Monetary Policy Imperatives in a Changing Global Landscape - Central Bank Governor Gabriel Makhlouf

The Central Bank of Ireland and the National Association for Business Economics this week co-hosted the International Economic Symposium in Dublin.

Giving the keynote speech this morning at the event, Governor of the Central Bank of Ireland Gabriel Makhlouf said: “If the last few years, not to mention the last few weeks, have taught us anything, it is that the optimal economic policy mix is one that needs to include both resilience-building measures alongside the right macroeconomic policies. 

"The global economic integration that has characterised most of the last half-century is now stalled, if not reversing.

“The last few weeks have seen an acceleration in the pace and scale of change.  The sudden shift led to increased financial market volatility across the world, reminding us all of the fact that that global trading systems and global capital flows are two sides of the same coin. As a country at Europe’s western edge, but at the heart of the European Union, and indeed the euro area, Ireland plays an important role in the global financial ecosystem. We are a highly globalised economy, with a large outward-focused financial sector. We see significant capital flows through our financial system and we have been closely and carefully analysing daily trade flow data during this period of volatility. 

“For businesses, the resulting scramble to adjust sourcing strategies will further fragment supply chains.  

“Uncertainty is also weighing on investment, with soft data pointing to a significant cooling in business and consumer sentiment. The recent IMF World Economic Outlook highlighted tariffs, policy uncertainty and tighter financial conditions as significant drags on growth.  Even if a full-blown trade-war turns out to be short-lived, the uncertainty effects will persist for some time.”

Looking at monetary policy, Governor Makhlouf said:  “In my view, one thing that is clear is that monetary policy must adapt to the new nature of supply shocks generated by geoeconomic fragmentation. Given the effects of the size, scale and more persistent nature of fragmentation-induced shocks, and their impact on prices, our monetary policy responses will need careful calibration.”

“So, what are the implications for our monetary policy framework?  First, we have seen that threats of inflation de-anchoring, from both above and below, warrant forceful and persistent responses.  Second, central banks will need to incorporate risk and uncertainty more explicitly into their frameworks. Third, we must ensure that our frameworks are sufficiently agile to account for sudden changes in the economic environment in order to allow for a swift exit from policies should there be a change in the state of the economy. Fourth, and finally, the interest rate remains the default policy lever in our toolbox. However, when constrained by the lower bound, other policy tools such as targeted lending programmes and balance sheet operations have their uses

Commenting on the theme of economic resilience, Governor Makhlouf said: “We are already in a period of transitions – in demography, in climate, in technology – and we are now witnessing a rapid change to a new geoeconomic framework. 

“All transitions pose challenges and all transitions need to be managed, building economic resilience so that households, businesses and the community as a whole can weather the storms but also take the opportunities that change provides.

"I believe our three priorities for resilience building should include completion of the Single Market to deliver deeper and stronger ties within the 27 Member States.  For too long, Europe has maintained high internal barriers and deepening the Single Market offers a hedge against broader global trade fragmentation.

"I also believe that a less open US economy could lead to a redistribution of capital flows through Europe, and so completing the Savings and Investment Union, which goes hand-in-hand with a deeper and stronger single market, should be another priority. The public and private spending uplift that will be required to fund the transitions we face will be enormous. As I said earlier this year, the prompt delivery of the Savings and Investment Union is a key enabler to unlock the almost €12 trillion in savings and cash deposits held by Europeans.

"Finally, the lack of a unified, pan-European payment rail (that does not rely on foreign providers) is a key vulnerability for the euro area. A central bank digital currency (CBDC) such as the Digital Euro can fill the gaps in our current fragmented pan-European infrastructure, while also encouraging innovation and competition in payments, and delivering in terms of strategic autonomy.  This is essential to shore up the resilience of our financial plumbing system, and something that will deliver long-term and reliable benefits for business and consumers alike.”

Closing his remarks, Governor Makhlouf said: “We face a new global economic order characterised by trade fragmentation, structural economic shifts, more frequent supply disruptions and policy unpredictability. 

“Nobody welcomes the geoeconomic fragmentation we are currently experiencing, but I believe it merely serves to accelerate changes that up to recently were more gradual. 

“To a large extent, it brings to a head decisions that, for Europe, had been put off for far too long.”