Modern central banking and lessons learned from monetary policy in the 21st century

Remarks by Mr Tao Zhang, BIS Chief Representative for Asia and the Pacific, at the Bank of Mongolia Conference on "Modern central banking: challenges and prospects", Ulaanbaatar, 9 July 2024.

Deputy Chairman of the Parliament, Governor Lkhagvasuren, colleagues and friends, good morning.

On behalf of Agustín Carstens, General Manager of the Bank for International Settlements, I would like to warmly congratulate the Bank of Mongolia on its centenary. One hundred years of central banking is an achievement to be celebrated, and the BIS is delighted to be part of the gathering to celebrate the occasion.

Like many central banks, the Bank of Mongolia has seen its share of challenges since inception, including stabilisation of its banking system, transitioning from one economic system to another and coping with external shocks. The Bank of Mongolia has seized the opportunities offered by changes in environments, behaviours and technologies, and transformed itself.

Looking back at the history of central banking and drawing lessons from the past can often provide useful guidance on what and how we could do better in the future. This is particularly relevant in today's world where central banks are operating in an increasingly complicated environment characterised by tremendous challenges including climate change, geopolitical tensions and new technologies.

As we gather here to celebrate 100 years of the Bank of Mongolia, allow me to offer a few observations to contribute to the discussions.

Looking at the global economy today, it seems poised for a smooth landing. Inflation in general continues its descent towards central bank targets, and activity remains resilient. At the same time, the global financial system appears to have adjusted smoothly to higher interest rates. Only a year ago, these outcomes were far from assured. Central banks have acted decisively in response to these historic challenges. As a result, the financial system has remained stable in times of financial crises, and inflation has been prevented from becoming entrenched.  

While welcoming these positive developments, it is too soon to declare victory. Several important pressure points remain, which could derail the smooth landing. These include persistent inflationary forces, macro-financial vulnerabilities, fiscal trajectories – including high levels of public debt – and low productivity growth. High-for-long interest rates could still be necessary, testing economic and financial system resiliency.

On top of this, we are also facing continued uncertainties from geopolitical tensions. Tailwinds of globalisation have turned into headwinds of fragmentation. These represent structural challenges to a world with high inflation, high debt and possibly low growth.

At the same time, we are also experiencing a digital revolution.

Digital advances have reshaped the financial system, and financial services have become more user-friendly, affordable and accessible. Safe and efficient cross-border payments can offer benefits to all, particularly emerging market and developing economies, through lower costs, faster speed, greater transparency and improved access.

That said, the increased digitalisation of financial services also has costs: cyber risks, frauds and scams, and data governance and privacy concerns, just to name a few. 

Central banks need to find a balance between safeguarding the safety and integrity of the financial system and not stifling innovation. Here, we at the BIS, through various committees we host, including the Committee on Payments and Market Infrastructures, and the BIS Innovation Hub, have played a leading role as we recognise that digital revolution could fundamentally reshape and change the financial system.

Let me turn to monetary policy. A key, though not really new, lesson we have drawn is that monetary policy is a powerful tool. Recent events have confirmed once more that decisive monetary tightening can pre-empt a transition to a high-inflation regime. We have also seen how forceful action by central banks during stress episodes, including the most recent stresses in March 2023, can stabilise the financial system and prevent disinflationary spirals. And the experience of emerging market economies has shown how the use of FX intervention and macroprudential measures can help to improve policy trade-offs. And increasingly this has become part of central banks' policy toolkit, particularly in emerging market and developing economies.  

But recent decades have also revealed monetary policy's limits. Exceptionally strong and prolonged monetary easing has diminishing returns, and its limits and unintended consequences have been brought to light. It cannot fine-tune inflation in a low-inflation regime, and the unwelcome and persistent side effects have indeed contributed to the recent inflation flare-up. Meanwhile, the proliferation of monetary policy instruments, as well as unrealistic expectations about what they can deliver – including the misperception that central banks can be relied on to propel economic growth through an extended period of accommodative monetary policies – has complicated communication.

I am sure that my central bank colleagues will have a lot to say about their experiences.

Let me conclude.

Lessons from the turbulent period over the past two decades point to the power, but also reveal the limits, of monetary policy. It is an effective tool to deliver low inflation and stabilise the financial system in times of crisis. But monetary policy should not, and cannot, be relied upon as an engine of economic growth on its own. Other policies, including fiscal and structural ones, will have to step in to ensure sustained economic growth, propel the green transition and adapt to the vast technological advances.  

As we gather today here in Ulaanbaatar to celebrate the centenary of the Bank of Mongolia and discuss challenges facing central banks, we hope some of these lessons learned from history can help provide soe useful guidance to central banks in the years ahead.

Once again, happy 100th birthday to the Bank of Mongolia. I wish the conference great success.