2023-06-27 02:19:41
The vice-president of the International Monetary Fund has warned that central banks must accept the “inconvenient truth” that they may have to endure a longer period of inflation above their 2 percent target to avoid a financial crisis, according to the Financial Times.
The newspaper quoted Gita Gopinath at the annual conference of the European Central Bank in Sintra, Portugal, as saying, Monday, that policy makers risk facing a stark choice between resolving a future financial meltdown for heavily indebted countries and raising borrowing costs enough to tame stubborn inflation.
Gopinath told the Financial Times ahead of her speech that the high debt levels of many European governments left them vulnerable to another financial crisis.
Gopinath, who was promoted last year from chief economist at the International Monetary Fund to deputy managing director, added: “We are entering a period in which we have to realize that fighting inflation takes a long time to reach the desired goal, and this is the first uncomfortable fact, and this means that we We risk inflation becoming entrenched.”
“When governments lack the fiscal space or political support to respond to a problem, central banks may need to adjust their monetary policy response to account for fiscal pressures,” she said in her speech.
But she added that there would have to be a “high bound” before major central banks would accept inflation remaining above the 2 percent target for a longer period because it might make rising prices more entrenched, as happened in the United States in the 1960s.
And she continued: “The financial pressures in the euro area may also have various regional effects, with (interest rate) spreads rising further in some high-debt economies, and this may amplify other vulnerabilities arising from household indebtedness and a large share of variable-rate mortgages.” in some countries.”
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