Central banks confront challenges amid shifting global economy

In a recent virtual address, a prominent figure in the financial sector discussed the challenges central banks face amid global economic shifts. The speaker began by acknowledging Agustín Carstens, General Manager of the Bank for International Settlements (BIS), praising his leadership during times marked by significant upheaval such as pandemic shutdowns and war in Europe.

The speaker noted, "Your term, Agustín, has been marked by significant global upheaval—from pandemic shutdowns to war in Europe and double-digit inflation." They commended Carstens' ability to unite leaders and facilitate learning among them. As Carstens' retirement approaches, the speaker recognized his exceptional contributions, particularly his interest in the Americas.

Attention then turned to future challenges. The global economic landscape has experienced considerable changes with implications for central banks. Structural tailwinds like peace and globalization are turning into headwinds, resulting in a more shock-prone world. Factors such as higher long-term interest rates, elevated sovereign debt, slower growth, lagging productivity, rising trade protectionism, economic fragmentation, new technologies like artificial intelligence, and climate change are all contributing to increased vulnerability.

Of particular concern is a shift in U.S. policy direction under President Donald Trump’s administration. His threats of new tariffs have already impacted business and household confidence in Canada and Mexico. The speaker warned that prolonged uncertainty could weigh on economic activity and that significant tariffs would test economic resilience while reducing long-run prosperity.

Monetary policy faces limitations when addressing these issues. "With a single instrument—our policy interest rate—central banks can’t lean against weaker output and higher inflation at the same time," they explained. Central banks must balance inflation pressures from supply chain disruptions with downward pressure from reduced economic activity.

Additional structural headwinds present similar challenges for monetary policy which cannot directly address or offset their consequences. This environment demands harder choices from central banks which might lead to public disappointment or criticism about their effectiveness.

To navigate these difficulties, several actions were suggested: maintaining humility about unknown factors while being confident in monetary frameworks; clearly communicating what monetary policy can’t achieve; recognizing changing world dynamics; investing in richer information about economies; fostering collaboration among central banks; remaining evidence-based and technocratic; being open to improvement based on valid criticism; staying independent yet accountable.

Despite these challenges making today’s world tougher than before, the speaker emphasized that independent central banks are designed for such tough times.

"I look forward to hearing from my esteemed colleagues on this panel," concluded the speaker.