MNI: Central Banks Must Cancel Out Fiscal Stimulus- Carstens

Central banks must neutralize fiscal policy stimulus interfering with their need to restore price stability, Bank for International Settlements general manager and former Mexico central bank chief Agustin Carstens said Friday.

Failure to take strong action risks creating a lasting loss of trust between the public and monetary policymakers, Carstens said, extending some previous comments about the potential for a new era of stickier supply chains and inflation.

"In a world with inelastic aggregate supply, the impulse fiscal policy could give to aggregate demand would surely have to be neutralised by monetary policy in order to control inflation," he said in remarks prepared for a conference at Brazil's central bank.

FISCAL POLICY STRAINS

Global fiscal policy faces strain with record debt burdens, even higher interest rates expected in coming years, and pressure to spend more on infrastructure and healthcare, Carstens said. His argument about tight monetary policy echoes comments from a top IMF official earlier this week, a contrast with investors and some officials looking at a transition to rate cuts. (See: MNI INTERVIEW: Higher ECB Peak Rate Means Faster To Cut-Simkus)

"This strong response must continue as long as necessary, for only by resolve, perseverance and success in this task can trust in money be preserved," Carstens said. "This process may run into obstacles, particularly in the final stretch towards eventual convergence with inflation targets."