Singapore: Central bank’s role to maintain price stability to manage inflation: Ravi Menon

WHILE central banks may not be at the forefront of structural changes that result in inflation, their role to maintain price stability “cannot be underestimated”, said Ravi Menon, managing director of the Monetary Authority of Singapore (MAS).

Speaking at the Symposium on Asian Banking and Finance on Wednesday (Sep 29), Menon said maintaining price stability will “give confidence” and ensure necessary technological advancements and adjustments are not disrupted due to liquidity shocks.

Menon noted that structural shifts in the labour market, supply chains and a focus on energy security are contributing to the medium-term outlook on inflation.

Monetary policies “can’t do much about labour supply”, but central banks should still understand it well and work with governments on appropriate and smart labour policies, due to its implications on productive capacity and inflation, Menon said.

In recent years, he noted a shift towards hybrid work arrangements, a reduction in labour force participation, as well as labour shortages in contact-intensive sectors.

Central banks should also focus on understanding supply factors and supply chains, amid a greater emphasis on resilience than on efficiency, which may result in a fragmentation of the global economy and a reduction in cross-border interactions.

Noting that inflation has been the result of both supply and demand, Menon said “it’ll do well for central banks to focus on understanding the supply side capacity of the economy much better”, as the structure of our economies are changing.

He also noted a greater confidence between the objectives of tackling the climate crisis, enhancing energy security and addressing inflation.

“In the short term, I think there are conflicts and trade-offs, but in the longer term, addressing the climate challenge and enhancing energy security go in the same direction,” Menon said.

In the short term, using clean energy may have an impact on inflation as it is still more expensive than hydrocarbons, but technology should drive costs down and boost supply in the longer run, he said.

While there is debate on the extent of how much central banks should be involved, Menon noted MAS has leaned in on promoting digital technologies in the financial sector and supporting climate policy objectives.

“The facilitative and convening power of central banks as regulators in this regard cannot be underestimated,” he said.

Menon was speaking in a fireside chat at the virtual symposium with San Francisco Fed president Mary Daly.