Zinger Key Points
- Gopinath pointed out that inflation is taking too long to get back to target.
- She noted that financial stresses could lead to tensions between central banks’ price and financial stability objectives.
- The economist pointed out that central banks may experience more upside inflation risks than before the pandemic.
- Get New Picks of the Market's Top Stocks
International Monetary Fund Deputy Managing Director Gita Gopinath has highlighted three uncomfortable truths that monetary policy will have to confront for contending with high inflation.
In her remarks before the European Central Bank Forum, Gopinath pointed out the first uncomfortable truth is that inflation is taking too long to get back to target. This means that central banks, including the ECB, must remain committed to fighting inflation despite risks of weaker economic growth, she said.
Also Read: How To Invest In Startups
Gopinath warned that the costs of fighting inflation will be significantly larger if a protracted period of high inflation boosts inflation expectations and changes inflation dynamics. She also noted that some side effects of reining-in inflation with monetary policy could be tackled by giving fiscal policy a bigger role.
"While central banks must be vigilant about not easing prematurely, they should be prepared to adjust course if a chorus of indicators suggest that these downside inflation risks are materializing," she said.
The IMF deputy managing director said the second uncomfortable truth is that financial stresses could lead to tensions between central banks' price and financial stability objectives. Gopinath explained while central banks can extend broad-based liquidity support to solvent banks, they are not equipped to deal with the problems of insolvent borrowers.
Upside Risks: The third uncomfortable truth, she said, is that central banks may experience more upside inflation risks than before the pandemic. ‘Some of the upside risk reflects structural changes affecting aggregate supply—heightened by the pandemic and the war in Ukraine—and that may result in larger and more persistent shocks,' she said.
The economist observed that there cannot be sustained economic growth without a return to price stability. ‘The good news is that while low inflation may seem elusive, it is certainly no stranger, and central bank actions can deliver it. Unlike the characters in Godot, we are not waiting for a potential stranger to arrive; we are inviting an old friend to return,' she said.
Read Next: Cathie Wood Is Piling On Chip Stocks Amid Recent Market Correction — Continues To Sell Tesla Shares
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.