Monetary policy decisions should never come as a surprise to markets. On the contrary, it is most advisable for them to be predictable, which strengthens both their ability to prevent disruptions and to counter rising inflation expectations.
In just a few months, we have gone from hearing that the exceptional expansionary measures of the past decade should be maintained to anticipating—and even seeing—increases in official interest rates. The upturn in inflation, more persistent than initially seemed, has hastened the return of monetary policy to normal.
Inflation is never good, regardless of its origin—whether due to excess demand in the face of limited production capacity or to a supply shortage that drives prices up. And in both cases, the greatest risk is that rising inflation becomes self-reinforcing in the production process and triggers a spiral of price-rise expectations among economic agents.
In a scenario like the current one, central banks face various risks. On the one hand, they risk appearing too complacent about the dangers of inflation, which could undermine their credibility; on the other, they risk disrupting macroeconomic and financial stability. Their greatest challenge, however, is to avoid creating greater future risks at the expense of preserving the current scenario.
The change in financial conditions should not be seen as an obstacle to growth, but rather as a necessary action to foster it. It is the return to normal after an overly expansionary monetary policy that has lasted too long. And like any return to normal, it entails a temporary adjustment in agents’ expectations.
Financial stability is key to macroeconomic stability, so it is necessary to define the limits of monetary policy and ensure that its combination with the rest of policies—from fiscal policy to supply-side measures through reforms—is truly effective.
José Luis Martínez Campuzano, spokesperson for the Spanish Banking Association
