Picture: 123RF/JOZEF POLC
Picture: 123RF/JOZEF POLC

Madrid — A growing cohort of elderly and fewer young people is a big factor pushing down inflation rates around the world and policies need to be adapted in response, European Central Bank (ECB) policymaker Pablo Hernández de Cos has said.

He sees a need for a new policy response, where there’s a “bigger role” for both fiscal and macroprudential policies. That’s partly because equilibrium interest rates have been pushed so low in recent years.

Ageing societies could end up putting downward pressure on inflation rates because they spend less, while wage growth tends to slow as people near retirement, another potential drag, Hernández de Cos said in a speech in Geneva.

At the same time, savings increase as workers devote more resources to retirement.

“No wonder that most estimates point to a significant decrease in the natural rate of interest in recent decades, one closely associated to demographics,” he said.

Policymakers at the ECB as well as the US Federal Reserve are taking that decline into account as they rethink central banks’ goals and capacity to act in their respective strategy reviews.

“This decline in the natural real of interest has significant implications for monetary policy,” said Hernández de Cos, who is also the governor of Spain’s central bank. The reviews taking place “partly reflect the fact that the optimal policy mix for macroeconomic stabilisation might have changed following the decline in equilibrium interest rates.”

On fiscal policy, he sees a need for what he calls “semi-automatic stabilisers” whereby stimulus, such as tax reductions, automatically comes into play as the economy goes into recession.


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