Mid Term Challenges for Central Banks

Notes

1. Deglobalisation and Fragmentation: Mid Term Challenges for Central Banks Andrew Hauser Deputy Governor Institute of International Finance Global Outlook Forum 16 April 2026 ( 15 April 2026, 4.00 pm EDT )
2. – Washington, D.C. The below is an abridged transcript of Deputy Governor Andrew Hauser’s participation in the
3. panel. Moderator We haven’t talked a lot about negative supply shocks. And my question for the panel, and
4. I’m going to start by alphabetical order: it does seem that the world has been seeing more
5. frequent supply shocks. I would say that that may be a new period for the world economy, because we
6. also have more fragmentation, so they have more geopolitical events. So in that situation, how do you
7. do monetary policy? How do you balance these shocks vis-à-vis your policy objectives? Andrew Hauser Thanks for the invitation. And I agree with you that the list of adverse supply shocks is
8. lengthening. COVID, Ukraine, Iran, you can add climate and demographics along with that. They’re
9. not all negative. I mean, the AI shock, tech shock, maybe the other way, it’s a supply shock
10. still. But then the adverse supply shock is the central bankers’ nightmare, right? Because it
11. pushes inflation up and it pushes activity down and causes you real challenges in managing that.
12. I’d say, since I get to go first, I’ll set out a framework rather than a specific
13. discussion on Australia. I put it into three broad buckets. So firstly, we need to work out how to
14. analyse these shocks. That’s not as easy as it first seems. You know, we all had to become
15. epidemiologists during COVID and we’re not really epidemiologists by training. Now having to
16. become energy experts, understanding the nature of the shock is not something that necessarily we as
17. central banks are expert at, but we need to do so. Our models are much better at describing demand
18. than supply, 88 words for snow and none for rain, as it were, and identifying the difference
19. between supply and demand shocks can be difficult, so that’s the analytical challenge. In terms
20. of designing policy, you can’t do much to affect the first-round effects on inflation, but you
21. do need to assess what the impact over the medium term will be, and you do need to bear in mind that
22. it can get built into inflation expectations, which again as I say, happened in the 1970s, we
23. can’t go back there. Starting conditions matter a lot. In Australia, we went into the Iran shock already running quite
24. hot, and that created some challenges. If you do have capital flow, exchange rate issues as well,
25. those are particularly difficult. You’ve got to explore the flexibility in your flexible
26. inflation targeting regime, but you can’t do that so far that you actually let inflation
27. expectations get out of control. Final point, communications. Supply shocks are a hard sell to the
28. public, inflation is never going to be higher, activity is going to be lower, we’re going to be
29. poorer. There’s not much upside news in that story, but you don’t get a lot of public
30. support necessarily for that. That’s harder at a time when we’ve had high inflation
31. already, and people are already a bit resentful about that, so you need to be clear and direct with
32. people, restate the importance of stabilising inflation. You need to be very clear what you
33. can’t do, because people are maybe thinking that monetary policy can solve everything, and you
34. need rock solid support from governments at a time when you’re going to be making hard
35. decisions. That’s actually quite a tough list in terms of setting monetary policy and lists that
36. we haven’t always met in the last period. (Panel discussion) Andrew Hauser Just on this point about pre-emption. It’s easy to say that it’s pre-emptive, so long as
37. you know what you’re pre-empting against. And my mind goes back to Brexit and the challenges
38. that the Bank of England faced when that occurred. It looked like a pretty classical supply shock.
39. However, that’s not how it played out. The adverse supply effects took a decade to come through
40. the UK. It will be dealing with them now, we thought they were going to come through pretty quickly.
