Economists Warn Premature Rate Cuts Would Cost Central Banks Their Credibility

Economists gathered at the Tashkent Monetary Policy Dialogue warned that cutting interest rates too early could lock inflation above target and erode the trust that makes monetary policy work, Euronews reported. They cited Uzbekistan as a case study, where lower inflation, falling inflation expectations and reduced dollarization followed a period of restraint.

The timing is significant. Many major central banks had signaled readiness to ease, and the energy shock now working through prices makes those cuts harder to justify without appearing to abandon their inflation targets.

The Uzbek example carries a lesson that reaches well beyond Central Asia. Reduced dollarization, meaning citizens hold more of their savings in the local currency rather than in dollars, is a result of credibility. When a central bank loses that trust, people move out of its currency into the dollar or into hard assets, and the currency's usefulness shrinks. This is the underlying mechanism behind the gradual global shift toward parallel monetary channels.

For a sound-money reader, the warning is welcome but incomplete. Credibility is not a communications exercise. It rests on whether a central bank will actually tolerate slower growth to defend the value of its money, a test that arrives precisely when governments most want cheap financing.