benoit cœure : central banks as risk managers speech by mr benoit cœure, member of the executive board of the european central bank, at the 53rd seacen governors'conference / high - level seminar and the 37th meeting of the seacen board of governors, bangkok, 16 december 2017. * * * it is a great pleasure for me to be here today. before i comment on this panel ’ s topic, let me express my gratitude and satisfaction with the strategic partnership between the ecb and seacen, which got off to a successful start this year. many cooperation activities, ranging from seminars on macroprudential analysis to central bank governance, have already been launched and more is being planned for 2018. i look forward to strengthening our cooperation over the coming years. the topic of this panel deals with the implications of political risks for central banks. given the independence of central banks and their legal separation from the political dimension, this is obviously a complex issue – and one where monetary policymakers need to tread very carefully. for this reason, i would first like to spell out how the ecb generally incorporates different kinds of risk into its monetary policy strategy, and how this has influenced our actions over the last few years. i will argue that every central bank is to a considerable extent a risk manager, reflecting the forward - looking nature of monetary policy. i will then explain why political risks cannot be addressed in the same way as economic risks. central banks should not prejudge political outcomes through their actions. rather, they should address their effects if and when they become visible in the economic and financial data that are relevant for their price stability mandates. monetary policy and risk management my starting point is that monetary policy works with long and variable lags. in the euro area, for example, the full transmission of interest rate decisions to output has been estimated to be between one and two years, and even longer for inflation. 1 so, if we were to decide policy on the basis of past outcomes, we would always be behind the curve. monetary policymakers therefore have to look at the economy in a forward - looking way. to do this, we produce forecasts, on a regular basis, that indicate our central expectations for the economy – the baseline. in principle, this should be enough to form a view on how policy should be designed today. but we all know that this would be a bad idea. policymakers are typically poor forecasters, and central bankers are no exception. 2

to lend, at any given level of bank rate. between 2003 and the beginning of this year, 2 - year - fixed mortgage rates fell by around 50bps relative to the wholesale interest rates they are usually priced off. this is one reason why credit has gone on rising so strongly, despite increases in official interest rates. at this stage, we can only speculate about what will happen next. my guess is that over the next 3 - 5 years, we will see a sustained – though not necessarily complete – reversal in these trends, as banks re - appraise the risks around certain business models and complex financial instruments. this would increase the cost of credit to final borrowers, for any given policy rate. if that happens, this summer ’ s crisis will influence the economy – and potentially the interest rates set by the mpc – for some time to come. energy prices let me now turn to the second of the global developments i mentioned earlier : higher energy prices. during the past month, the oil price has threatened to breach the $ 100 a barrel. just last january a barrel of oil cost $ 55 ; four years ago, it cost less than $ 30. some of this is due to the weakness of the dollar. but the rise in sterling terms has been pretty spectacular too – from £17 a barrel four years ago, to £27 last january, to around £45 now. at these levels, oil is almost back to its 1979 high, after correcting for inflation 3. what ’ s going on? it ’ s always hard to disentangle underlying demand and supply factors from the speculative froth. it ’ s possible to point to some short run factors behind the recent surge. stocks of oil across the oecd economies have been falling, at a time of year when they should be rising. this reflects temporary supply disruptions such as weather - related problems in mexico and in the north sea. as production comes back on stream, the market should ease. but short - run influences can only have this kind of leverage over the price because underlying market conditions are so tight. world demand for oil has been boosted by a strong world economy, led by booming emerging markets. china alone has been responsible for a third of the growth in global oil demand over the past four years. meanwhile supply has struggled to keep pace – partly because of policy decisions by oil producing economies, but partly because it takes quite a long time for investment in extra production capacity to come on stream.