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Speaker 1: Gita gooppin off, of course of the IMF, who yesterday

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Speaker 1: also really opened the forum here in syndrome with a

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Speaker 1: very powerful speech linking fiscal policy and monetary policy and

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Speaker 1: really reminding everyone that they had to work in tantem So, Gita,

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Speaker 1: thank you so much for joining us. When you look

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Speaker 1: at the fight against inflation, there's now a lot of

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Speaker 1: talk about recession. You know the fact that core inflation

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Speaker 1: is still high but headline inflation is coming down. What

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Speaker 1: does a policy mistake from central banks now look like?

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Speaker 2: First of all, it's a pleasure to join your friends

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Speaker 2: seeing what are you experiencing is that inflation is taking.

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Speaker 3: A long time to get back to its target.

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Speaker 2: And yes, headline is coming down significantly, but core inflation,

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Speaker 2: while it has eased, is still persistently high. So in

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Speaker 2: this environment our advisors at central banks will need to

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Speaker 2: stay the course. In the case of the ECB, that

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Speaker 2: will mean that some more continued tightening and then to

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Speaker 2: stay on hold to make sure that you're confident that

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Speaker 2: inflation is coming back durably down and that that could

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Speaker 2: come along with more weakness in liber markets that we've

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Speaker 2: seen so far, and more weakness in the economy in general,

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Speaker 2: but that's what is needed to bring inflation down.

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Speaker 3: Do you worry about the markets?

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Speaker 1: And I know you don't look at the markets same

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Speaker 1: day out, but there seems to be a bias in

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Speaker 1: the markets that are actually inflation is coming down and that

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Speaker 1: central banks will be ready to not hike as much

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Speaker 1: as maybe they will. So is there a danger that

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Speaker 1: the market is mispricing something that will then create an event.

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Speaker 3: When the markets have been off since the start of

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Speaker 3: this year.

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Speaker 2: I mean, if you look at their expectations of the

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Speaker 2: policy rate part in some countries, especially the US, they

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Speaker 2: were expecting three rate cuts this year for US FED policy,

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Speaker 2: and they have adjusted. They've come back now to recognizing that, no,

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Speaker 2: we're here for longer than was expected.

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Speaker 3: So I think markets.

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Speaker 2: Have been very optimistic, and I suspect there's still somewhat

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Speaker 2: optimistic about the path for interest rates.

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Speaker 3: What do they most misunderstand.

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Speaker 1: Is it the fact that interest rates have to remain

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Speaker 1: higher for longer, which the Guard actually laid out beautifully

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Speaker 1: in her speech, or that they have to rise higher

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Speaker 1: than expected.

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Speaker 3: I think it's how long they're going to stay at that.

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Speaker 2: I think that's the part where there is a disconnect

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Speaker 2: between the markets and what central banks are signaling, and

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Speaker 2: so far it's the markets that have had to correct

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Speaker 2: to central bank paths as opposed to other way around.

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Speaker 2: So I still think that they're off a bit on

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Speaker 2: the duration for which they have to keep rates high.

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Speaker 1: What's the path forward for growth should we worry about

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Speaker 1: once we get inflation in control.

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Speaker 2: We are seeing growth weakening, We are seeing slowing activity

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Speaker 2: at this point. We need to bring inflation down to

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Speaker 2: have sustainable growth, which is why it's super important to

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Speaker 2: do this this time around, since it's not just a

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Speaker 2: demand phenomenon. We've had supply disruptions correct themselves, We've had

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Speaker 2: energy prices come down. I think both those factors are

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Speaker 2: helping bring inflation down without needing too much of a

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Speaker 2: hit to the economy. But we have to wait and see.

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Speaker 2: We're only just seeing the effects of Montreal policy work

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Speaker 2: through the system now and we can see much more slowing.

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Speaker 1: But is that why, I mean, why is corentflation so

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Speaker 1: stubbornly high. No one can quite figure it out, which

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Speaker 1: is why it keeps on surprising us to the upside.

