Debts piled up during the global financial crisis and more recently the COVID-19 pandemic, are making the central banks' task more complex too. Some are already seeing political pressure to slow rate hikes to ensure the cost of servicing that debt does not spiral. They are also facing large losses - on paper at least - on the trillions of dollars, or euros, worth of bonds they bought to try to boost their economies during crises, meaning that governments are also no longer getting a share of the profits those purchases once generated.
"These risks are material," Carstens said.
Another major challenge is financial instability. Since the
1970s, in close to one fifth of cases, banking stress has broken
out roughly three years after the start of a coordinated global
interest rate hiking cycle.
Larger increases in inflation and higher levels of private
sector debt make stress ever more likely, Carstens added, noting
that this was the first time since the Second World War where a
major surge in inflation has come when debt levels are so high.
It also means policymakers should alter their approach going
forward and refrain from aggressive rate cuts, or stimulus, when
inflation settles below targets.
That should help limit the negative side effects of
ultra-low interest rates, most notably the build-up of the kind
of financial vulnerabilities that have been seen recently in the
banking system.
Central bank independence should be enshrined and mechanisms
to encourage prudent fiscal policy should also be given greater
bite, Carstens said.
"A shift in policy mindset is called for," the former Mexico
central bank governor said. "Returning firmly inside the
boundaries of the region of stability should be a conscious and
explicit policy consideration."
(Reporting by Marc Jones; Editing by Sharon Singleton)
