Source: Bank for International Settlements
Several central banks in advanced economies are currently reviewing their monetary policy frameworks. These reviews are timely, since the post-pandemic inflation surge offers important insights to refine frameworks. This experience has shown that inflation risks are considerably more two-sided than previously appreciated and has highlighted the public’s strong aversion to inflation. The inflation surge has also underscored the unpredictable nature of economic developments, emphasising the need for monetary policy to be able to react nimbly. These considerations indicate scope for rebalancing frameworks towards the risks of inflation surges and reducing reliance on policy tools that are difficult to adjust. Crucially, the reviews should adopt a realistic perspective on what monetary policy can achieve and ensure the robustness of frameworks against a wide range of possible economic developments.