Economic Affairs

Financial stability risks can trump inflation concerns

The Bank of England's recent experience shows how broken financial markets can change monetary policy

The Bank of England decided to step in following market turmoil caused by the announcement of a mini-budget by the UK government. PHOTO: REUTERS
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We commonly think of central banks as having two main objectives: controlling inflation and dealing with recession. That indeed is, in essence, the so-called "dual mandate" of the US Federal Reserve as well as other central banks.

But the turmoil in Britain's financial markets during the week of Sept 26 was a reminder that central banks also have a third mandate, which is to ensure financial stability - and that this can conflict with its anti-inflationary mandate.

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