Public trust helps central banks keep prices stable, but persistent inflation above their targets has damaged their record since COVID, a speech published by the Bank for International Settlements said.
That marked a change from the decades following the 1980s, when inflation targeting delivered consistently low and stable inflation alongside rising real incomes. The BIS published “Trust, expectations and monetary policy” on Nov. 10 in its central bankers' speeches series.
That deterioration was linked to a broader decline in trust in public institutions and an environment exposed to shocks from several directions. Those conditions make inflation more likely to miss central banks' targets and economic forecasts more likely to prove wrong.
Trust affects how monetary policy works, beyond giving central banks public legitimacy. Confidence that central banks will maintain stable prices helps sustain confidence in money itself.
Money depends on a social contract. People accept banknotes and bank deposits because they trust that others will accept them tomorrow at much the same value, rather than because either has intrinsic value outside the monetary system.
That makes central banks particularly dependent on trust. Their role in keeping prices stable supports the confidence on which the acceptance of money rests, connecting their performance directly to the public's willingness to rely on it.
Central banks must earn that confidence. Flexible inflation targeting, an approach that seeks low and stable inflation while allowing policy flexibility, delivered the favourable record built over the decades after the 1980s.
The more recent experience has been harder, particularly since COVID. Inflation that stayed above target damaged that record at a time when the wider climate of confidence in public bodies had also deteriorated.
Tariffs, wars, geopolitical tensions and pandemics were among the sources of shocks. Technological and environmental change also contributed to an increasingly volatile, uncertain, complex and ambiguous setting for central banks.
The consequences extend beyond inflation missing its target. More frequent forecasting errors and harder choices between competing policy objectives also follow from that environment, complicating the task of maintaining stable prices.
The argument concerned central banks around the world and contrasted their experience after the 1980s with conditions since COVID. The supplied text gave no numerical estimates or specified dataset, and did not quantify how much trust had declined or how strongly it affected inflation.
