“Beyond hawks and doves, trying to get it right in an uncertain world”

Pierre Wunsch, Governor of the National Bank of Belgium, gave a guest lecture at Frankfurt School on 8 May 2024 about his evolving stance on the primary drivers of monetary policy in recent years and his thoughts on the medium-term trajectory of monetary policy. He also discussed the fundamental questions around the limits of central bank mandates.

The event, which was met with great interest among students and central bank participants, was hosted by the two Directors of the Frankfurt School Centre for Central Banking, Professor Jens Weidmann and Professor Emanuel Mönch.

A series of acute crises have clearly tested the limits of central bank mandates, and Governor Wunsch made clear that central banks have learned a lot from the experiences of the last few years.

“A key lesson learned from being in Jens Weidmann’s company is that giving central bankers birds’ names – hawks, doves, owls, parrots, you name it – is simplistic. Let it be noted once and for all: we are all staunch supporters of price stability. Delivering it is our mission. Our mandate is not dual; we don’t do trade-offs. What differentiates us, however, is our perception of risks, and relatedly, our willingness to take risks.” Pierre Wunsch, Governor National Bank of Belgium

Governor Wunsch expressed his opinion, that monetary policy is about much more than a fight between two established camps. In a nutshell, aside from times of crisis, monetary policy has been more constrained by the effective lower bound than we thought. Persistent inflation has come back, although medium-term expectations remain well anchored. In Pierre Wunsch’s view, central banks need to revisit the reliance on some instruments. While Quantitative Easing proved effective in the midst of crises, it failed to bring us back to target inflation within a reasonable timeframe. And forward guidance proved relatively inefficient compared to the cost of tying central banks’ hands. Where does this leave us? Probably with a humbler form of monetary policy. One that tolerates some more deviation from our target when economic conditions are benign and when risks of larger deviations are contained.

Beyond these lessons on the inflation front, Pierre Wunsch discussed longer-term challenges for central bankers and highlighted risks of “mission-creep” particularly with respect to climate policies for which he sees no role for central banks. He also worried about fiscal dominance, pointing out that "fragile public sector balance sheets and mounting fiscal challenges ... might become a persistent concern for central bankers”.

Governor Wunsch concluded with his conviction that central bank independence should come with a narrow mandate, and that central bankers must show agility to adapt and respond to extraordinary circumstances. Be it during the COVID-19 pandemic or the “whatever it takes” episode, central bankers may be called upon as architects and enablers of effective solutions. But however forceful these actions may be, they should remain exceptional and temporary. They should also pass a simple test: do central banks have tools at their disposal that elected politicians do not have, that are more efficient, and that they would want central banks to use?

The lecture was followed by a questions and answers session, and the attendees continued their discussions at a reception.