Pop­ulism is Shak­ing the Ed­i­fice of Cen­tral Bank In­de­pen­dence

The Economic Times - - Finance & Commodities -

Lon­don: As pop­ulism grips Europe, the US and else­where, there are few tar­gets as ripe for po­lit­i­cal as­sault as the in­sti­tu­tions stuffed with un­elected tech­nocrats wield­ing the power to af­fect the eco­nomic fate of mil­lions.

That means you, cen­tral bankers. And the ar­rows have started to fly. In the US, the Fed­eral Reserve’s free­dom to set in­ter­est rates is al­ready the tar­get of House Re­pub­li­cans push­ing for a rules-based pol­icy. Across the At­lantic, the Euro­pean Cen­tral Bank is un­der im­mense pres­sure to tighten pol­icy at Ger­many’s be­hest. In In­dia, a dra­matic mon­e­tary re­form has hap­pened largely over the cen­tral bank’s head. Mon­e­tary of­fi­cials are be- ing lam­basted by politi­cians feed­ing on anti-es­tab­lish­ment sen­ti­ment, and some in­sti­tu­tions have ef­fec­tively given up the legally-man­dated au­ton­omy that they pre­vi­ously en­joyed. It is con­ceiv­able that gov­ern­ments may soon want greater con­trol of rates and bal­ance sheets, while push­ing other po­lit­i­cal tasks, like amend­ing in­come and wealth in­equal­ity, onto cen­tral banks’ to-do lists.

“In any con­flict with elected leg­is­la­tures cen­tral banks are go­ing to lose, and the perime­ter of in­de­pen­dence is still a very, very open ques­tion,” said Charles Good­hart, a pro­fes­sor at the Lon­don School of Eco­nom­ics and a Bank of Eng­land pol­icy maker af­ter it was given the power to set rates in­de­pen­dently 20 years ago. “It’s cer­tainly pos­si­ble to go back to a world where the short-term in­ter­est rate is set by gov­ern­ments.” That seems like a revo­lu­tion­ary thought. But things haven’t al­ways been the way they are now.

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