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Speaker 2: It's a big part of the conversation we're having at CenTra.

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Speaker 2: Which is is it the fact that mantret policy transmission

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Speaker 2: is now wicked than it used to be, or is

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Speaker 2: it the fact that you haven't raised interest rates by enapp.

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Speaker 2: I think these are questions that are coming up. We

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Speaker 2: have a situation where it has been the case that

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Speaker 2: household balance sheets corporate balance.

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Speaker 3: Sheets have been strong, which has helped hold up resilience.

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Speaker 3: Labor markets are ties.

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Speaker 2: People believe that they will have a job, they can

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Speaker 2: keep a job. Wages are going up, and services pending

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Speaker 2: tends to be much less intrasensitive than when it comes

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Speaker 2: to durable goods, which consumers piled up on already during

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Speaker 2: the peak up the pandemic. So I think all these

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Speaker 2: factors could be muting the effect of Montreal policy transmission.

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Speaker 2: But now as those effects decline, we could start seeing

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Speaker 2: more of a slowing inactivity.

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Speaker 1: I mean, to put it simply, A nightmare scenario would

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Speaker 1: be some kind of spiral. So you have wages going up,

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Speaker 1: prices go up, and then you lose control.

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Speaker 2: Are we there yet? I don't think so. I don't

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Speaker 2: We're not seeing that in like in the US or

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Speaker 2: in the Euro Area. We certainly are seeing wage catch

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Speaker 2: up and that has happened. That's happened in previous cycles too.

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Speaker 2: We should expect to see that, but we're not seeing

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Speaker 2: wages pushing up prices. The concern, of course, is that

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Speaker 2: if it takes so long to bring inflation down, then

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Speaker 2: you might unhinge inflation expectations and then trigger a wage

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Speaker 2: price file. This is why President god spends a lot

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Speaker 2: of time talking about, you know, the persistence of inflation

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Speaker 2: and the reason to stay high for long.

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Speaker 1: So is that why interest rates you think have to

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Speaker 1: stay higher for longer?

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Speaker 3: Is it really?

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Speaker 1: I mean it's to get inflation two percent, but really

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Speaker 1: it's to try to break through that spiral that could

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Speaker 1: be impossible actually almost to get out.

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Speaker 2: If you look at projections for when inflation gets back

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Speaker 2: to targets in the that's the middle of twenty twenty five.

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Speaker 3: That's two years from now.

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Speaker 2: This is a long time, and that's why it is

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Speaker 2: critical that you can't have any further risks to de

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Speaker 2: anchoring of inflation, because it's two years is a long

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Speaker 2: time to bring inflation back down to target. To make

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Speaker 2: sure it happens, you have to stay the course and

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Speaker 2: keep interest ras high and until you see durable signs

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Speaker 2: that core inflation is coming down.

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Speaker 3: Then of course you have to be data dependent.

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Speaker 1: I mean, all the world central bankers are here. It

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Speaker 1: was quite exciting for me to see J. Powell also

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Speaker 1: walk in in the sneakers. I don't often see them

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Speaker 1: actually in sneakers or face to face. Is a gravitational

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Speaker 1: pull of what the FED does. Too heavy to hand

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Speaker 1: for the UCB, but also the Bank of England, the

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Speaker 1: Bank of Japan.

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Speaker 2: What the Fed does matters for the whole world, including

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Speaker 2: for other major central banks. But I think this is

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Speaker 2: a time when central bankers are coming together also to

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Speaker 2: understand inflation dynamics better. There are still several questions, there's

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Speaker 2: a lot of uncertainty on the outlook, and centralize a

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Speaker 2: good learning experience for all central banks.

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Speaker 1: How hard is it for monetary policy to counter fiscal policy?

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Speaker 1: And again, because we're seeing inflation rise, that means the

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Speaker 1: cost of living goes up, So it's understandable that politicians want.

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Speaker 3: To be there. Further citizens, I.

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Speaker 2: Think it's perfectly good for governments to want to be

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Speaker 2: there for their vulnerable citizens and to provide targeted support.

