China’s former central bank chief urges revamp of modern central banking
- Zhou Xiaochuan, who was the head of People’s Bank of China (PBOC) for over 15 years until 2018, supports reform of the way inflation is defined and measured
- US president-elect Joe Biden has flagged a cost of living index which factors in asset prices as well as the cost of public services
An important issue here is whether the monetary policies of major developed economies are still in line with economic and financial realities
“A basic textbook on economic law of central banking is that excessive monetary easing (with money supply growing at a faster pace than [gross domestic product] growth) will lead to inflation. But this law is no longer working and the foundation of our knowledge is being challenged,” said Zhou in an article published by the PBOC on Friday.
“An important issue here is whether the monetary policies of major developed economies are still in line with economic and financial realities.”
Central banks in advanced economies are struggling to cope with ultra-low inflation rates even as benchmark interest rates have been cut to levels near or below zero.
The US Federal Reserve and the Bank of England are holding short-term borrowing cost near zero, while the European Central Bank and the Bank of Japan have already cut their main policy rates into negative territory.
These efforts, though, have failed to generate inflation even as economic growth has picked up, with medium-term targets at or near 2 per cent remaining remote.
“Ultra-low inflation poses a challenge to a central bank’s monetary policy operation and its theoretical framework … and the theoretical foundation of the inflation targeting system has been shaken,” added Zhou.