There are five areas where central banks are being pressed to do more than fight inflation
Save time by listening to our audio articles as you multitaskThirty years ago, after inflation in the rich world had spiked in the double digits, these powers were harnessed for a single goal: to keep prices stable. Most central banks were given strict mandates and made independent of meddlesome, vote-seeking politicians. For a time it seemed that this ingenious policy fix had banished the spectre of inflation altogether. Central banks’ targets moulded expectations of price rises everywhere.
This special report notes that this threat to central banks’ credibility comes as they have extended themselves far beyond just fighting inflation. After the financial crisis of 2007-09 their regulatory authority was beefed up. During the pandemic they intervened in a wide range of asset markets, hoovering up government bonds and even lending directly to companies and governments.
In America the Fed and the Treasury agreed that the central bank would no longer cap government-bond yields. The Fed forcefully displayed its independence in the early 1980s, when Paul Volcker provoked a recession to tame inflation. Central banks were given independence and inflation targets, first in the rich world and then in many emerging economies. Today most are independent .
Another reason for the growing role of central banks is the new attention paid to financial stability, after a period of neglect. Stricter regulation of banks has led to a rise in non-bank intermediaries in a range of credit markets. When the crisis came, central banks had to stabilise these markets. The extraordinary cash crunch brought on by the lockdowns of 2020 pushed central banks back to the sphere of credit allocation.
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