Inflation or recession – that’s the dilemma facing the global economy

One of the best known of the latter category was a routine press conference in East Berlin in November 1989, when a media relations officer of the East German government was pressed about when new rules on travel restrictions to West Germany would be put in place. Uncertain of the answer, he spontaneously mumbled, “unverzüglich” – immediately. Within hours, border posts were overrun with tens of thousands of people flooding to West Berlin. The Wall had collapsed and the Cold War was over. 

Another such moment happened the same year in the unlikely setting of Wellington, New Zealand. In a similarly routine press conference, finance minister Roger Douglas was asked what he considered to be the ideal inflation rate, given that the Reserve Bank was soon to be made independent and given the world’s first inflation targeting mandate. Also entirely unsure of the answer, he mumbled, “zero to 2% seems to be appropriate”.

“It was almost a chance remark,” the then head of the Reserve Bank of New Zealand, ex-farmer Don Brash, said in a recent interview. 

“The figure was plucked out of thin air to influence the public’s expectations.”

This story has since become the stuff of monetary policy legend. The experiment of an independent central bank with a 0% to 2% inflation target was so successful in slaying the high inflation of the 1970s and 1980s, that almost all of the world’s most advanced nations subsequently emulated it in one form or another (including the South African Reserve Bank, even if its target range is wider, at 3%-6%). 

For the world’s most important central banks, a 2% inflation target is virtually a monetary policy religion. 

“Let me be quite clear, there are no ifs or buts in our commitment to the 2% target. That’s our job, and that is what we will do,” said Bank of England governor Andrew Bailey last July.