41. Some of the more powerful adverse supply shocks that we are all experiencing now, namely, with the
42. exception of the US, are not these things out of the clear blue sky, but the grinding lower effects
43. of weaker productivity growth, and the lack of innovation and there’s other things which at
44. least Australia are probably still the dominant policy challenge, rather than something who comes
45. today and goes tomorrow. Moderator Now we can talk about a second aspect of what this type of supply shock may cause for an economy
46. which have financial stability risks. So if you have supply shock is big enough, and we feel like is
47. going to affect certain long-term expectations for inflation, you may want to tighten, but you may be
48. causing some, or may have some undesirable effects. In the case of Australia, to think about the
49. whole discussion about household balance sheets that may be hurt because of their level of
50. indebtedness. So how do you see financial stability in this world of supply shocks and, and in the
51. particular case of Australia, how do you deal with those? Andrew Hauser At the moment, I wouldn’t actually say in Australia that the potential adverse effects of Iran
52. is to be specific on financial stability in Australia is not our biggest policy challenge. To be
53. frank, households have rebuilt their balance sheets and the firms over the course of the last few
54. years. The banking system in Australia is almost comically well-capitalised and highly liquid. We do
55. have a large pension system which are heavily invested in the US. And that issue, I suppose, could
56. come to light. I think, if I may, the more substantial financial stability risk that could arise here
57. comes from this broad question of fragmentation, where I think this is a big and growing issue,
58. increasingly separate pools of capital that find it hard to allocate across different countries,
59. separate payment systems, walled gardens, regulatory competition and divergence. And I think
60. you’re probably more likely to see sanctions and cross-border contagion, provision and liquidity
61. resolution. We’ve worked so hard over the past decade or two to try and put in place imperfect,
62. but more effective than before, tools for dealing with that across corporate contagion effects and in
63. the world of fragmentation, I think the biggest risk for all of this is that some of those efforts,
64. get into reverse. Moderator It may be too much to ask for central bank to deal with all the financial stability issues. Maybe
65. there’s in this world you need more coordination of fiscal policy, industrial policy,
66. regulation. What’s the role of these other policies? Andrew Hauser Well, I think here you have to be humble. I mean, it was interesting in the UK for a period, people
67. thought, wow, the Bank of England can solve everything. And many of us, over the years, have been
68. asked to do more and more. And actually what I think, particularly in this circumstance, and
69. colleagues on the panel said have already, we have to stick to our knitting as the UK would say. We
70. have to be clear that what monetary policy can do is anchor inflation and inflation expectations. It
71. can’t deal with the distributional goals. It can’t make you richer, or you not richer, it
72. can’t replace lost supply. Again, there’s not a lot of good news in some of this when it
73. comes to monetary policy communication, that the things that monetary policy cannot do in these
74. spaces far outweigh the things that we can. (Panel discussion) Moderator No, thank you very much. Actually, I have a follow up question, Are you truly concerned about in
75. NFBI? I mean, like we had just a discussion last week at the BIS, and they asked me to presentation
76. on private markets, the size of the sector, and the links to this. I understand that, because they
77. are not, it’s not a public market, and if you don’t have an exit for that capital, through
78. IPO or through other ways. You may not know the price of things. You may not know the true risk, and
79. then you need to pay attention. But I don’t know if any of you are actually very concerned, or
80. is just part of a broad agenda that you need to know? (Panel discussion) Moderator I think it is important to look at the risks. I don’t know if anybody else has a view? Andrew Hauser Well, as the veteran of the LDR crisis in the UK, I can tell you that the view that NBFI’s
81. can’t blow you up is just wrong. You know, that all came out of a clear blue sky for the UK
82. financial system, and the UK Government is still paying a premium on its debt for that error.
83. [inaudible]. The problem is, you’re looking for a needle in the haystack. And so that’s the
84. challenge. Moderator No, I agree. There’s a big challenge. And here we are. We are kind of hitting the issue of
85. it’s a societal issue. People take risks. So if you curb risk in one side, these risks are going
86. to appear in the other side. And there is something quite healthy about taking risks. By taking
87. risks, how you create things and economic activity flourish. One should also think about how to deal
88. with firms or people that take risks that did not succeed. And then you come back to structure polls,
89. how you do with bankruptcy courts, the ability of people to kind of get back in their feet, because
90. we have this relation that allowed people who took risks that didn’t work out to come back. So I
91. think here is another place where structural policies matter a lot. (Panel discussion) Andrew Hauser if your point is in the developed world, one of our biggest challenges outside the US is low
92. productivity growth. And it may just be the case that low productivity growth is a function of an
93. unwillingness to take almost any conscious risk than you must be right. Whether financial regulation
94. is the primary cause of that, I’m not sure. There’s a whole political discourse about this
95. topic, isn’t there, but certainly we all need to find ways of generating innovation in our
96. economy. Some of us have done it well. Many of us have not yet done it well. If that was your point,
97. I think that has considerable merit.