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Central Banks Debate Inflation Targets, Asset Purchases and Monetary-Fiscal Coordination

Central banks worldwide are seeking lessons from the cost-of-living crisis, as they convene for their penultimate meetings of the year.

The focus of their discussions revolves around three key debates: the flexibility of central banks in reaching their inflation targets, the effectiveness of asset purchases (quantitative easing), and the merits of monetary and fiscal coordination, Bloomberg reported Sunday (Oct. 22).

Central banks are unlikely to rush to hit their inflation targets at the expense of breaking their economies, the report said, citing a Bloomberg survey of economists. Instead, they are expected to allow more time to bring inflation back to target if it means minimizing damage to their economies. Some economists even suggest accepting slightly stronger or weaker price pressures as long as expectations remain anchored.

The idea of raising the inflation target has gained traction among some economists, but it is considered controversial and can only be considered once central banks have successfully brought inflation back to their current targets, per the report.

Regarding quantitative easing (QE), economists predict that central banks will use this tool more sparingly in the future, according to the report. Only 40% of economists surveyed expect central banks to use QE in the same manner as before, while a quarter anticipate more limited usage. Some economists view QE primarily as a tool to address financial-stability concerns, while a small minority believes it will not be used again at all.

There are concerns about the future use of QE due to its impact on long-term borrowing costs and potential losses, the report said. Unwinding balance sheets can also be challenging, as small mistakes may trigger market turbulence. For example, the Bank of England estimates that its purchases will cost the government over £200 billion ($243 billion) over the next decade.

The coordination between monetary and fiscal policy is also under scrutiny, per the report. While low interest rates and large-scale QE programs have allowed governments to borrow at low costs for stimulus campaigns, the massive increase in spending during and after the pandemic has contributed to the recent inflation outbreak.

Central banks emphasize the need for their independence in delivering price stability and warn that failure to scale back fiscal spending could result in higher interest rates, the report said. They also call for structural policies that promote sustainable growth, reducing dependence on monetary and fiscal measures.

Consumers don’t think inflation is going to abate anytime soon, and their expectations may give retailers and other merchants pause, PYMNTS reported Oct. 13.

Consumers see inflation a year from now at 3.8%, which is higher than the 3.2% that had been in their sights a month earlier, according to the University of Michigan’s latest reading of consumer sentiment.

This sentiment of gearing up for a tougher time making ends meet comes as the holiday shopping season approaches.