Policymaker champions central banks coordination but urges watch on stability
A key Bank of England policymaker has said that central banks should be "mindful of spillovers" when setting domestic monetary policy, but warned that protectionism could erode cooperation and put global stability at risk.
In a speech delivered at a conference in Hong Kong, deputy governor Minouche Shafik stressed that it was in each country's interest to maintain international stability, considering that "the global financial system is as interconnected as ever".
"However, the body of evidence required to justify including the interests of other nations in the setting of domestic policy is understandably large, even when the long run benefits would be to all," she added.
"This is more true now than ever, as the unequal distribution of benefits from globalisation has increased scepticism about international co-operation."
There is still scope to deepen coordination between central banks, like stress tests and risk assessments, she said.
In the meantime, countries can act in the global interest by strengthening domestic financial systems through tools like countercyclical buffers, which provide a cash padding in the event of a banking crisis.
"Even without consensus around a fully articulated global framework for macroprudential policy, we can make quite a bit of progress by countries pursuing their local national interests."
She added: "By building resilience to stress, the countercyclical capital buffer allows the banking system to remain an absorber, rather than an amplifier, of shocks, and reduces the probability of a downturn abroad becoming crisis at home," she said.
Ms Shafik added: "We do not need to choose between openness and stability."
The deputy governor was speaking at a joint conference between the Bank of England, International Monetary Fund (IMF) and Hong Kong Monetary Authority, covering monetary, financial and prudential policy in a "post-crisis world."
Ms Shafik herself previously worked at the IMF and World Bank before joining the Bank of England in August 2014.
She announced earlier this month that she will be stepping down from the Bank of England at the end of February next year to become the director of the London School of Economics (LSE).