 Today I'm coming to you from Cintra in Portugal, where the ECB Forum on Central Banking is currently taking place. The forum brings together central bank governors, academics, financial market representatives, journalists and many others to exchange views on current and future economic developments and to discuss policy issues. As central banks across the world struggle with persistent inflation, it's no surprise that this year's forum is all about stabilizing the economy and using monetary policy in today's challenging environment. You're listening to the ECB podcast, bringing you insights into the world of economics and central banking. My name is Katie Ranger. We took the opportunity while in Portugal to speak with some of the guests here at the forum. Joining the conversation today is Geeta Gopinath, first Deputy Managing Director of the International Monetary Fund. I'm going to ask her to share her global perspective on current developments. Geeta, I'm thrilled to have you here with me. Welcome to the ECB podcast. Hi, Katie. It's a real pleasure to be here and to participate in this conference. It is a critical time for central banking, so I'm very glad that we're all here to discuss the challenges ahead. The global economy, as we projected in April, is slowing this year compared to last year. We have growth at 2.8% this year as opposed to 3.4% last year. Now, most of that slowing is coming from within advanced economies. Emerging markets, on the other hand, we do see some recovery. Among the larger prints in terms of recovery, there is China because it's reopening from the lockdown. Now, overall, I would say the outlook is challenging also because inflation remains stubbornly high in many countries. And so it's a good opportunity for us here to be discussing this at Cintra. Now, you gave a dinner speech here in Cintra speaking about what you call the three uncomfortable truths about monetary policy. It outlines some of the challenges that you see central banks facing as they contend with high inflation. Things like the uncertainty about when inflation will return to target and the tensions between central banks' price and financial stability objectives. What do you think these challenges will mean concretely for the work of central banks? How will it impact their policymaking? So the first uncomfortable truth is that it's taking too long for inflation to come down back to target. If you look, for instance, at forecasts for when inflation in the euro area returns to target, we're getting to the middle of 2025. That is a long time and that can have important effects on inflation dynamics. What that means is that central banks will have to remain committed to fighting inflation, even if that means risking weaker growth. The second uncomfortable truth is that financial stresses can create tensions between central banks' price and financial stability goals. There are several reasons for it and especially the fact that central banks don't really have the tools to deal with solvency problems. What this first tells you is that it's important to do significant stress testing, supervision, make sure that banks are in a position that they can deal with the increase in interest rates and other challenges that are coming up. Also, this will require a whole-up government approach to not just central banks, but in many cases fiscal authorities will have to step in, as we saw, for instance, in the US. The last uncomfortable truth is that central banks are likely to face more upside risks to inflation than they did before the pandemic. Supply shocks could become more common. We also know that the Phillips Curve is not reliably flat. That then has implications for monetary policy strategy and how we use our tools. I think we have to be a little more refined and more cautious about how we use forward guidance and quantitative easing. Let's look at fiscal policy that you mentioned just there, Gita, and you also touched upon in your speech yesterday. Now, it's played a huge role in alleviating the burden for many of the people hit by recent shocks, most notably the pandemic and the energy crisis. We now find ourselves in yet another crisis, a cost of living crisis, and wages are not rising in quite the same way that prices are, and this is increasing the burden, especially for the low-income groups. Now, we as a central bank are doing all we can to bring inflation back down and to alleviate this burden, but how exactly can fiscal policy best help the most vulnerable here directly? As a central bank, we can't really do that. It's more for governments. So first, I think we should all recognize that labor markets are strong in many economies, including the euro area, where unemployment rates are at record lows. So that is a strength or resilience of the economy that we should recognize. The second thing we should recognize is that the process of bringing inflation down requires the economy to slow and the labor market to cool, so we should expect to see that. But that's needed to be able to have sustainable growth in the future. Fiscal policy can, as you said, provide targeted support, and it has done that very well in terms of providing support to households. I think our general theme is that you have to keep it targeted, because otherwise in this environment, with high levels of inflation and high levels of debt, just broad-based support will then fuel both the high debt and also the inflation problem. And so we should have consistency between fiscal and monetary policy. Okay, let's move a little bit away from inflation and fiscal and monetary policy now, and talk about another topic that's been quite hot recently, and that's geo-economic fragmentation. Now, both you and your colleagues at the IMF have recently discussed the growing threat of more inward oriented behavior by some governments and how this is leading to trade tensions across the world. Gita, what kind of behaviors are you seeing here more concretely, and what does it mean for the world's economies and societies? What's the impact there? The pandemic and the war has made many countries worry about the resilience of their economies, especially to supply chain disruptions and of course to hostility from trading partners. In terms of the most direct impact that we see, we see it right now, for instance, in Europe with the fragmentation in energy supplies. Europe has had to, appropriately, move away from relying on energy supply from Russia to other sources. That's the source of fragmentation, and that has kept energy costs higher in Europe than it is, for instance, in the US. So one of the consequences of this kind of fragmentation is you could end up with more cost pressures. Now, again, I do believe it's important to build resilience. That implies diversifying the sources that you buy your products from. My worry is that countries decide instead to be more inward looking, which is rely on their own home production to produce everything. Then we're in an environment with much higher inefficiency, much higher costs and much higher pressures on inflation and on livelihoods around the world. Gita, thank you so much for joining us today and for sharing your insights on the global view of economic developments at the moment. Thank you, Katie. It was a pleasure to join you. Well, that brings us to the end of this episode. I want to thank Gita Gopinath, first Deputy Managing Director of the International Monetary Fund for joining the conversation. Listeners, be sure to check out the show notes for more on this topic. We've also linked to the excellent dinner speech by Gita about three uncomfortable truths for monetary policy, which she gave on the first day of our ECB forum on central banking in case you missed it. You've been listening to the ECB podcast with Katie Ranger. If you like what you've heard, please subscribe and leave us a review. Until next time, thanks for listening.