Speech by Mr Hervé Hannoun, Deputy General Manager of the BIS, on "Monetary policy in times of high external vulnerability" - 47th SEACEN Governors' Conference, Seoul, Korea.
Central banks need to recognise, and to communicate, the limitations of monetary policy. They should reject calls for unlimited intervention to pursue goals that are beyond their reach. Not least, the perception that the central banks can do “whatever it takes” to address any solvency problem of banks and sovereigns is dangerous. The ultimate source of central banks’ power is their ability to supply funding liquidity ex nihilo. That is what underpins the smooth functioning of payment and settlement systems, their control over short-term rates and their influence on broader financial conditions. But that power has to be used wisely. For it is effective only as long as the central bank retains the confidence of the public. And that confidence can evaporate faster than we think.
It also gives rise to three major risks and one ultimate possible consequence for monetary policy itself: these three risks are those of financial dominance, exchange rate dominance and fiscal dominance; and the ultimate possible consequence is an inflation surprise that could severely damage central banks' hard-earned credibility. To prevent these risks from materialising, we need to forge a consensus on what could be called "the new frontier of monetary policy" in order to refocus monetary policy on maintaining lasting price stability. This also implies that central banks should reject the market illusion of unlimited intervention and the associated theory of the "printing press".
Full speech
© BIS - Bank for International Settlements
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