Time to Reset? Central Banks Explore New Paths Beyond Price Stability

As global economies navigate an evolving landscape of inflation, growth, and technological disruption, experts and policymakers are urging a reconsideration of traditional monetary policy targets. The Reserve Bank of India (RBI), along with major central banks worldwide, is exploring refined frameworks that balance inflation control with broader economic stability and inclusive growth.

 

Shifting Monetary Policy Paradigms

The current flexible inflation targeting (FIT) framework, focused primarily on a 4% consumer price index (CPI) inflation target with a +/- 2% band, is under review for adaptability to new economic realities.

 

Experts argue for a broader mandate that incorporates employment, financial stability, and sustainable growth alongside inflation control.

 

Recent RBI policy meetings have signaled a cautious approach to rate cuts, weighing growth revival with vigilance against inflation resurgence.

 

Lessons from Global Central Banks

The US Federal Reserve, under Chair Jerome Powell, recently reverted to a more traditional monetary strategy emphasizing price stability while balancing employment goals in an evolving dual mandate.

 

European Central Bank (ECB) projections highlight the need for monetary easing towards a neutral interest rate, tailored to regional economic conditions.

 

These shifts reflect recognition that rigid inflation targeting requires flexibility to address post-pandemic supply chains, labor market dynamics, and geopolitical uncertainties.

 

Economic Conditions Prompting Change

India’s projected GDP growth of around 6.5%-6.7% for 2025-26 coincides with moderating inflation pressures, offering space for supportive monetary policies.

 

External challenges like tariff shocks, global commodity volatility, and geopolitical tensions necessitate responsive and adaptive policy frameworks.

 

Domestic financial markets demand clear, transparent policy communication to reduce uncertainty and encourage investment.

 

Implications for Investors and Businesses

A revised monetary policy target could foster a more balanced environment where growth and employment receive equal priority with inflation.

 

Investors may see increased clarity and predictability in monetary policy decisions, enhancing market confidence.

 

Businesses can benefit from supportive credit conditions aligned with realistic inflation and growth expectations, aiding expansion and job creation.

 

Future Outlook and Policy Recommendations

Policymakers are encouraged to incorporate forward-looking indicators, technological and environmental factors into monetary frameworks.

 

Enhanced interlinkages between fiscal and monetary policies will be crucial to achieving holistic economic outcomes.

 

Regular reviews and stakeholder consultations can ensure monetary policy remains responsive and inclusive.

 

Summary

The call for a different monetary policy target reflects the complexities of the modern economy in 2025. Central banks like the RBI must evolve beyond narrow inflation targets to embrace a multidimensional approach balancing price stability, employment, and growth. Such strategies promise to sustain economic momentum while safeguarding financial stability in a rapidly changing world.

 

Source: Financial Express, PIB India, Federal Reserve, ECB, Sanskriti IAS