So here comes a riddle, here comes a clue
If you were really smart, you would know what to do
-Uh-oh, love comes to town by talking heads
Central bankers have traditionally promoted puzzles, scattered puzzles and mysterious concepts of trafficking when communicating with the general public. The 2008 financial crisis forced him to simplify and shoot straight. The aftermath of the pandemic and, strangely enough, the ripple effects of the Russia-Ukraine war could once again force central banks to review how they communicate with households, firms and markets. A revamped communication tool-kit for central banks is clearly in the works.
Reserve Bank of India (RBI) Governor Shaktikanta Das provided some insights on the progress in this work. In a recent address, Das said: “… while forward guidance can be a useful policy instrument in a monetary policy phase, it can be quite difficult to provide consistent and consistent guidance in a tight cycle. In the current times of high uncertainty The difficulty is exacerbated by the environment. Such forward guidance could also have a destabilizing effect on financial markets, especially if subsequent policy actions differ from earlier announcements. Thus, in the current context, central bank communication is more likely than actual policy actions. It has become even more challenging.”
At first, it may seem that Das is ignoring the narrative that emerged from central bank actions after the great inflation of the 1970s and 1980s; Or even papering on the Indian experience of the past four decades when a succession of central bank governors provided “coherent and consistent guidance in a tight cycle” and raised inflation and inflation expectations with varying degrees of success. managed to train together. In fact, a string of RBI governors—including YV Reddy and D. Subbarao—often sent fake messages to the markets, with several clashes with the government (which also acted as signals).
But he must have misunderstood the slave; His focus is on the phrase “forward guidance”, which is also going in favor of central banks in advanced economies. US Federal Reserve Chairman Jerome H. Powell said after the central bank’s July meeting that it was better to go with a meeting-by-meeting approach rather than provide further guidance, as the Fed has been doing since 2008.
Central banks can use it to provide forward guidance and shape expectations over the past decade as economies were characterized by low inflation and interest rates. There was little that could go wrong, although growth forecasts were often missed. But with most macroeconomic variables now in flux — high inflation, broken supply chains, slowing growth, rising debt levels — it may be foolish to offer further guidance. European Central Bank (ECB) executive board member Philip R. Lane has said that the uncertain economic environment and rising rates make a meet-by-meeting approach a better fit for improving monetary policy than forward guidance.
Central bank governors are providing a different kind of guidance these days, which clearly outlines the course of rate action for the foreseeable future. Jerome Powell was clear at Jackson Hole that no quarter would be given in the fight against inflation: “…the current high inflation in the United States is the product of strong demand and limited supply, and … There is aggregate demand. There is clearly one thing to do to reduce the demand to better sync with the supply. We are committed to doing that work… we will keep doing it until we are confident Looks like the job is done.”
The ECB’s latest monetary policy statement also does not mince words: “We have raised 75 basis points in three key ECB interest rates today, and expect further interest rate hikes, as inflation remains very high and above our target.” For an extended period… our future policy rate decisions will remain data-dependent and follow a meeting-by-meet approach. We will continue to ensure that inflation remains within our medium term inflation target We are ready to accommodate all our equipment within our mandate.”
So far, so logical. But this is where the RBI governor is running in the gray zone. Das is basically taking issue with Powell’s Jackson Hole statement, which sent markets, including those in emerging economies, into a temporary tailwind. It is true that the Fed’s normalization process—both in 2013 and now—has regularly rocked markets with debilitating effects in emerging economies. But it also raises the question: Does Das’s definition of forward guidance differ from Powell’s? It then points to the potential for a growing schism in how the central banks of rich countries and emerging economies define what constitutes forward guidance.
But, in addition, Das inadvertently turns on the arc-lights on the RBI’s guidance record by drawing attention to the Jackson Hole “guidance”. The RBI has often missed out with its GDP growth forecast, which likely feeds its inflation forecasts and shapes its rate. Policy.
Wisely, India’s Wholesale Price Index has been in double digits for almost 18 months and the Consumer Price Index has surpassed the mandated target for almost three quarters. Now is the time to be tough, or even appear to be hard on inflation, and not come across as irreversible.
Rajrishi Singhal is a policy advisor and journalist. His Twitter handle is @rajrishisinghal.
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