christian noyer : monetary policy and banks, and the rise of global protectionism introduction by mr christian noyer, governor of the bank of france and chairman of the board of directors of the bank for international settlements, at the gic ( global interdependence center ) central banking series “ monetary policy and banks, and the rise of global protectionism ”, paris, 10 march 2014. * * * these are challenging times for economic policy making. as was apparent at the g20 meeting in sydney, the performance of the world economy is contrasted and uncertain. a central question is whether monetary policy has a role to play to improve the situation. to me, the answer is unambiguously “ yes ”. monetary policy should remain active because persistently low inflation threatens the achievement of price stability as commonly defined by all major central banks today. not all central banks are the same and there is some diversity in their objectives, mandates and, of course, the situations they are facing. remarkably, however, all advanced economies have converged – in recent years – towards the same definition of price stability, first adopted by the eurosystem in 2003 : an inflation rate “ close to 2 % ” ( and in our case : below but close to 2 % ). i will focus my introductory remarks on two issues related to this challenging objective : the low inflation level and the forward guidance strategies. i ’ ll start with low inflation. inflation has been falling recently in all advanced ( although not emerging ) economies. its behavior has been atypical compared to previous episodes following a recession. this fall was especially marked in the euro area, from 2. 7 % in 2011 to 0. 8 % in december 2013. recently, developments in the euro area have started to diverge downward from some other advanced economies such as united states and canada. the sources and reasons for such a low inflation are complex and multiple. there are many uncertainties. temporary and global factors may be at play in the euro area with import prices going down. i also think there are more permanent and deep forces pushing inflation down both at the euro area and global level. besides there is still an important unused capacity – commonly labeled as “ slack ” - in most advanced economies, as demand has not yet caught up with its pre - recession levels and firms, as a consequence, have not recovered their pricing power. commodity price inflation has been trending down recently. this is true both for energy and food prices. commodity prices have

a global impact and react very amply to small changes in supply and demand equilibrium. they act as amplifiers and transmitters of disinflationary pressures. powerful headwinds – and disinflationary forces - are coming from the deleveraging process especially in the euro area, due to the importance of the banking sector and the amplitude of its balance sheet adjustment. we are working very hard to repair the bank - lending channel in the euro area. we have achieved a lot by creating the banking union and the ssm in less than two years – which is unprecedented in european history. also, the process of balance sheet repair for banks is well underway in the euro area and we will make sure that the forthcoming asset quality review removes any doubt as to the sustainability of the euro banking sector. furthermore, for the euro area, there is the exchange rate question. as you all know, from a monetary policy perspective, the exchange rate is not a policy variable, let alone a target. but bis central bankers ’ speeches it is obviously a very important input when considering overall monetary and financial conditions. the recent appreciation of the euro has had a strong disinflationary impact. we could discuss further the different causes of low inflation in the debate, but let me make some remarks on this crucial matter for us central bankers. first, low inflation is not deflation. as many analysts and observers are today alarmed about deflation in the euro area, it is useful to understand the difference. deflation is a permanent and cumulative process of decrease in the overall price index, fuelled by negative expectations. deflation is a pernicious spiral. because consumers expect prices to decrease continuously, they tend to defer purchases, thereby further fuelling the deflation process. deflation increases the real burden of debt and creates an incentive to defer investment. deflation is especially dangerous because, as the experience of japan has shown, once it becomes entrenched, it is very difficult to stop. from this perspective, there is no deflation today in the euro area. prices are still increasing and, most important, so are nominal wages. and, as i said, inflation expectations remain firmly anchored in positive territory, even in the short run. second, low inflation provides economic stimulus by boosting real income. in most parts of the euro area, nominal wages are downward rigid. every time inflation “ surprises ” on the downside, it creates an unexpected increase in real wages and purchasing power.