IMF teaches Central Banks on managing inflation expectations

In its recent report, the International Monetary Fund (IMF) exposed Central Banks on how managing inflation expectations can help economies achieve a softer landing.

Expectations increasingly drive inflation dynamics. Improvements in monetary policy frameworks can better inform people’s inflation expectations and thereby help reduce inflation at lower output cost, the Fund said.

According to the IMF, Central Banks can encourage expectations to be more forward-looking through improvements in monetary policy’s independence, transparency, and credibility and by communicating more clearly and effectively.

Inflation around the world reached multi-decade highs last year. While headline inflation is decreasing steadily, core measures―excluding food and energy―are proving stickier in many economies and wage growth has picked up, the report noted.

Nigeria’s inflation rate accelerated to 24.08 per cent in July from 22.79 per cent in the previous month, according to the National Bureau of Statistics Bureau of Statistics (NBS).

The Washington-based Fund said one way Central Banks can improve their communications is by simple and repeated messaging about their objectives and actions that is tailored to the relevant audiences.

However, improving monetary policy frameworks and crafting new tailored communication strategies to help improve inflation dynamics can take time or be difficult to implement.

Such interventions complement more traditional monetary policy tightening actions, which will remain key to bringing inflation back to target promptly.

The report’s authors are Silvia Albrizio (co-lead), John Bluedorn (co-lead), Allan Dizioli, Christoffer Koch, and Philippe Wingender, with support from Yaniv Cohen, Pedro Simon, and Isaac Warren.

According to them, more recently, near-term inflation expectations have turned the corner and shifted onto a gradual downward path.

“Beyond the world of professional forecasters, we see similar patterns of inflation expectations by companies, individuals, and financial-market investors, on average.

“Movements in near-term expectations are economically crucial for inflation dynamics. According to our new statistical analysis, after the inflationary shocks in 2021 and early 2022 started unwinding late last year, inflation has been increasingly explained by near-term expectations.

“For the average advanced economy, they now represent the primary driver of inflation dynamics. Expectations have grown in importance for the average emerging market economy, but past inflation remains more relevant, suggesting that people may be more backwards-looking in these economies. This could partly reflect the historically higher and more volatile inflationary experience in many of these economies,” the report said.