Populism is Shaking the Edifice of Central Bank Independence
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.