Adapting Monetary Policy Amid Growing Global Uncertainty

As global economic forces grow more unpredictable, central banks are reassessing how best to steer monetary policy through an era of frequent shocks and emerging risks.

Recent years have served as a harsh reminder that assumptions based on prolonged periods of low inflation can quickly be upended. Central banks underestimated the inflationary impact of pandemic-driven supply disruptions combined with highly expansionary fiscal policies, resulting in a surge of inflation not seen in decades. Countries like Norway and Chile, despite their wealth in natural resources and prudent use of sovereign wealth funds, are small, open economies particularly exposed to international trends—experiencing imported inflation from weaker currencies and rapidly needing to adjust policies.

Looking ahead, global challenges such as climate change, geopolitical tensions, and advances in artificial intelligence are expected to make economic shocks more common and more complex. This new environment underscores three key lessons for central bankers: maintain a strong commitment to low and stable inflation, recognize the limits of monetary policy in addressing sector-specific or societal challenges, and build public trust by communicating transparently about decisions and the reasoning behind them. Adaptability and regular policy reviews, as well as openness about policy changes, are essential to anchor inflation expectations and maintain confidence.

Ultimately, these insights highlight the enduring importance of transparency and a steadfast focus on price stability for central banks navigating an increasingly uncertain world.