MNI: Central Banks To Prioritise Prices Over Jobs -ExOfficials
MNI (MELBOURNE) - Central banks with dual mandates will place greater weight on price stability over objectives for the labour market should price rises become entrenched as the result of a trade war, former Australian and New Zealand central bankers told MNI.
“Those that have a dual mandate still see price stability as their primary goal – their most serious failure is to let inflation get away,” said Grant Spencer, teaching fellow at Victoria University of Wellington and former deputy governor at the Reserve Bank of New Zealand. “If price stability gets away, the finger is pointed at them. From my experience, they take that as really the most central objective and responsibility of monetary policy, even though they might have dual mandates.”
Most central banks with a dual mandate only target the natural rate of unemployment, which can change with the economy and move with supply-side shocks, he added, noting monetary policy could only impact demand.
The New Zealand government removed the RBNZ’s employment focus in late 2023, but Spencer believes the dual mandate led the Reserve to ease the official cash rate significantly in 2019 from 1.75% to 0.25% during the Pandemic.
Central banks globally in future will likely move to simplify their targets and try to lean on the fiscal side during supply shocks, he said. (See MNI INTERVIEW: Fed On Hold, Next Move Could Be Hike-Andolfatto)
TRADE WAR OVERDONE
Bob Gregory, emeritus professor at the ANU’s Research School of Social Sciences, who served on the RBA board between 1985-1995, noted the impact of any trade war on inflation will not be catastrophic, unless the U.S. imposed significantly higher and extensive tariffs than those about to be put in place.
“Tariffs themselves obviously increase prices, but considered in isolation they aren't really as big a deal as many commentators make them out to be on inflation,” he said. “In terms of the aggregate economy of the U.S. the tariffs only apply to a small selection of items and there’s always domestic substitutes. The U.S. exchange rate also increases a little in response to the tariff increases and this offsets some of the tariff induced import price increases.”
However, the duties can have flow on impacts, such as workers demanding higher wages, which can drive inflation and other prices setters can change their price expectations, he added. “If we get 60% tariffs on every U.S. import, that’s a different matter, but in terms of the final outcome there are likely to be many exceptions," he continued. (See RPT-MNI INTERVIEW2: Trump Stagflationary For EZ-ECB's Wunsch)
How central banks react to the tariff wars will depend in part on how they adjust their weights on their different price stability and labour targets and how their economic forecasting outcomes are shifted in response to U.S. President Donald Trump's policies, he noted, pointing to the RBA's "go slow" strategy this cycle that had sought to protect the employment market. Central banks obviously change their focus, depending on whether inflation or unemployment is likely to increase quickly, he added, noting central banks do not only focus on their inflation target.
Central bank targets, by their definition, were imprecise, Gregory continued. Even if a Central Bank mandate only included inflation it would still need to keep unemployment changes in mind when setting monetary policy due to the interconnected nature of inflation and labour market outcomes, he added.
Adrian Pagan, professor of economics at the School of Economics at the University of Sydney, and an RBA board member between 1995-2000, noted the Reserve's employment mandate was vague. "I have never been a fan of having the labour market as part of the targets," he said.
"If you don't fully understand changes in the labour market and its ways of setting wages and conditions, then making it a target is a bad idea," he continued. "Targets should be things you can affect. The RBA can affect demand but how that flows into the labour market is a different thing. It seemed once that the level of unemployment could be related to levels of demand and so it was useful to have that as one of the potential targets."