Time for banks to break the shackles of inflation targets

By Daniel Moss

15 Mar 2023 · 4 min read

When it comes to containing prices and inflicting the least damage to the global economy, pragmatism is better than purity. Worries about encouraging risky behavior didn't prevent a rescue of depositors at Silicon Valley Bank or the rollout of a further U.S. backstop to the banking system. The same is true of a totem of monetary policy the past few decades: inflation targeting.

Being above your target - for many central banks it's somewhere around 2% - isn't an argument to keep going with interest-rate hikes regardless of the cost to either growth or the financial health. Even in New Zealand, the country credited with pioneering the use of numerical objectives, flexibility has been key. While the relentlessly hawkish tone of the Reserve Bank of New Zealand may obscure it, the target has evolved and was only ever intended as means to an end. It's been diluted and widened over the years. There's a lesson there: No need to charge full speed ahead given this bout of volatility. It isn't necessarily a betrayal of principle.

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