Q&A: How should central banks navigate the new world order?

US policy uncertainty has rippled through rate-setting meetings across the world, as central bankers try to work out what a global trade war means for monetary policy. Stagflation fears are rising on the back of Donald Trump’s tariffs. And threats to central bank independence abound.

Economics commentator Chris Giles, writer of the Central Banks newsletter, joined the FT’s Monetary Policy Radar reporters Elettra Ardissino, Joel Suss and Andrew Whiffin to answer your questions live.

The Q&A is now closed but here are the highlights:

Gladimir Poutine, FT reader: Should the BoE target a permanently higher level of inflation (3% or 4%) to ease constraints on monetary policy and facilitate growth?

Joel Suss: No. What we have re-learnt with the recent inflation surge is that people really dislike inflation, and 4 per cent is seen as a threshold at which they really start to notice and attend to prices. Low and stable inflation makes price changes recede to the background and allows people to get on with their lives without worrying about inflation. That facilitates economic growth. A benefit for a higher inflation target would be in the ability to respond to economic recessions by having more room to cut interest rates.

Gabriel, FT reader: What would be the effects in the market if China decided to sell their US Treasury holdings? Could we see global deals in CNY? Is China ready for this?

Andrew Whiffin: In short we are already seeing China shift out of USD and we are also seeing some commodity trading shifting into CNY. The big hurdle for CNY becoming the reserve currency is capital controls and that getting your money out once it’s in the CNY system is difficult. That said CNY has been internationalising via the Belt and Road Initiative but there are no signs of China addressing the concerns around capital controls.

Jiho LEE, FT reader: I agree that this is a supply shock to the US. But I am not sure whether this is only a demand shock to other countries that do not retaliate.

Elettra Ardissino: That is mostly correct. In the US, tariffs will constrain supply and raise prices, generating a positive price shock and a negative demand shock. The net effect is likely to be stagflationary (though it is difficult to say exactly how much). In countries that do not retaliate, the main effect of the tariffs will be to lower export demand. This will increase slack in the economy, generating disinflationary pressures. US tariffs could affect supply in other economies in the longer term by dragging down global growth and discouraging investment. However this would likely happen over time, not necessarily qualifying as a shock.

Clarisse Murphy, FT reader: In January 2025, the Fed left the NGFS seemingly under political pressure to distance itself from environmental concerns. The ECB in response has reaffirmed its commitment to the network, yet seems to have become more cautious on the topic. Will the momentum for climate-related considerations for monetary policy disappear, or will it carry on despite the US’s efforts to discard them? Why is the Fed so reluctant to see the importance of climate-related considerations for monetary policy compared to other central banks?

Chris Giles: I think we should be honest that the Network for the Greening of the Financial System has achieved very little and placed very few constraints on central banks’ monetary policy whether they are members of the network or not. In short, there is no momentum for climate considerations in monetary policy — and rightly not. Central banks cannot and should not seek to solve all the world’s problems. Addressing climate change is a responsibility for society expressed through elected governments. Effective policies are regulations on carbon emissions and taxes, not money and interest rates.

OK. Rant over. Many central banks do have responsibilities for financial stability and the prudential regulation of banks. They need to ensure that the financial system is not taking very significant risks that will blow up due to climate events or the move towards net zero. I would call that prudential regulation although, if it is fashionable, it can be seen as a contribution towards combating climate change.

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