Allianz’s Subran Warns of Increased Risk of Policy Mistakes from Fed or ECB

Ludovic Subran, Chief Economist at Allianz, has warned of the potential for policy missteps by US or euro-zone policymakers as they seek to tighten monetary conditions. Such errors could pose a serious threat to the global economy. During an interview with Bloomberg Television, Subran voiced his concern that central banks could overshoot in their attempts to rein in consumer prices, potentially disrupting the anticipated “soft landing” of the economy.

Subran’s perspective on the economy is heavily influenced by the determination of central banks to suppress inflation. He expressed, “The economic trajectory is intensely reliant on the will of central banks to curb inflation.” He went on to clarify that one of the main risks to the global economy is the chance of policy blunders by these institutions. A blend of fiscal and monetary tightening could create a toxic policy mixture detrimental to the economy.

In the present economic atmosphere, policymakers from developed economies continue to lean towards interest-rate hikes. The US Federal Reserve and the European Central Bank are both projected to declare rate increases later this month. Concurrently, in Australia, officials have kept borrowing costs steady but have suggested additional action if needed.

Subran cautioned about the possibility of policy errors if central banks retain stringent monetary policies for a prolonged period. He pointed to recent conversations among officials at the ECB’s annual retreat, speculating on the potential ramifications of the ECB maintaining elevated rates while also introducing more hikes throughout 2024. He noted, “Should this scenario materialize, it would be a policy mistake, as the real economy would begin to experience the impact of this embedded tightening. By that point, it would already be too late for the central bank to shift gears.”

The ECB’s historical policy errors, particularly the premature tightening cycles initiated in 2008 and 2011, serve as reminders of the risks associated with overly aggressive monetary tightening.

When asked about enduring risks to the financial system, Subran conceded that these dangers have not vanished. He recommended prudence regarding liquidity for at least the coming year and raised concerns about excessive leverage and credit risk. He underscored the importance of rigorous testing by financial institutions. Subran also reminded that financial mishaps can stem from external shocks, such as those associated with climate risks. His remarks highlight the intricacy and delicate balance required in managing economic policy, especially during uncertain times.