Rajan cautions central bankers to watch out for a shift to low-inflation regime

The global economy could go back to a low-inflation regime, and central bankers pursuing restrictive monetary policies should keep that in mind, said Raghuram Rajan, the former governor of the Reserve Bank of India. 

Central banks must ask themselves if their policies were nimble enough when inflation shifted from low to a high regime, said Mr Rajan, who is now a professor of finance at the University of Chicago Booth School of Business. “We should be prepared to potentially go back to low-inflation regime,” he said on Friday in a conference organised by the Bank of Thailand and the Bank for International Settlements. 

“We need to examine what constrained us, Mr Rajan said, adding: “We need to assess if we didn’t recognise inflation building or we were actually waiting for our instruments to play out, wanting to preserve them for the next time.”

Therefore, it was important for central banks today to pursue policies that provide for changes in inflation dynamics over time, he said, adding that headwinds, including de-globalisation, slow growth in China and K-shaped recovery in emerging economies could hurt growth. 

Amid volatile times, Mr Rajan said that emerging market central bankers had done a wonderful job in anticipating the need to raise interest rates, and it had “served them well”.

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