‘Distracted’ central banks at fault for inflation surge, says ex-official

CENTRAL banks have been distracted by topics such as climate change and are to blame for soaring inflation after fumbling policy during the pandemic, a top former official has said.

Monetary authorities made “errors of judgment” in response to Covid and have become “distracted by extraneous political objectives”, said Graeme Wheeler, former governor of the Reserve Bank of New Zealand.

In a report published by the New Zealand Initiative think tank, Mr Wheeler – who led the RBNZ between 2012 and 2017 – and Bryce Wilkinson, a senior research fellow at the think tank, said central banks moved too slowly to fight inflation because they “took their eye off their core responsibilities and focused on issues that were much less central to their roles”.

“Confident in their ability to maintain low inflation, central banks in recent years began diverting resources to other topics such as climate change and inequality. Such issues bear little if any relationship to the reasons why central banks exist – ensuring price stability and financial stability,” they wrote.

Mr Wheeler said central bankers “need to reflect deeply” on the recent management of policy.

“Central bankers need to learn from their misjudgments because the social,

‘Rate-setters took their eye off core responsibilities and focused on issues much less central to their roles’

economic and political consequences of major mistakes run deep and the trust and confidence that the public have in them can be readily depleted,” he wrote.

Central banks around the world are rapidly increasing the pace of interest rate rises, as part of efforts to curb rampant inflation.

Critics say policymakers should have acted earlier to tackle rising prices, partly caused by the impact of the pandemic.

The US Federal Reserve is expected to increase its key rate by as much as three quarters of a percentage point today, with the Bank of England set for a half-point increase – its first since 1995 – next week.

Foreign secretary Liz Truss, seen as the frontrunner to succeed Boris Johnson as Prime Minister, told The Sunday Telegraph this month she would “look again” at the Bank of England’s mandate, with UK inflation at a 40-year high.

Confidence in the Bank has reached the lowest in at least 23 years, according to its own surveys.

In New Zealand, the report prompted Adrian Orr, governor of the Reserve Bank of New Zealand, to say the RBNZ would review its recent performance.

He said that climate change, efforts to integrate a Maori worldview and moves to combat financial exclusion had not distracted from its inflation goals.