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Mohamed El-Erian: The world needs independent and honest central banks to face challenges

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The Bank of England surprised the world yesterday by approving the largest interest rate increase in 27 years, while providing an accurate and impartial analysis and assessment of the state of the British economy, according to global economist Mohamed El-Erian, who believes that the independence of central banks from the rest of the authorities in the country is its intellectual integrity and analytical integrity. Vital for the world to overcome current social and economic challenges.

In an analysis published by Bloomberg News Agency, El-Erian, CEO of Harvard Management Company, which is responsible for managing the assets and investments of Harvard University, and a member of the Harvard Global Advisory Board, said that the Bank of England today presented a kind of frankness in analysis and intellectual honesty that is unusual on the part of the major central banks in the world. . At the same time, the bleak picture presented by the Central Bank of the British economy will have an impact on the global economy, albeit not due to the unique circumstances that Britain is going through.

In a statement issued by the Bank of England yesterday, it announced a 50bps rate increase with the approval of 8 to 1 MPC members.

high inflation

The bank warned of the possibility of a rise in the inflation rate in Britain next October to 13%, ruling out the return of inflation to the target level of 2% before 2025. It also warned that in light of the current political conditions, Britain faces the possibility of a stagnation of the economy, which could start during the quarter The last of the current year, and continues throughout the next year. This means a GDP contraction of 2% and a painful reduction in real incomes for many British households.

just wishes

Al-Arian, who was CEO of Pimco Investments until 2014, says in his analysis that, unlike what often happens with the US Federal Reserve, no one was quick to dismiss the Bank of England’s assessments as “just wishful thinking”, “funny” or “no”. can be interpreted” or “analytically unjustified,” phrases that former US Federal Reserve officials frequently use to comment on Fed statements.

The BoE’s statement was candid and direct. It also came as a catalyst for serious discussions and analysis, and most importantly, for a deep analysis of what Rishi Sunak and Liz Terrace, the two contenders for the position of British Prime Minister to succeed the resigned Prime Minister Boris Johnson, are proposing.

The Bank of England has reminded the world that a politically independent central bank can act as a “trusted advisor” willing to provide the analytically impartial insights that other politically sensitive institutions may find either unwilling or unable to provide.

negative results

El-Erian believes that the BoE’s approach is of course not without risk. Such openness can push consumers and companies to actions that lead to negative outcomes, rather than motivating decision-making institutions to take appropriate actions that lead to better economic and social outcomes. Nevertheless, it is worth the risk, especially when the alternative is the central bank’s loss of its institutional credibility, the erosion of the effectiveness of its monetary policy advance directives, and it becomes more vulnerable to the risk of political interference in its work.

Al-Arian points out that the situation in Britain is clearly different from that in other countries. The economic challenges facing the UK are complicated not only by steadily rising energy prices but also by political conditions, and the changing nature of Britain’s relations with its main trading partners, especially the European Union, following its exit from the EU last year. But this does not mean that the repercussions in other countries do not require the analytical and intellectual integrity of the Bank of England. On the contrary, it needs this amount as well.

4 items

In his analysis, El-Erian monitors four other elements, the first of which is the difficulty of determining the “best first” monetary policy to deal with crises, in a world in which central banks are late in dealing with inflation in a timely manner. The second of these is a reminder that in a world like this, high inflation can coexist with economic stagnation. As for the third element, it is emphasizing the need for central banks to deal with relative decisiveness with the possibilities of deteriorating consumer demand as a result of the high rate of inflation.

Finally, emphasizing the need for governments and international institutions to support efforts to contain inflation, encourage productivity and economic growth, and protect the neediest segments of the population.

Nevertheless, the BoE may discover in the next few days that it is not easy to be the bearer of unpleasant news, no matter how honest or well-intentioned they may be. In any case, it is now setting an example for other central banks, as an inspiring bank, and as a catalyst for a more comprehensive approach to Britain’s economic and social challenges.

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