It is a year since Andy Haldane, then the Bank of England’s chief economist, delivered a lecture to the UCL Economist’s Society, extolling the virtues of independent central banks. But his words are sounding more resonant than ever.
“Governments had a natural tendency to overinflate their economies, especially around election time,” he said, explaining that the “inflation bias” that helped cause runaway prices in the 1970s then spurred a fashion for central bank independence.
Today, close to 90 per cent of the world’s central banks are classed as independent. But, as finance ministers wrestle with record debt burdens, the Covid-19 crisis and fast-rising inflation, worries are growing that central banks will become increasingly instrumentalised by governments.
A decade-plus of ultra-low interest rates has suited governments nicely, allowing debts to remain manageable even as they have spiralled. Some governments have explicitly pressured central bankers towards even looser policies: when he was US president, Donald Trump infamously called on Federal Reserve “boneheads” to cut rates to zero and talked of potential negative rates as a “gift”.
And the inflation taking hold in much of the world now, after rapid economic bouncebacks from coronavirus lockdowns, may worry some but it is also politically popular in some quarters — and not only because it whittles away at the debt pile, or facilitates ideological imperatives such as home ownership via cheap mortgages. In a populist speech at the Conservative party conference in October, UK prime minister Boris Johnson exhorted businesses to pay staff higher wages.
The rhetoric of Trump and Johnson has prompted suggestions that monetary policy decisions by the Fed and the BoE have been more dovish and less “independent” than the economic data merited.
Last week’s rate rise from the BoE may have undermined that narrative somewhat. But with a 2 per cent inflation target, and price rises running at more than 5 per cent, the oddity was that it had taken this long to hike.
“The idea of independent central banks these days is a fiction,” says one former central banker, now in asset management. Structurally more dangerous than the vast asset bubbles created in everything from equities to property, the asset manager says, is that central bankers have aligned themselves with the interests of political leaders, evoking the bad old days of non-independent central banks.
It goes beyond monetary policy. One recent UK initiative, seemingly minor but with potentially major ramifications, was the plan to ensure regulators at the BoE (and at the Financial Conduct Authority) considered UK competitiveness when rule-setting. This was a disaster, with global repercussions, when it ushered in “light touch” regulation pre-2008. Reinstating it is a recipe for further trouble.
Another less noticed proposal is similarly ominous. In September, the UK Treasury put out a consultation paper, the “Review of the Cash Ratio Deposit Scheme”, proposing to reform a long-running scheme that obliges commercial banks to fund the BoE. The consultation not only proposes moving to a different system, but points out in passing that the new levy would be set “as part of annual budget-setting processes and discussed with HM Treasury”. This is a significant departure: the current CRD operates without government interference for five years at a time.
Critics of the government-BoE relationship argue that subtle politicisation of governance has helped such reforms to go unchallenged. Tory peer Dido Harding has been a member of the supervisory “court”, or board, since 2014; she was joined in 2019 by financier Ron Kalifa, author of a Treasury-commissioned fintech review. BoE governor Andrew Bailey, selected by Number 10 in preference to a recommendation by Treasury officials, is seen as more politically aware than many of his predecessors.
The UK is not alone. In the US, Fed chair Jay Powell has been criticised in some quarters first for bending to the will of the dovish Trump White House, and latterly for hawkishness inspired by President Joe Biden and Treasury secretary Janet Yellen. Haruhiko Kuroda, governor of the Bank of Japan, and the world’s most enthusiastic proponent of government-friendly quantitative easing, is also regarded as having blurred the lines between politics and monetary policy.
“So what has central bank independence ever done for us?” Haldane asked at the end of his UCL lecture. It has helped to control inflation, and for the past decade at least has helped maintain financial stability, he concluded. “Safeguarding [it] and the institutional regime in which [it is] embedded is more important now than ever.” Quite so.
patrick.jenkins@ft.com
Source: Economy - ft.com
