SINGAPORE (Feb 5): Central banks ought to watch more than just consumer price inflation when setting monetary policy, says Eric Fishwick, head of economic research at CLSA. While the primary mandate for central bankers is to keep inflation stable and achieve full employment, they should also monitor the risks associated with growth in financial leverage and the rise in asset prices, he adds.

Fishwick believes inflation is likely to remain relatively low by historical standards, owing to a global “output gap”. An output gap refers to the difference between a country’s actual and potential output. The way Fishwick sees it, a substantial build-up in capacity around the world has kept manufacturing prices in many countries relatively flat. “That flatness of manufacturing prices does feed into suppressed consumer prices even in countries whose local labour markets are looking fairly tight,” he explains.

This lack of inflationary pressure has reduced the pressure on central banks to tighten monetary policy, Fishwick says. But that could be a mistake. “Policymakers are more focused on core inflation and the idea of 2% core inflation being desirable. I don’t believe that policy should be set in this way. It results in a global interest rate environment that is too loose,” he notes.

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