As the cost-of-living crisis takes a firmer grip on vulnerable people all over the world, we must ask how this crisis has materialised and the slow response by central banks to adopt a more pre-emptive monetary policy stance. This is not an unforeseen crisis. To the contrary, indicators of persistent and substantially higher above-target inflation have been evident since early 2021, particularly in the US, UK, and parts of the European Union. Monetary policy principles adopted since the Global Financial Crisis have played a pivotal role in delaying actions by central banks to stem escalating inflationary risks resulting in central banks potentially walking the public into a cost-of-living crisis.
As the realities of the cost-of-living crisis become clearer, such as people having to decide between heating or eating, central banks need to better understand how changes in the way consumers, industries and international markets function threatens their overreliance on historical models as a guide to setting future monetary policy.
An example of this is demonstrated by the consistent narrative of central banks across western nations throughout 2021, siting inflationary risks as “temporary”. This forecast, now widely recognised as being wrong, contributed to central banks maintaining positions of excessively loose monetary policy. The failure to understand new and emerging undercurrents of inflationary risks highlights the need to review the balance of economic analysis used to inform monetary policy decision-making.
It is in the public’s interest for investigations to be undertaken into current monetary policy analysis, to understand the underlying causes of why monetary policy inactions proved so detrimentally wrong. In support of this, see attached a copy of my letter to Rishi Sunak, the UK’s Chancellor, requesting that the UK Government launch an investigation into the Bank of England’s handling of monetary policy.
In 2020, I published a paper entitled ‘New Markets, New Models’. This paper provides more in-depth analysis of why firms across industries should adopt caution when relying on historical models to forecast future credit and liquidity risks. To access this paper, click here.
Please let me know what you think.
