Raghuram Rajan, former governor of India’s central bank, said that the global economy may return to low inflation and central bankers following tight monetary policies should keep this in mind.
Rajan, who is now professor of finance at the University of Washington’s Booth School of Business, Chicago, said central banks need to ask themselves whether their policies were nimble enough when inflation moved from low to high regimes. “We have to be prepared to potentially return to low inflation,” he told a conference organized by the Bank of Thailand and the Bank for International Settlements on Friday.
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“We have to see what compels us,” Rajan said. “We need to assess whether we failed to recognize the build-up to inflation or whether we were actually waiting for our instruments to run out, wanting to preserve them for next time.”
Therefore, it is important for central banks today to pursue policies that anticipate changes in inflation dynamics over time, he said, amid headwinds including deglobalisation, slowing growth in China and a K-shaped recovery in emerging economies. Development may suffer.
In a volatile environment, emerging market central bankers have done an excellent job of anticipating the need to raise interest rates, Rajan said, and this “has served them well.”