Monetary policy in the crisis: testing the limits of monetary policy

Speech by Mr Hervé Hannoun, Deputy General Manager of the BIS, at the 47th SEACEN Governors' Conference, Seoul, Korea, 13-14 February 2012.

In the wake of the crisis, demands on monetary policy have grown beyond recognition, putting frameworks under enormous pressure. Central banks are increasingly seen by market participants as all-powerful, able to intervene without any limit. The trend towards unlimited intervention combined with ultra-low interest rates does not only have potentially serious side effects on the functioning of the market economy. It also gives rise to three major risks and one ultimate possible consequence for monetary policy itself: these three risks are those of financial dominance, exchange rate dominance and fiscal dominance; and the ultimate possible consequence is an inflation surprise that could severely damage central banks' hard-earned credibility. To prevent these risks from materialising, we need to forge a consensus on what could be called "the new frontier of monetary policy" in order to refocus monetary policy on maintaining lasting price stability. This also implies that central banks should reject the market illusion of unlimited intervention and the associated theory of the "printing press".