Central bank independence – Is that 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 often tend to wriggle out of these constraints, the constant jostling between two often opposing opinions is a worldwide phenomenon. Such is the relationship between the government and the central bank.

Governments tend to look at short-term targets, often fueled by their intentions to attract vote banks before election time, but central banks generally focus on longer-term targets for the economy and in doing so are given complete autonomy.

But often politics overtakes this independence. Let’s start with home. Twenty years ago, Gordon Brown, the then chancellor of the U.K., gave the Bank of England its much-needed independence. Market commentators jumped to applaud this move, and newspapers screamed with headlines of the “Old Lady” 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 U.K. 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. The U.S. Federal Reserve is a classic example of this.

In July this year, U.S. President Donald Trump criticized the Fed for increasing interest-rates and later admitting 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 the government is well within its rights to question the central bank, the trouble starts to brew when they look to influence decisions.

Another example is India where a recent standoff between Narendra Modi-led government and the Reserve Bank of India (RBI) has led to speculation that the current governor Urijit Patel may look to resign. This came days after the RBI’s deputy governor said undermining a central bank’s independence could be “potentially catastrophic.”

In another dramatic move, Turkey’s currency went tumbling after President 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’s policies.

Handing control of the central bank to the government will be foolish. However, ever since the financial crisis, a lot of attention has turned to central bank policies and their impact on the general consumer, making it more and more tough for them to escape constant questioning and meddling – whether they like it or not.

Source: Read Full Article