The global economy is bracing for a period of heightened inflation volatility, requiring more forceful monetary and fiscal policies than previously seen, Bloomberg reports, citing Ales Michl, Governor of the Czech National Bank (CNB).
In remarks delivered at a central banking conference in Mexico City last week and published on Monday, Michl warned of a future where consumer prices swing more dramatically.
“After a period of high inflation, we are now entering a phase of higher inflation volatility around central bank targets, with an upside risk,” Michl said.
He attributed the persistent price pressures to a decade of near-zero interest rates prior to the COVID-19 pandemic, resulting in excessive money creation.
Michl stressed the need for central banks to maintain higher interest rates for an extended period to counter this trend. He also urged governments to prioritize balanced budgets, arguing that failure to do so could trigger a second wave of inflation, potentially exacerbated by future cost shocks.
Despite the CNB’s recent actions – eight consecutive interest rate cuts totaling 3 percentage points over the past year, bringing the benchmark rate to 4% – Michl emphasized that some degree of monetary restriction remains necessary. He highlighted the importance of controlling core inflation in a small, open economy like the Czech Republic, asserting that keeping core inflation below 2% is crucial for managing headline inflation.
“Looking ahead, core inflation may need to be slightly below 2%,” Michl said. “Since this is not reflected in our current outlook, we are already discussing the appropriate time to pause rate cuts.”
