Almost three decades after an influential academic paper started a worldwide movement to give central banks more independence, the tide has turned against the idea. Many people now argue that monetary policies should again be subject to democratic processes, as is the case with decisions to tax and spend.
The consensus is shifting back towards more public control over central banks. This would be a welcome development in SA, where the country needs additional policy tools to confront the triple crises of unemployment, poverty and inequality.
From the US to the UK, India and Turkey, politicians have recently locked horns with central bank governors over monetary policies. The public has also questioned the powers given to unelected and sometimes arrogant bureaucrats in the wake of the global financial crisis.
In the US, President Donald Trump has criticised Federal Reserve chair Jerome Powell over the Fed’s decisions to hike rates in 2018, and pushed for the appointment of two friends to the bank’s board. In the UK, politicians and the public have attacked the Bank of England for taking sides in the Brexit debate.
In December, Reserve Bank of India governor Urjit Patel resigned after President Narendra Modi put him under pressure to pump liquidity into struggling state banks and use some of the country’s $50bn foreign exchange reserves to fund the country’s budget deficit. The new governor, Shaktikanta Das, a former finance ministry official, cut rates in February ahead of an election. In Turkey, President Recep Erdogan has been in a tug of war with the central bank for the past year.
“Central bank independence is as dead as vaudeville. Not to dwell on the past, but there was a time when central banks in advanced countries were supposed to be independent of their governments,” Financial Times columnist John Dizard wrote recently.
Central bank independence is not the natural order of things. The People’s Bank of China is not independent. Governor Yi Gang is an alternate member of the Communist Party’s central committee. The Bank of England was a department within the treasury until 1997. The Bank of Japan became independent in 1998, but in 2013 former president Shinzo Abe released a joint statement from the government and the bank to strengthen policy co-ordination and work together to stimulate the economy. Japan’s central bank now owns more than 50% of the government bonds, which is worth more than the country’s GDP. It is also a major shareholder in the country’s listed companies.
A 1992 study by Alberto Alesina and Lawrence Summers showed that central bank independence was associated with lower inflation. It influenced many governments to give central banks operational (or instrument) independence. But few gave them political (or goal) independence. In most cases there was only one goal, an inflation target, and one instrument, the interest rate. In the wake of the global financial crisis, it became clear that there were many targets and many instruments.
As interest rates reached the zero lower bound, central banks implemented unconventional policies such as quantitative easing. The distinction between monetary and fiscal policy became blurred as central banks bought government bonds. A popular view was that central banks had made political decisions to bail out banks and not the person in the street. Also, as quantitative easing failed to reflate rich country economies and increase inflation towards target rates, many policymakers argued for direct monetary financing of government spending or helicopter drops.
Ken Livingstone, a former UK Labour Party MP and former London mayor, said: “If we can get the Bank of England to fund the banking system, why don’t we get them to build us a proper broadband system … or to modernise our transport system?”
So, the idea of people’s quantitative easing was born. The argument now in rich countries is that central bank independence was invented to solve a problem, high inflation, that no longer exists. “A union of fiscal and monetary policy may become an option if the economy continues along this path,” says Joachim Els, a German economist at global bond trader Pimco.
Yaga Reddy, a former governor of the Reserve Bank of India, says: “The interface between fiscal and monetary policy is essentially a political economy issue, and the extent to which it should be apolitical is also a political economy issue.”
• Gqubule is founding director at the Centre for Economic Development and Transformation.
Correction: April 16 2019
A previous version of this column referred to Ken Livingstone as a UK Labour Party MP, he is, in fact, a former MP and former London mayor.
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