Bank of England policymaker Catherine Mann highlighted the potential impact of a fragmenting global economy on countries’ exposure to inflation shocks in the future during a panel discussion at the International Monetary Fund. She pointed out that the era of stable inflation and low volatility, known as the “great moderation,” is over and central banks need to be more vigilant as a result. Mann emphasized the importance of central bank independence and inflation targeting but also noted that global integration played a significant role in maintaining stability in the past.
Mann warned that central banks will need to use their autonomy effectively to address the challenges posed by increased inflation volatility and shocks in the future. The fragmentation of global trade and capital flows has led to reduced trade and finance, affecting both emerging market and advanced economies negatively. This disengagement trend is lowering the potential growth rate of economies, creating inflationary pressures that central banks need to address.
She explained that while a division of the global economy into two blocs might not be destabilizing, the current trend of disengagement poses significant challenges. Moves towards bringing supply chains closer to home and forming partnerships with friendly nations are contributing to a more volatile environment. Mann argued that the benefits of global disengagement are being overestimated, and the consequences of this shift are significant but not thoroughly considered.