Traditional Monetary Policy Losing Effectiveness Amid Prolonged Supply Shocks: CEA Nageswaran

(MENAFN- IANS) New Delhi, Nov 13 (IANS) Chief Economic Advisor V Anantha Nageswaran stated on Friday that traditional monetary policy instruments, such as modifying interest rates, might lose their effectiveness in addressing inflation in a world that is increasingly susceptible to supply-side disruptions.

He noted that fiscal and other public policy strategies will become more crucial, as simply increasing interest rates will not resolve problems caused by supply issues. In fact, it could potentially have the opposite effect, he remarked at the 9th Annual Food Systems Dialogue held here.

"Fiscal and other public policy measures will be more important because raising interest rates will not solve the supply-induced problems. If anything, it may even be counter-productive," he said at the 9th Annual Food Systems Dialogue here.

Given the ongoing supply-related challenges, nations will need to adopt various flexibilities concerning their inflation targeting strategies, he added.

"Since 2022, only a small number of countries have achieved their inflation targets. Therefore, it will remain a framework, but I believe countries will interpret it flexibly, as circumstances require,” he added.

Supply chain disruptions resulting from the Russia-Ukraine war, which has continued since February 2022, followed by the crisis in West Asia, have caused prices -- particularly energy prices -- to surge worldwide.

To curb inflation, major central banks around the world, including the US Federal Reserve, have raised interest rates.

"Since 2022, very few countries have met their inflation target. So, it will be there as a framework, but I think countries will take creative liberties with it, as they have to," he added.

Citing various reports, Nageswaran predicted that supply shocks will shape the global landscape for the next 25 to 30 years, or possibly even longer.

He explained that as nations increasingly weaponise supply chains and exploit natural waterways and other strategic chokepoints, traditional monetary tools, such as adjusting interest rates, will no longer be effective in addressing these challenges.

Given this environment, Nageswaran advocated for restoring agriculture as the primary engine of economic growth.

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