Central banks are largely responsible for the serious situation in which the world economy is, accuses the former governor of the Bank of England (2003 and 2013), in an interview with the “world”.
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From his personal library made of thick pounds connected in leather, in front of the neoclassical busts of Adam Smith and Cicero, the former governor of the Bank of England (2003-2013) looks with a very severe eye What he considers the failure of central banks to control inflation in recent years.
inflation returns to the Western world. Central banks increase their interest rates very quickly. Is this a turning point in monetary policy?
I think. We return to a world of more normal interest rate. The consequences will be very important because the world has accumulated debts. Ultimately, there are reasons to be optimistic because higher interest rates can improve the performance of the economy. But the transition may be very difficult.
Central banks are responsible for the current inflation thrust?
Their big error was to stop thinking about the money supply, and being interested only in inflation expectations. Their theory was that if people thought that inflation would remain low, then wages and prices would remain low. The problem is that this did not answer the question of what determines these anticipations. The argument was completely circular …
In these circumstances, in 2020 and 2021, central banks ended up printing a lot of money. The old -fashioned economy manuals of the 1950s or 1960s would have said that inflation is the consequence of too much money for too little goods and goods. This is exactly what happened during the pandemic.
But, now, central banks have reacted and increase their interest rates very quickly …
Central bankers understood that we had to return to a higher interest rate world and that we had to accept the consequences [an slowdown in the economy]. Jay Powell, the president of the American federal reserve [Fed], clearly assumes it. He began to talk about Paul Volcker [President of the Fed between 1979 and 1987] in his speeches. In the 1980s, Volcker was probably the most hated person in America when he increased short -term interest rates to 20 %. But, twenty-five years later, he became “Saint Paul Volcker”. Jay Powell decided that was the right strategy for him. It does not matter to him now that there is a recession in America, even if it does not wish it, if it is the price to pay to bring inflation to 2 %.
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