Autocrats are challenging central bank independence, perhaps rightly

Central bank independence is under threat. When politicians attempt to take control of monetary policy for their own ends, markets tend to panic, but it may be time to acknowledge that monetary policy is inherently political.

  • By Jasper Cox, Lewis McLellan
  • 09 Jul 2019
Email a colleague
Request a PDF

The principle of central bank independence has taken an astonishingly strong hold in financial markets, given that it is a recent idea.  The Bank of France was made independent in 1993 and the Bank of England only began setting interest rates of its own accord in 1997. And while the European Central Bank (ECB) was founded in 1998 as an independent institution, independence was a new idea to many of the 19 institutions that preceded it.

Nevertheless, the idea is now a prerequisite for a mature, healthy economy. Monetary policy should be left to technocrats and their data, so they can decide what’s best for the economy, runs the argument, so politicians will not be able to manipulate the money supply to win elections at the expense of their country’s long-term economic health.

This idea is now facing serious challenges. In Turkey, president Recep Tayyip Erdoğan fired the governor of its central bank, Murat Çetinkaya, for not cutting interest rate cuts. In a speech, Erdoğan said Çetinkaya was not “conforming to instructions given on this subject”, despite economists wanting Turkey to have higher interest rates to combat its inflation problem. 

In the US, president Donald Trump regularly attacks Federal Reserve chair Jerome Powell for not reducing interest rates — a move that could boost Trump's popularity as the 2020 election campaign season approaches — while India’s prime minister Narendra Modi has been accused of attacking the Reserve Bank of India’s independence by appointing bankers willing to toe his line.

These examples illustrate the importance of central bank independence. Politicians cannot be trusted to make unpopular decisions and impose short term pain to rebalance their country’s economy.


Politics of money

But the backlash against independent central banks highlights another issue: monetary policy is inherently political. There is a growing sense across the political spectrum that even the most data-driven, technocratic approach is not free from political consequences or considerations. Viewed from this angle, the nomination of Christine Lagarde, head of the IMF and a former politician, to lead the ECB is apt.

We may trust central bankers to use the tools given to them in the best way to achieve their ends, but the goals of their mandate — usually stability of prices and the wider financial system — have huge political ramifications, yet appear to be seen as an entirely settled matter that politicians cannot reopen.

Ensuring low, stable inflation is an important goal, but so is reducing unemployment. The Federal Reserve has a mandate to maximise employment, but the ECB does not. Is employment not as important in Europe? What about reducing economic inequality? These issues are outside the purview of most modern central banks, but the tools they use clearly impact on them.

Nowhere has central banks’ influence on fiscal and geopolitical issues been more obvious than in their response to the 2008 global financial crisis. This, in the form of QE and rate cuts, boosted asset prices, affecting the distribution of wealth in developed countries by helping those with assets at the expense of those without.

The ECB’s corporate sector purchase programme favoured large corporations with active debt programmes over those without. The same can be said of its public sector purchase programme, which had the added effect of allowing some countries to put off painful and expensive structural reforms but enjoy the boost to growth provided by historically easy monetary policy.

Central banks can argue, with some justification, that their decisions made sense in light of the failures of banks, regulators and politicians in addressing the crisis. But that response indicates their willingness to make political trade-offs.


Risk-takers

Someone with different political priorities might conclude that a different, albeit riskier, course of action, would have been merited to keep a lid on inequality. Maybe QE did not need to go so far, or central banks could have used ‘helicopter money’ paid out to citizens.

Whichever course was correct, the final decision was undeniably political but delegated to those with no democratic accountability.

In the US, the Federal Reserve’s decision to extend swap lines to certain other central banks in relatively rich countries, so that the latter could provide dollar liquidity to struggling banks, was clearly political. It decided to go beyond worrying about US employment and price stability to help out other countries’ financial systems — but not, for example, those of China, Russia or eastern Europe.

And the Fed did it surreptitiously. “Political support for domestic banks is hard enough to legitimise. Huge liquidity actions designed to support foreign central banks and foreign banking systems were not something that the Fed wanted to pitch to Congress in 2008 or at any point after that,” wrote historian Adam Tooze.

Now central banks are going green, not just by looking at the financial risks of climate change and the transition to a low carbon economy, but exploring active encouragement of sustainable finance. This is undeniably a political choice. It is a clear example of central banks expanding their mandates beyond conventions, but without political scrutiny. Green activists, meanwhile, argue that QE has helped carbon emitters by making their debt cheaper.

Central banks have been given tools to affect our society in profound ways which are far outside their mandates, but they have not been given guidance on the goals they need to achieve.

Central banks risk turning into a political football that autocrats strong arm into providing cheap credit and election-winning economic props. We need to avoid that. But while we’re at it, we should reconsider what we do want from central banks.

  • By Jasper Cox, Lewis McLellan
  • 09 Jul 2019

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 294,431.58 1323 8.57%
2 Citi 267,175.53 1124 7.78%
3 Bank of America Merrill Lynch 229,132.49 937 6.67%
4 Barclays 211,780.31 853 6.16%
5 Goldman Sachs 169,480.13 704 4.93%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 BNP Paribas 34,500.40 147 7.53%
2 Credit Agricole CIB 33,521.86 144 7.31%
3 JPMorgan 25,404.62 68 5.54%
4 Bank of America Merrill Lynch 23,368.44 65 5.10%
5 SG Corporate & Investment Banking 22,509.71 104 4.91%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 9,157.42 55 10.33%
2 Morgan Stanley 8,122.33 40 9.16%
3 Goldman Sachs 7,432.91 40 8.38%
4 Citi 6,426.54 47 7.25%
5 UBS 4,913.18 26 5.54%