Investors pay close attention to the nuances of statements and utterances from the world’s major central banks. The US Federal Reserve, plus the central banks of Europe and Japan, determine the price of money. However, for emerging trends, pay heed to the smaller institutions.

The Reserve Bank of New Zealand pioneered inflation targeting and was among the first central banks to enjoy explicit legal independence. Now a request from the country’s finance minister for help in taming house prices may portend big changes to the wider world of central banking.

In effect, after a 20 per cent annual rise in house prices, the bank was asked to set its sights well beyond consumer price inflation.

Governments across Asia, along with many central bankers, are starting to take a more expansive view of monetary policy. Strict inflation targeting, officially adopted by most of the region’s monetary authorities, is often seen as too limited a mandate for the challenges ahead. The banks are likely to come under greater pressure to broaden their horizon.

Inflation is hardly a challenge at the moment. With the exception of India, underlying price pressures have fizzled out and look likely to be slow to rebound over the coming year.

But there are other concerns, including rising asset prices. Central banks in Korea and mainland China have also signalled worries about rising housing prices. And as growth recovers after the pandemic, the broader distortions of excessively loose monetary policy will likely come into focus elsewhere in the region, notably across the ASEAN bloc.

The pandemic has also exposed deep income inequalities in many parts of Asia. Political pressures are thus rising on monetary authorities to lend equal weight to employment and growth as they do to inflation.

Central banks have played a critical role in maintaining stability in an unprecedented year. But as economies emerge from the pandemic, monetary-policy orthodoxy will be increasingly challenged: political pressures will only grow for a shift in target and purpose.

It is tempting to think this points to an extraordinarily dovish setting for some time yet. If anything, central bankers have signalled greater tolerance for ‘inflation overshoots’ while fiscal constraints and the lasting scars from the growth disruption surely point to a continuation of loose policies.

But actually, the single-minded focus on inflation – the central banks’ lodestar in recent years – is starting to dissolve in the face of multiple objectives. And these goals can conflict: a greater focus on employment can contradict concerns over run-away asset prices. When objectives multiply, policy is bound to become more erratic and unpredictable.

The contour of future Asian monetary policy is thus perhaps not persistent dovishness, but increased uncertainty and volatility.

Subtly, slowly, almost imperceptibly, monetary policy is undergoing a shift in Asia, driven by conflicting political pressures that risk injecting far more uncertainty than investors have grown accustomed to in recent years. That’s another lasting change the pandemic has wrought.

First published 30 November 2020.

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