International Money Fund (IMF) First Deputy Managing Director Gita Gopinath spoke on the importance of fighting inflation at the Annual Conference of the Central Bank of Brazil/Banco Central Do Brasil (BCB), according to an article.
"Fighting inflation remains the priority of central banks around the globe," Gopinath said. "This is no easy task, given that growth is slowing, and financial stresses could intensify. Today, I’ll focus on the challenges that emerging markets (EMs) face in bringing down inflation, which is running at multi-decade highs."
The BCB hosted its inaugural annual conference at its headquarters in Brasília from May 17-19. The event stemmed from the BCB wanting to unify the traditional seminars on "Inflation Targeting" and "Financial Stability and Banking." The conference's goal is to encourage debate and research in the areas of macroeconomics, sustainability, financial stability, banking, financial intermediation and innovation, macroprudential regulation, international economics and finance. Keynote speakers included Gopinath and Massachusetts Institute of Technology (MIT) professor Robert Townsend. In addition, the event featured policy panels with renowned researchers including Chicago Booth's Amir Sufi, Banco Central de Chile's Elías Albagli, Bundesbank's Sabine Mauderer and BIS' Stijn Claessens.
In her speech, Gopinath focused on the challenges of approaching high inflation in emerging markets (EMs). She highlighted four key issues: "First, EMs have performed well so far in the face of rapid tightening by advanced economies (AEs). What accounts for the solid performance of EMs? Second, core inflation remains far above central bank targets. What is the appropriate strategy for bringing inflation back down? Third, how should EM central banks respond to financial stresses, which may pose tradeoffs in achieving price stability goals? Finally, how can fiscal policy help the fight against inflation?"
Gopinath noted that EMs have performed well despite the restricting of monetary policy in advanced economies (AEs). Reforms put in place over the past several decades have reduced credit and currency risks, while stronger monetary policy frameworks and greater exchange rate flexibility have bettered policy transparency and stability. However, Gopinath cautioned that, similar to its impact in AEs, inflation in many EMs has been unexpectedly high and persistent. Factors contributing to inflation's "stickiness" include strong pent-up demand, a shift in demand from goods to services and the pandemic's impact on potential output and supply-chain bottlenecks.
"Some of the side effects of fighting inflation with monetary policy, including the financial stresses just mentioned, can be reduced by allowing fiscal policy to play a bigger role," Gopinath said. "Governments can—and should—prioritize the needs of the most vulnerable while scaling back broad-based fiscal support that isn’t warranted in a high inflation environment. Weak fiscal positions can heighten the risk of an adverse sovereign-bank nexus, in which declines in sovereign bond prices hurt the banks, and the weaker macro outlook in turn undermines the sovereign’s creditworthiness, including through fiscal channels. Weak fiscal positions can also increase risks of fiscal dominance, especially in an environment of high inflation where the fiscal authorities may fear that tight monetary policy will further weaken public sector balances and the macroeconomy. IMF research has shown how deteriorating fiscal positions in EMs tend to put upward pressure on long-term inflation expectations, complicating the task of monetary policy."