The Banking Executive Magazine - July 2022 Issue

Inflation and Crypto The transition to an electronic stan- dard with a Zero Inflation target will benefit from the use of several com- plementary tools: • Subsidies: The interest-on-reserves formula can be used to subsidize zero rates on small deposit ac- counts. • Macroprudential measures: These include raising capital require- ments and imposing stricter amor- tization requirements. • Measures to overcome downward wage stickiness, particularly by creating incentives for firms to pay a substantial fraction of compensa- tion in the form of bonuses that can vary from year to year. CENTRAL BANK DIGITAL CURRENCY POTENTIAL TO FIX INFLATION The opinion of Guido Cozzi in the Hinder Business Line affirms that central bank digital currency (CBDC) can fix the inflation problem. Guido Cozzi opinion is that a good way to arrest the fall in the value of a nation local currency and contain the nation fiscal deficit is through the use of digital currency. Initially faced with the popularity of private cryptocurrencies, central banks are designing central bank digital curren- cies (CBDCs) that will completely revolutionise payment systems. China has begun experimenting with its digital yuan, the European Central Bank is designing the digital euro, and The United States Federal Re- serve is thinking of developing its digital dollars. Policymakers around the world are faced with a dilemma on whether to control inflation or support growth. In the context of Covid-19, the onus fell on the government to take up deficit financing to keep the econ- omy going. This activity was sup- ported by central banks, which lent easy money through quantitative eas- ing, thereby increasing money sup- ply and lowering interest rates. The Russia-Ukraine war has changed the global economic scenario. Higher commodity and oil prices coupled with supply-side glitches raised inflation. For India, which is a major importer of crude, consumer price inflation is inching towards the 8 per cent mark. The inflation sce- nario in the US is no different, recording 8.3 per cent in April, among the highest levels in four decades. Higher inflation expectations on ac- count of the war, triggering higher commodity and fuel prices, has led to a fall in consumer purchasing power. This could lead to industry leaders not willing to invest, causing a further fall in employment genera- tion and growth. The present inflationary factor has more to do with the supply-side shock. In such circumstances, it does not make sense to follow tight mon- etary policy to control inflation. It would seem that central bankers are resorting to quantitative tightening to control the value of the exchange rate. Financial post analysis by Ethan Lou suggests that central bank digital cur- rency could be an inflation-fighter's best friend. A central bank digital currency theoretically allows for micro-targeting with real-time feed- back. ISSUE 163 JULY 2022 the BANKING EXECUTIVE 13