Is central bank independence even a thing?
Parents often find it tough to let go of the control they have on their children’s lives, no matter how old they are.
While children usually tend to wriggle out of these constraints, the constant jostling between two often opposing opinions is a worldwide phenomenon.
And such is the relationship between the government and the central bank.
Governments tend to look at short-term targets, often fuelled by their intentions to attract votes before election time. But central banks generally focus on longer-term targets for the economy, and in doing so are given complete autonomy.
And yet, politics often overtakes this independence.
Let’s start with home, 20 years ago, when the then chancellor Gordon Brown gave the Bank of England (BoE) its much-needed independence.
Market commentators jumped to applaud this move, and newspapers screamed with headlines of the “Old Lady of Threadneedle Street” being set free. But subsequent governments have constantly tried meddling with the central bank’s policies, with the BoE often finding itself walking on a tightrope.
The trend is not just limited to the UK. In the past few years, there have been innumerable examples of governments encroaching into this space. Central banks across the world are struggling to keep politics out of their day-to-day functioning, and the US Federal Reserve is a classic example.
In July this year, President Donald Trump criticised the Fed for increasing interest rates, and later admitted that he “maybe” regretted appointing Jerome Powell as Fed chairman. Last month, Trump continued his tirade against the Fed when he blamed the central bank’s policy decisions for a sharp market decline. “The Fed is going loco and there’s no reason for them to do it. I’m not happy about it,” Trump told Fox News in a televised interview.
While a government is well within its rights to question the central bank, the trouble starts to brew when politicians look to influence decisions.
Another example is India where a recent stand-off between Narendra Modi’s government and the Reserve Bank of India (RBI) has led to speculation over the resignation of the current governor Urijit Patel.
This came days after the RBI’s deputy governor called undermining a central bank’s independence “potentially catastrophic”.
In another dramatic move, Turkey’s currency went tumbling after President Recep Tayyip Erdogan put his son-in-law in charge of economic policies in June this year.
The list goes on, with countries like Russia, Nigeria, South Africa, and Argentina often seeing their governments meddling with central bank policies.
Handing control of the central bank to the government would be foolish. However, since the financial crisis, a lot of attention has turned to central bank policies and their impact on the general consumer, making it tougher for them to escape constant questioning and meddling – whether they like it or not.