The low interest rates from before the pandemic are not coming back anytime soon, and unpredictability must now be part of the economic equation.

Central Banks and Inflation

Central banks are on their way to winning the war against inflation, but they must remain vigilant to face the new normal of the global economy, which is more complex and uncertain than ever. This was the message from two central bankers, Tiff Macklem, Governor of the Bank of Canada, and Joachim Nagel, President of the Deutsche Bundesbank, at the Montreal Conference.

The first lesson learned is that inflation hurts. "This is something we already knew, but many experienced inflation for the first time," Tiff Macklem pointed out. "Inflation is our common enemy."

For Macklem, the past two years have been challenging, but for his German counterpart, the experience has been even tougher. Joachim Nagel took office in January 2022, when inflation was considered "transitory" by central banks. A month later, Russia invaded Ukraine, causing energy prices to soar. Inflation peaked at over 10% in the eurozone in 2022.

The Role of Central Banks

Like his Canadian counterpart, Joachim Nagel believes that restoring price stability is the best thing central banks can do for the economy. The task of the European Central Bank (ECB) is particularly complicated, he noted, with 20 countries and 26 decision-makers around the table.

The ECB and the Bank of Canada are the only two central banks among G7 countries to have started reducing their key interest rates. The US Federal Reserve, grappling with persistent inflation, decided on Wednesday to maintain its rate and expects only one more cut by the end of the year.

Inflation is persistent and its future trajectory is impossible to predict, admitted Joachim Nagel. "It's still too early to know," he said. More research is needed, and to dispel uncertainty, the war in Ukraine must end.

Challenges Ahead

Since the recent European elections and the rise of the far right, sources of uncertainty are even greater, according to the Bundesbank president. Government fiscal policies, both in Europe and elsewhere, can counteract the work of monetary policy, he noted.

Both in Europe and Canada, central banks cannot declare victory yet. "The work is not finished," said Tiff Macklem. "We are not on autopilot," added his German counterpart.

Interest rates are expected to continue falling, but much less rapidly than they rose, reiterated the Governor of the Bank of Canada. Above all, no one should expect rates to return to the very low levels seen before the pandemic.

Living with Uncertainty

We will need to learn to tolerate more uncertainties, particularly due to wars and climate change. It is important not to remain paralyzed and wait for uncertainty to disappear, because that will not happen, according to Tiff Macklem.