NEWS Release - Monetary Policy and the Future of Central Banking: Implications for Africa - Remarks on the 50th Anniversary of the Central Bank of Kenya Mitsuhiro Furusawa, IMF Deputy Managing Director - September 13, 2016
Ladies and Gentlemen, Governor Njoroge, I am honored to join you today to commemorate the 50th anniversary of the Central Bank of Kenya.
I have had the pleasure of working closely with Patrick—if I may call you Patrick, Governor—during his previous incarnation at the IMF, and it is truly a joy to share this moment with you.
This is an important milestone for Kenya, so I am very happy to have this opportunity to reflect upon your journey over the past half century—and to discuss with all of you the way forward.
In the time we have today, I would like to discuss the current state of central banking in Sub-Saharan Africa and to explore the challenges that this region’s central bankers face as they address the increasingly complex forces at work in the global economy.
Of particular concern is a global economy marked by subpar growth with downside risks related to the ongoing adjustment in the global economy.
In addressing these challenges monetary policy has a central role to play. Along with government fiscal policies, well-designed and well-implemented monetary policies are essential for a country to achieve strong, sustainable and inclusive growth.
Evolution of Central Banking
Let me begin by briefly taking stock of developments in central banking and monetary policy over the last 50 years, and then placing those developments in the African context.
Traditionally, the primary objectives of monetary policy have been to maintain price and financial stability and to help achieve full employment.
At times there may appear to be a conflict between the goals of low inflation and economic growth. But we have learned from hard experience that high inflation distorts the private sector’s savings and investment decisions—leading ultimately to slower growth.
That is why countries have increasingly placed greater emphasis on price stability, and many of them have made low and stable inflation the primary objective for monetary policy.
To achieve the price stability objective, we have seen monetary policy frameworks evolve over time. In the period after World War II, monetary policy operated in the context of fixed exchange rates under the Bretton Woods system.
Following the collapse of that system in 1972, central banks generally used monetary targets and soft exchange rate pegs to bring down the high inflation that the world experienced through the early 1980s.
However, as inflation fell, and financial innovation emerged, the link between money targets and inflation outcomes became increasingly tenuous. In addition, the increase in capital flows—and the market volatility that followed—created significant challenges for small, open economies operating soft exchange rate pegs to deal with external shocks while seeking to achieve price stability.
This is why central banks have gradually switched to forward-looking monetary policy frameworks to stabilize their economies. Starting with New Zealand in 1989, many central banks responded to these challenges by switching to formal inflation targeting as a framework for monetary policy.
This approach essentially combines an explicit inflation target with a commitment to use market-based instruments and a flexible exchange rate to achieve the inflation target over the medium term.
Not all central banks adopted formal inflation targeting frameworks. But in most cases the operational framework has been similar—that is to say, it was centered on adjusting short-term policy rates to maintain low and stable inflation over the medium term.
These forward-looking monetary policy frameworks have been supported by legislative mandates to give central banks operational independence. This has been coupled with procedures that ensure central bank transparency and public accountability.
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