Monetary policy prospects discussed in Davos

Central bank rates will be higher in the coming years than they were in the aftermath of the 2008–09 financial crisis, even after the current tightening cycles end. This is what the “new normal” will look like, according to participants at the World Economic Forum (WEF) in Davos. The main reason for maintaining high rates will be a higher level of inflation. The rise in prices will be affected by the consequences of deglobalization (the transfer of production to the domestic market or to “friendly” countries leads to increased costs), the characteristics of the demographic situation and the results of the fight against climate change.

In the coming years, central bank rates will on average be higher than in the period after the 2008–2009 crisis, participants at the WEF monetary policy session held in Davos on Tuesday suggested. “We are seeing significantly more supply shocks and they are more pronounced. We have also seen that inflation may be accelerating,” said Gita Gopinath, First Deputy Managing Director of the International Monetary Fund (IMF). She warned that market participants’ expectation of a sharp rate cut this year was premature and predicted that rates would only begin to decline in the second half of the year. The fund believes that the effect of a tighter monetary policy has already been largely realized (this applies to the United States to a greater extent than the euro area). In general, according to the deputy head of the IMF, the economies of developed countries have proven to be very resistant to rising rates: inflation is decreasing without significant losses in business activity, and the likelihood of a “soft landing” has increased.

The head of the French Central Bank, François Villeroy de Galo, noted that the fight against inflation was more successful than the participants in the Davos session expected a year ago, but wondered whether the reason was monetary policy or whether central banks were simply lucky with lower energy prices.

However, not only general inflation, but also core inflation, decreased; the main goal of regulators was to maintain inflation expectations and prevent the impact of energy shocks on the cost of other goods and services – this is the key difference between the current situation and the consequences of the energy crises of the 1970s, he noted head of the French Central Bank.

As for the future of rates, François Villeroy de Galo suggested that in the coming years they will not be higher than today, but will still exceed the average level of 2015-2022. “The new normal will not be the same as before, and will depend on the medium-term level of inflation, which, in turn, will be increased due to deglobalization, demography and policies to reduce emissions,” said the head of the French Central Bank. “The second parameter is neutral rate level (at which monetary policy has neither a stimulating nor a cooling effect). We don’t know exactly what it is, but according to our estimates, it has stopped declining. This trend has been observed over the past 20 years; now this rate is around zero. With inflation around 2% and a near-zero neutral rate, real rates will also be around zero, and nominal rates around 2%.”

The session also discussed the lags with which monetary policy operates. We are talking about the impact on financing conditions and then about their impact on the real economy. In the first case, the transmission has already occurred (in Europe, this role is played to a greater extent by banks), but the impact of the second lag is more difficult to assess, and it varies by sector – in real estate, for example, the transfer of the effect of raising rates occurs faster. Participants still consider overheated labor markets to be the key obstacle to a faster reduction in inflation and rates: rising wages impede the decline in consumer activity.

In the medium term, what will keep inflation elevated will primarily be new risks associated with supply chains, says CISCO CEO Chuck Robbins. “Onshoring (transfer of production to the domestic market.— “Kommersant”), friendshoring (to “friendly” countries.— “Kommersant”), differentiation of supplies – all this leads to increased costs. This is a long-term factor, as nationalism in economic policy is growing: in some markets the principle “either you produce here or you don’t sell in this market” already prevails,” Mr. Robbins explained.

Tatiana Edovina