Ludek Niedermayer is an economist and former deputy governor of the Czech National Bank. He has been a member of the European People’s Party in the European Parliament since 2014.

For more than a decade, central banks have been more concerned with the risk of deflation than inflation, with their boards spending most of their time and effort trying to raise inflation by a few tenths to reach their 2% target, considered a good level of price stability at the time.

But almost overnight, they are now struggling to keep inflation in the single digits.

It would be unfair to blame central bankers for not having been able to anticipate what happened, because it was a set of unique factors that caused this change, and to judge whether an inflation spike is temporary or will there is a serious risk of long-term inflation was difficult, if not impossible — at least until the fall of last year.

Now, though, to say that by not acting soon enough many of them made a mistake that undermined their credibility seems like a fair judgment. Central banks have lagged behind the curve. And as a former central banker myself, I think several systemic factors put them on the wrong track.

The first factor to consider is excessive transparency. Central banks are always very transparent and they are clear about their objectives, disclosing how they make their decisions and what tools they use. During deflation, however, some took transparency even further by committing to future policy action. And although the violation of these “promises” cannot be sanctioned, the central bankers have taken them very seriously.

Such firm commitments are no longer used, but it seems that the often communicated “additional action plan” played an important role in the central banks’ (in)ability to act quickly.

At the start of 2022, central banks and most economists expected 2023 to be a very slow recovery year for the COVID-19 economy. And it appears that central banks – in particular the European Central Bank (ECB) – have been reluctant to move quickly from a “commitment to continue the policy of very low interest rates to support the recovery” to a “rapid reaction at risk of inflation. The assumption that quantitative measures—that is, credit to banks—must be abolished before interest hikes have also slowed the necessary policy shift.

At the same time, a fairly intense public debate took place in Europe on the question of whether the fiscal debt position of certain member countries in the eurozone was relevant for the necessary increase in ECB interest rates. .

There are a few obvious reasons why this wasn’t the right question. First, since the ECB’s mandate is to preserve price stability, monetary considerations can only play a role if they have clear implications within that mandate — and the higher cost of servicing the debt of some country is not such a factor.

More importantly, however, central bank policy that is “lagging the curve” – ​​that is, interest rates are too low – triggers a rise in long-term interest rates. , leading to an increase in the cost of servicing the debt. Therefore, keeping inflation and expected inflation low is the best way to make public debt financing both predictable and cheap over the long term.

Finally, there is also the relationship between central banks and politics to consider. The past few decades have been a good time for central bankers: high inflation was not a problem, and despite the two major global emergencies of the 2008 financial crisis and the pandemic, financial stability – often the secondary objective of a central bank – has been preserved. So much so, in fact, that it may even have made central banking seem like a simple job.

As a result of this stability, central bank boards have since changed. Instead of leading economists like Alan Greenspan or Mario Draghi, or very experienced central bankers like Eddie George or Paul Volcker, people with stronger political skills than economics or central banking qualifications filled some of these positions. .

A person with extensive political experience can, of course, add value to a central bank’s board, helping it to communicate better with the public and politicians, which is very important. Nevertheless, it is difficult for non-economists or those with limited central banking experience to understand the complexity of today’s policy issues and be bold enough to make tough decisions. Even fully understanding complex economic analyzes or having a basic understanding of the models used to produce inflation forecasts can be a difficult task for some board members.

One could say that it is not a problem if some members lack strong macroeconomic skills, because the boards of directors of central banks are composed of a large number of people. But in fact, the opposite is true. Situations where some board members simply follow the prevalence of other colleagues clearly run counter to the logic of a board’s collective wisdom, which ensures better results than a single governor’s vote.

Overall, by not raising policy rates fast enough, some central banks – including the ECB – lagged behind, despite the fact that the complexity of the situation was extremely high and apparently misjudgments at the era could very well be justified and legitimate.

It’s good that central banks are now trying to catch up with the development of the economy, of course. Nevertheless, they still face the challenge of explaining the need to raise interest rates to a much higher level – where they should have been months ago – when there are already signs of a recession. , which would probably slow inflation growth and at least argue for rate stability. But that’s only if they were at an appropriate level to start with.

Being a central banker today is an extremely difficult job with great responsibilities, which makes it even more important than before that we have the right people on their boards. Additionally, central banks should consider whether some of these practices they have been using for many years restrict their ability to act quickly in the future to maintain price stability.

The shock we are currently facing is unique, but it is certainly not the last. However, price stability is the unconditional primary objective of a central bank, which means that there is no room for political or fiscal considerations, or unnecessary mistakes.