Sound management of the central bank’s balance sheet is also important to maintain the central bank’s standing and credibility as a regulator and supervisor (if it has these responsibilities). The financial risks of central banks should be managed in a business-like way similar to our expectations of commercial banks.
While we are able to tolerate a single external shock for a limited period of time, we cannot tolerate multiple simultaneous shocks that are likely to keep inflation elevated for two years. Shocks of this nature raise the risk that inflation expectations for the coming years will recalibrate to a significantly higher level.