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Speaker 2: What is not really good at this point would be

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Speaker 2: to have broad based support that generates very large physical deficits,

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Speaker 2: especially increases in fiscal deficits, then then.

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Speaker 3: Feeds into inflation. That is a problem.

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Speaker 2: I mean, all the indicators, the fact that we have

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Speaker 2: high inflation now, the fact that debt is high and

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Speaker 2: we need to build buffers because they're going to be

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Speaker 2: future shocks. All of that point towards fiscal tightening, and

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Speaker 2: that's what we're recommending.

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Speaker 1: When you look at central the big central bankers around

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Speaker 1: the world, and of course you know dealing with inflation

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Speaker 1: and growth, who do you think has the toughest job Bank.

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Speaker 2: Of England I think at this point among the major ones,

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Speaker 2: if I put the US, the Euro Area on the

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Speaker 2: Bank of England, I think in the UK the inflation

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Speaker 2: problem looks more difficult than in the other parts because

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Speaker 2: they have a supply shock problem that came from the

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Speaker 2: energy prices, and they also have the demand side, which

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Speaker 2: is very tight labor markets and if you look at

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Speaker 2: wages in fact, in England, this is where you see

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Speaker 2: the most amount of wage pressures coming in.

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Speaker 3: So how do they get out of it?

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Speaker 1: Again, there's also huge reliability on mortgages, so it's not

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Speaker 1: as easy as you just keep on hiking because the

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Speaker 1: housing market is so sensitive to that.

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Speaker 2: Well. I think personally the fact that the Bank of

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Speaker 2: England raised rates by fifty basis points recently in the

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Speaker 2: most recent meeting, I.

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Speaker 3: Think that's a welcome step.

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Speaker 2: That's a clear signal that they are in the fight

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Speaker 2: to bring inflation down. One of the reasons they've been

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Speaker 2: somewhat cautious is exactly what can happen to mortgages and

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Speaker 2: the housing market. But you know, there's been an increase

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Speaker 2: in the duration of fixed rate mortgages in the UK,

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Speaker 2: so you have some attenuation of that effect. And household

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Speaker 2: balance sheets are much stronger than they were in the past,

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Speaker 2: so that should also help.

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Speaker 1: Tom Keen was also talking about, of course, your outlook

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Speaker 1: and what we saw just a couple of weeks ago.

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Speaker 3: By the IMF.

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Speaker 1: Are you more optimistic now about the world economy in

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Speaker 1: twenty twenty four than new or six months ago.

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Speaker 2: We had a projection for the world economy to grow

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Speaker 2: as around two point eight percent this year, which was

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Speaker 2: coming down from three point four person last year and

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Speaker 2: then going up to around three percent. Our new numbers

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Speaker 2: will be out in July. We don't have it ready

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Speaker 2: at this point. We're getting different data from different countries

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Speaker 2: at this point, but I think the overall story of

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Speaker 2: an economy that's slower this year than it was last

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Speaker 2: year will remain.

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Speaker 1: So how much of the conversation here is also trying

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Speaker 1: to understand some of these forecasts going forward and how

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Speaker 1: central banks actually can do a better job in understanding

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Speaker 1: the impact that monetary policy has on future inflation.

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Speaker 2: I think everybody's trying to understand how economic activity is

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Speaker 2: being impacted by the rate increases that have happened so far.

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Speaker 3: Because they've been sizable.

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Speaker 2: The expectation was that we would have seen more slowing

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Speaker 2: down already than we've seen so far. So the surprise

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Speaker 2: is on the resilience of economic activity.

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Speaker 3: Now.

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Speaker 2: Of course, we don't want to extrapolate and just assume

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Speaker 2: that this resilience is going to continue. So it's a

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Speaker 2: difficult job for central bankers at this point. They have

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Speaker 2: to wash the data very carefully, but at the same

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Speaker 2: time they have to show real commitment to bringing inflation down.

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Speaker 1: Gita, thank you so much for joining us, Gita Governor. There,

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Speaker 1: of course, of the IMF