Christopher Dembik: Central Banks have become full market managers

Central Bank’s purposes, priorities and capacities in stimulating national economic growth have been widely debated in Russia. To learn the views of the foreign professional community, Invest Foresight interviewed Christopher Dembik, Head of Macro Analysis at Saxo Bank, member of the Polish Center for Social and Economic Research, and advisor to French MPs.

Do Central Banks follow reasonably similar monetary policies or guide themselves by diverse concepts?

The role of the Central Bank has changed dramatically in recent years. Nowadays they are not only targeting inflation which is no longer a priority (except in some developing countries where it makes sense), but in most cases Central Banks have to deal with the financial situation, liquidity, financial stability, so now we are witnessing the emergence of a new paradigm, in which the Central Banks revise their goals since we can’t assume that inflation is the only thing that matters – not at all, that would not make sense.

What is the present-day academic view of the possibilities for stimulating economic growth through an active monetary policy?

In recent years, this is a very serious issue. We know that without accommodative monetary policy we will probably dive into much deeper crisis, this is clear. In fact, among the major problems are rising inflation in financial markets, assets prices and increasing inequality. But monetary policy does not have an obvious positive impact on the general population. So we need to reconsider the issue as a whole, drawing attention to the lack of fiscal action in recent years. 

After the 2008 crisis, have the principles of the Western countries’ monetary policies evolved due to the impacts of the crisis?

We know that Central Banks have mechanisms to achieve financial stability in the short term – they just provide financial sector with liquidity at a low price. This is obvious now, and we have seen it again in the recent decision of the European Central Bank. I don’t think the situation will change, but the problem is that over the past ten years, role of Central Banks has changed from minor, insignificant actors which can only regulate inflation to full market managers – they have become chiefs due to inefficient fiscal policy.

At the moment, we are very concerned about the ability of monetary policy to significantly boost the economy. We know that lower Central Banks’ interest rates can have a positive impact on the rates in general. This means that lowering of key rates gives lower rates for both individuals and companies. But this figure is already very low, so it will not be able to significantly increase demand or investment. Thus, monetary policy has reached its limits. So we should not expect any fundamental changes from it in terms of economic activity.

How do you see Russia’s Central Bank’s current policies?

The Central Bank of Russia has been pursuing a very cautious monetary policy lately, mainly dealing with inflation regulation. Indeed, there has been a problem with inflation, and over the past few years the financial system has managed to improve significantly. This is a good result. Nowadays, the development is following global trends, but the bank needs to lower interest rate in such a way that it allows to avoid the dyssynchronization with global Central Banks. It’s a very good job in general. I would like to congratulate my colleagues on the fact that they have managed to bring the financial system into a better shape.

What’s your view of a claim that Central Bank’s top priority is targeting inflation whereas its other tasks are comparatively minor?

Indeed, for Russia, there is still a problem of inflation, you cannot grow rapidly because you are dependent on oil prices. Therefore, yes, this is probably the main goal at the moment. Though I wouldn’t make such a statement about other countries, in the case of Russia we understand that inflation must be within certain limits.

Russia has a very low national debt. What do you think of that fenomenon and the potential of boosting national economy through a public debt increase?

You can significantly push the economy with fiscal instruments. Russia is one of the few emerging markets that have the potential for both strong fiscal and monetary pushes. There is only one other such country – South Korea, so I would say that Russia’s national debt is not a problem at all at the moment.

For some while, the core of debate over macroeconomic policies was the disagreement between Keynesians and monetarists. Are there any new division lines like that now? 

I think that the monetarists are already extinct. There are no monetarists anymore. I wouldn’t say that Keynesians have won, at least not yet, but I think the discussion is more about new monetary policy tools. There is MMT (Modern Monetary Theory) common in the US – so there are many disputes around it. The point of the argument is that there are changes underway that imply a change in the role of Central Banks. Should they (and this is the essence of the discussion around MMT) give money directly to buyers, put it in their pockets? Thus, the root cause of the dispute is very different from one in the foundation of disagreement between monetarists and Keynesians. It’s not about that at all. This is a completely new aspect of the economy.

By Konstantin Frumkin

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