more effective tool than current "forward guidance" approaches. He also stressed the importance of central banks being able to respond swiftly when interest rates are near zero.
Additionally, Carstens urged central banks to reconsider "make-up strategies" that commit them to compensating for inflation undershoots with subsequent overshoots. This approach has been criticized for contributing to the recent inflation surge.
The Fed and the ECB are currently conducting policy reviews, which are expected to conclude mid-year. Notably, neither institution intends to adjust their inflation targets of 2% and slightly below 2%, respectively.