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Inevitable interference?

27 August 2019

Central banks are increasingly becoming politicised not just in America, but they have always faced pressure from politicians for lower rates. The question isn’t whether it is justified but whether it is inevitable.

You’d have thought that central bankers would normally be economists, wouldn’t you? But when Christine Lagarde takes over from Mario Draghi at the ECB we will have all but 2 of the G7 countries ‘benefit’ from central bank governors who started their professional careers as lawyers. This is a wider trend in society – 225 members of congress are lawyers. And it should be no concern – they’ve got plenty of very smart economists working for them. But it is a bit odd, no?

Is it just the latest manifestation of the trend in central banking towards less focus on the technicalities of the job and more on the politics? Christine Lagarde may have trained as a lawyer but is effectively a career politician. That wasn’t an obstacle, that was the reason for her nomination at the ever more explicitly political ECB. Unlike the technical mandates for other central bankers the chair of the ECB has the much wider task of keeping 19 countries in a single currency. With their economies and national identities so disparate, and popular scepticism so rampant, that will require some deeply political decisions – such as fiscal transfers between sovereign states.

But the politicisation of the job isn’t just in Europe. President Trump’s comments on Fed policy may be via an unusual channel of communication but they are certainly not unique to America. President Erdogan was very explicit that the reason for the dismissal of Governor Centinkaya at the Turkish central bank was that he didn’t cut rates fast enough. Similar political pressure pushed out Urjit Patel at the Reserve Bank of India.

Neither is this political pressure a new thing. The Bank of England’s nickname ‘The Old Lady of Threadneedle Street’ comes from a famous cartoon from 1797 showing an Old Lady attempting to resist the attentions of British prime minister William Pitt.   

The ideal of political independence is relatively new – the Bank of England was only granted independent rate setting power as recently as 1997 – before that Her Majesty’s Treasury set target interest rates.

Probably like me your immediate reaction is that the politicisation of central banks is a bad thing. Independence – and an ability to ignore election cycles when setting appropriate interest rates – is a tenet of central banking theory. But then like me you probably also believe that cutting rates stimulates growth. As a European I’m questioning that tenet of faith too (twenty years after our Japanese friends 

Is politicisation justified? One of the motivations of Brexit, arguably of many popular political trends at the moment was a sense of a lack of democratic accountability for important decisions. Before the financial crisis the work of central bankers was, although important, more technical and less obvious to the wider population. Now? Arguably monetary policy is replacing fiscal policy – during the hike cycle how many of those hikes in how many countries were attempts to stymie expansionary fiscal policy?

Ultra low interest rates (in Europe, in America let’s just call them ‘very low’) have pumped up house prices, low headline inflation has killed off pay rises. When the average person doesn’t stand a chance of being able to afford the average house, something is badly wrong. If this is because of dumb fiscal policies, politicians get booted out – ‘It’s the economy, stupid’. When it is because of monetary policy… 

Ultimately though, it isn’t a question of how much political accountability central banks should have, it is more of a matter of what the implications are for monetary policy?


By Richard Kemmish 


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