'Inflation Fighter' Central Bank, Will Its Role Shift to 'Employment Fighter' Amid COVID-19?

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] The COVID-19 crisis is expected to change the traditional role of central banks as 'inflation fighters.' As the economic slowdown caused by COVID-19 shakes the labor market, there is a growing view that central banks may prioritize employment in their policy goals. In the ongoing concerns about the so-called 'D (Deflation) fear' following the COVID-19 pandemic, how to achieve employment retention goals is likely to become the core of central bank policy formulation.

On the 27th (local time), CNBC reported in an article titled 'Central Bank Governors and Inflation' that the duties of central banks could shift from inflation to other factors.

According to the report, Pushan Dutt, Professor of Economics and Political Science at INSEAD, a French business school, believes that the priorities of central bank governors will change due to the economic slowdown caused by COVID-19. He said that current central bank governors grew up watching the 1970s oil shock and "they place more emphasis on inflation than on concerns about unemployment." He added, "The next generation of central bank governors grew up during the global financial crisis and the COVID-19 pandemic era. In my opinion, they will place more weight on reducing unemployment and be less concerned about inflation."

Joseph Gagnon, Senior Fellow at the Peterson Institute for International Economics (PIIE), also mentioned that the U.S. Federal Reserve (Fed) treats full employment and inflation as equal policy goals, stating, "But in places where employment did not have the same status as inflation, changes are expected. Frankly, since both inflation and employment are equally important, changes need to be made."

In this context, reports have emerged that central bank governors have recently reduced their mentions of inflation forecasts in official settings. According to Bloomberg News, Philip Lowe, Governor of the Reserve Bank of Australia (RBA), recently emphasized employment deterioration and GDP decline due to the pandemic more, while reducing references to the possibility of deflation. Bloomberg also reported that the Bank of Japan (BOJ) has reduced its mentions of inflation targets as it focuses on responding to COVID-19. After the monetary policy meeting on the 27th, BOJ Governor Haruhiko Kuroda predicted that the 2022 inflation rate would be between 0.4% and 1%, falling short of the 2% inflation target, but he did not expect deflation to recur.

The COVID-19 crisis has also raised the possibility of changes to the inflation targeting system implemented by central banks. Gabriel Sterne, Global Macro Research Director at Oxford Economics, a UK consulting firm, pointed out that "most central banks practice inflation targeting, but the problem with this system is that the target is either too high or too low," and criticized that monetary policy has largely failed to meet inflation targets over the past decade. He predicted that the COVID-19 crisis will make it even harder to meet targets and forecasted, "Next year, if inflation is not negative, it will fall to a very low level, making central banks' inflation targets unnecessary." The Nihon Keizai Shimbun also noted that "inflation has become less effective as an economic thermometer or as a basis for financial policy decisions."

However, some voices argue that amid growing uncertainty about future inflation trends, central banks need to discuss measures against inflation and related issues.

This content was produced with the assistance of AI translation services.