Univesity of Princeton economics professor Markus Brunnermeier has urged central banks to return to a monetary policy approach in which stabilising inflation expectations is a central priority.

His assertions come at a time central banks around the world, including the Reserve Bank of Malawi (RBM) are grappling with high inflation rates compelling them to raise interest.

Writing in the International Monetary Fund’s (IMF) March 2023 Finance and Development Magazine, Brunnermeier said a resurgence of inflation requires yet another shift in emphasis on monetary policy.

He said the predominant intellectual framework central banks have followed since the global financial crisis that began in 2008 neither stresses the most pressing looming issues nor mitigates their potential dire consequences in this new climate.

Said Brunnermeier: “Following a lengthy period of low interest rates and low inflation, the global economy is entering a phase characterised by high inflation and high levels of both public and private debt.

“Fifteen years ago, central banks saw an urgent need to incorporate financial stability and deflation concerns into their traditional modelling of the economy and developed unconventional tools to deal with both.”

In its Market Intelligence Report dated January 2023, the RBM said given the intense uncertainty surrounding the macro-economic outlook, it would be prudent for policymakers to adopt a neutral stance and react whenever it is necessary.

The central bank said while international prices for a number of commodities continue coming down, some country-specific factors could negate the impact of the anticipated low inflation pressures from global factors.

Reads the RBM report: “Existence of the United Nations-backed agreement, which is allowing Ukraine to export grains to other regions of the world and weak demand resulting from deteriorated purchasing power continues to drive down international prices for a number of commodities.”

But Brunnermeier said although financial stability remains a concern, there are important differences between the current environment and the one that followed the global financial crisis.

He said currently, the public debt is high and any interest rate increase to fend off inflation threats makes servicing the debt more expensive, with immediate and large adverse fiscal implications for the government.

In October last year, the RBM raised the policy rate, the rate at which commercial banks borrow from the central bank as the lender of last resort, by four percentage points from 14 percent to 18 percent.

Lately, financing needs for the government have been on an upward trend for the past four financial years, with the largest increase registered in 2020/21 financial year at the height of the Covid-19 pandemic.

Speaking in an earlier interview, Malawi University of Business and Applied Sciences associate professor of economics Betchani Tchereni agreed with the IMF’s observations that inflation needs to be tamed to control rising prices of goods and services.

“Inflation is a monster that is eating people’s disposable incomes. There is need to control it,” he said. n

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