Central banks must accept the “uncomfortable truth” that they may have to tolerate a longer period of inflation above their 2 per cent target in order to avert a financial crisis, the deputy head of the IMF has warned.
Gita Gopinath told the European Central Bank’s annual conference in Sintra, Portugal, that policymakers risk being faced with a stark choice between solving a future financial crash among heavily indebted countries and raising borrowing costs enough to tame stubborn inflation.
“We are not there yet, but that is a possibility,” Gopinath told the Financial Times before her speech. “In that environment is when you could see central banks adjusting their reaction function and saying ‘OK, maybe we tolerate inflation being higher for some more time.’”