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Editor’s blogFebruary 20 2015

Central banks take on development mantle

The role of the central bank has changed since the global financial crisis, says Brian Caplen, with many concerning themselves with social and economic inclusion issues.
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In the decades before the financial crisis the scope of central banks’ policy remit was narrowing – now it is enlarging again in ways that economic theorists of old could never imagine. This is especially true in emerging markets, where central banks are adopting something of a social and economic inclusion role.

In the advent of the monetarist fashion in the 1980s, many central banks focused on price stability and not much else. The fashionable view was that asset price bubbles should be allowed to collapse of their accord without central bank interference.

This all changed after the onset of the financial crisis in 2008, with macro-prudential measures coming into vogue such as the slowing down of house price inflation by demanding that commercial banks ask for larger mortgage down-payments.

Despite the fact that most emerging markets escaped the worst ravages of the financial crisis, their central banks are also adopting macro-prudential measures as they try to cope with excess liquidity flows for which interest rate rises are no solution. In fact, more generally there is a question about whether central banks have lost the ability to control even the basics, such as price stability. In the US and the UK, years of quantitative easing have still resulted in exceptionally low and falling inflation, for example.

In emerging markets something else is happening – not only are macro-prudential measures being used to complement inflation targeting in the quest for stability, but central banks are also getting involved in development goals, sometimes even taking balance sheet risk in the process.

One of the first central bank governors to comment on the need to fix far more things than just inflation and bank governance was Nigeria’s former governor Lamido Sansusi. Back in 2011 he was arguing of the need to address “the structural constraints that stop banks from lending”. This involved solving problems in the agricultural supply chain that prevented banks from lending to farmers

Mr Sanusi has some companions on this journey. Amando Tetangco, governor of the central bank of the Philippines, says in an interview in the March 2015 issue of The Banker that “microfinance and financial inclusion are becoming mainstream”. In pursuit of this, the bank has enacted regulatory reforms to foster microfinance.

The star prize, however, goes to Bangladesh, whose central bank governor Dr Atiur Rahman is The Banker’s central bank governor of 2015 for Asia-Pacific. Dr Rahman’s initiatives include lending $64.7m to a non-governmental organisation for loans to tenant farmers, establishing a project to set up savings accounts for street children and promoting green financing while also keeping inflation on a downward trend.

Sceptics will worry that this new, broader central bank model risks losing sight of the essentials, but the fact is that in many countries the central bank is the stand-out institution in terms of governance standards and stature. It is the obvious choice as a development institution as long as the risks can be managed properly.​

Brian Caplen is the editor of The Banker.

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