The job of central bankers is to maintain the value of a currency by controlling inflation. To this end, many of them are immune to political pressure from governments.
This independence, once a sacred cow in the Western world, has been increasingly questioned in recent years as central banks have supported governments when hit by the global financial crisis and then the coronavirus pandemic.
Here are some questions and answers on a topic that is rapidly moving from academia to politics and could significantly affect inflation in decades to come.
WHAT ARE WE PASSING?
The favorite to become Britain’s next prime minister, Liz Truss, has promised to review the Bank of England’s mandate, possibly including its ability to set interest rates without government interference.
It came after Britain’s central bank on Thursday raised interest rates to the highest since 1995, while forecasting a long recession and double-digit inflation – a double whammy for household finances.
BoE Governor Andrew Bailey is not alone. Central bankers around the world are under fire from politicians for failing to predict and prevent the current wave of high inflation.
WHAT IS CENTRAL BANK INDEPENDENCE AND WHY IS IT IMPORTANT?
A central bank is independent if it can implement policies, such as setting interest rates or printing money, without interference from elected officials or the private sector.
The idea is that governments would rely on the central bank to fuel a boom when they need re-election and to withhold interest rate hikes that would be too painful for their constituents.
As a result, the economy would overheat and inflation would rise too high until an inevitable collapse.
Instead, central bankers should turn their attention to inflation, sometimes coupled with another goal such as full employment, and let politicians deal with issues of redistribution and equity.
DOES IT WORK?
Data shows that central banks that were more independent, such as those in Germany, Austria and Switzerland, had lower inflation rates between 1970 and 1999 than central banks that were more closely tied to their governments, such as those of Norway, New Zealand and Spain.
But this relationship weakened in the new millennium, when new forces came into play, such as greater globalization and the introduction of the euro.
However, the alternative is difficult to digest.
In Argentina, where the central bank is firmly under the control of the president, inflation is approaching triple digits, the peso has lost half its value in less than a year and a half and citizens are facing restrictions they want to buy or sell currencies. goods abroad.
ARE MOST CENTRAL BANKS INDEPENDENT?
Most central banks in the developed world and many emerging banks are formally independent, although to varying degrees.
In practice, the line between central banks and governments can be blurred and, in some cases, little more than a polite fiction.
Turkey’s central bank is formally independent, but that hasn’t stopped the country’s president, Tayyip Erdogan, from firing governor after governor if he doesn’t comply with his wishes.
Even in the United States and Europe, central bankers are systematically accused of bankering states with massive purchases of sovereign debt, which have become commonplace since the global financial crisis.
While these “quantitative easing” programs are always justified by the need to raise inflation when it is too low, this means that central bankers work hand in hand, rather than at a distance, with their governments. .
Nowhere has this been more evident than in Japan, where the central bank owns half of the national debt.
HAS INDEPENDENCE FROM THE CENTRAL BANK ALWAYS BE THE STANDARD?
No, until recently central banks were an arm of government.
The idea of a fully independent central bank was mooted in 1962 by economist Milton Friedman, who rejected it on the grounds that it would not survive the first “real conflict” with the government.
The Federal Reserve has enjoyed operational independence since 1951, but presidential interference lasted until at least the 1970s.
Then-Fed Chairman Arthur Burns came under pressure to maintain lenient policy to help US President Richard Nixon win re-election.
The ensuing decade-long period of high inflation, triggered by an oil shock that Burns’ Fed tried to cushion, reinforced the idea of central bank independence.
This idea took off in the 1980s and exploded in the 1990s when many central banks, including the Bank of England, were reformed and others were established in what was once the bloc. ‘East.
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