Central Banks and the G20 Agenda. Ensuring Policy Coherence

The G20 has come a long way in pulling economies back from the brink. Yet, a lot remains to be done in its pursuit of inclusive and sustainable growth. Productivity growth is sluggish, unemployment remains well above pre-crisis levels, inequality is hitting record highs, and environmental risks pose threats worldwide.

Against this background, the pledge by G20 leaders to use all policy levers in targeting their goals is as important as ever. Central banks are already sitting at the G20 table and should not be carved out from this imperative. Consistent with their mandates and acknowledging their essential role in safeguarding price and financial stability the core G20 objectives must move onto their own radar screens. The urgent need highlighted in the joint declaration by G20 leaders in Buenos Aires to address distributional challenges, foster financial inclusion, close infrastructure financing gaps, and protect the environment should top their list.

Advancing G20 objectives

Central banks have already taken important steps in this direction and trailblazed initial pathways. Many have started evaluating the impact of their policies on inequality. References to the distributional effects of monetary operations by e.g. the President of the Minneapolis Fed, the Senior Deputy Governor of the Bank of Canada and the Deputy Governor of the Swedish central bank are examples. Studies of the distributive consequences of monetary easing by staff from the Bank of England, the Bank of Japan and the European Central Bank provide further illustration. Statements, such as the one from Jerome Powell, the Governor of the Federal Reserve, who recently referred to inequality as one of the biggest challenges for the US in the coming decade, also signal growing concerns.

Some central banks have deepened their engagement on financial inclusion and thus to support access to affordable financial services for households as well as small and medium-sized enterprises (SMEs). To that end the Reserve Bank of India relaxed regulatory requirements to open bank accounts. The Bank of England provided incentives for SME lending through its Funding for Lending Scheme. The People’s Bank of China reduced reserve ratios for credit to small and micro enterprises. The Fed, among many other central banks, is exploring pathways that seize the potential of digital services for financial inclusion and at the same time ensure consumer and data protection. And the Banque de France committed to ensure strict compliance by French banks with their December 2018 promise to cap bank charges at 25 Euro a month for 3.5 million vulnerable customers.

Other central banks have strengthened their role in supporting capital flows to infrastructure. Bank Indonesia has coordinated with the Indonesian Government, the country’s Financial Services Authority and other financial institutions to develop new instruments for infrastructure funding. The Hong Kong Monetary Authority set up the Infrastructure Financing Facilitation Office to expand infrastructure investment and started investing into infrastructure itself through the Long-Term Growth Portfolio of its Exchange Fund. The integration of a “physical and human capital” filter into the equity purchases by the Bank of Japan offers a further case in point.

Moreover, and crucially, 30 central banks and financial supervisors are now members of the NGFS, the “Central Banks and Supervisors Network for Greening the Financial System”, to mobilize finance for the transition to a sustainable economy. With their first progress report, NGFS members highlighted that environmental risks are a source of financial risk and that it is within their mandates to ensure the financial system is resilient to these risks. They also warned that such environmental risks are not sufficiently accounted for in financial markets and called for central banks to “lead by example” and to reflect environmental risks in their activities.

Many central banks and supervisors have already started moving towards this goal. The People’s Bank of China included green bonds with an AA rating and high-quality green loans as collateral into its medium-term loan facility. The central banks of Finland, France and the Netherlands, among others, have initiated the integration of environmental, social and governance criteria into the management of their non-monetary policy portfolios. The Eurosystem is reviewing its risk management processes to ensure “that all the relevant factors, including environmental ones, for the prudent management of the portfolio held by the central banks are being taken into account”. And the BoE started consultations on a supervisory statement that sets out its expectations on how the financial sector should manage the financial risks from climate change.

Expanding and accelerating momentum

Expanding and accelerating this momentum is critical. Central banks play a vital role for sustainable prosperity. With price and financial stability at the core of their mandates they provide key pillars for macroeconomic development. As lenders of last resort and prudential supervisors they fulfill fundamental tasks for functioning financial markets. And with oversight of payment as well as clearing and settlement systems they are essential for modern economies.

The instruments at their disposal to target their objectives have significant repercussions on a broad range of policy goals – including core elements of the G20 agenda. The distributional impact of monetary policy, the effects of financial supervision on financial inclusion and infrastructure investing, as well as the environmental risks inherent to central banks’ asset purchases and collateral frameworks are cases in point.

Understanding these linkages and ensuring alignment between central bank policies and the broader goal of inclusive and sustainable growth is essential. Many central banks have already made important steps in this direction. G20 leaders should endorse the momentum they have built. They should also encourage them and their peers to move further in assessing, reporting and engaging on the broader effects of their policies and thus to ensure policy coherence with the G20 agenda.

This blog is a synopsis of a forthcoming T20 policy brief that will be made available at www.t20japan.org/publications/policy-briefs.