Cen­tral Banks’ in­de­pen­dence un­der threat

Po­lit­i­cal pres­sure mounts against in­fla­tion-tar­get­ing

Finweek English Edition - - Economic trends & analysis - BY HOWARD PREECE howardp@fin­week.co.za

THERE ARE mount­ing de­mands on many cen­tral banks in­ter­na­tion­ally to ease up on anti-in­fla­tion stances.

“Po­lit­i­cal pres­sure is def­i­nitely in­ten­si­fy­ing,” says Steven Roach, chief econ­o­mist of Morgan Stan­ley.

He adds: “If cen­tral bankers end up run­ning po­lit­i­cally com­pro­mised mone­tary poli­cies, ul­ti­mately you’ll get more in­fla­tion.”

Lau­rence Meyer, a for­mer gov­er­nor of the US Fed­eral Re­serve, notes: “The dan­ger here is to in­fla­tion ex­pec­ta­tions. Mar­ket par­tic­i­pants will have less con­fi­dence in cen­tral bank in­de­pen­dence.”

Down the line – es­pe­cially as/when global eco­nomic growth eases ap­pre­cia­bly but ris­ing prices hold their trend lines – this could well have ma­jor con­se­quences.

The usu­ally dan­ger­ous siren songs call­ing for “ex­tra-cheap money” could ring out widely again.

So far, how­ever, this de­vel­op­ment has had at most a mod­est prac­ti­cal ef­fect on mone­tary poli­cies in many coun­tries – and none at all in the great ma­jor­ity.

But there have cer­tainly been some im­por­tant straws in the wind. • The most overt big-league ex­am­ple is Ja­pan. The cen­tral bank of Ja­pan un­ex­pect­edly left the bench­mark equiv­a­lent of the bank rate un­changed this month at 0,25%.

This was af­ter chief cabi­net sec­re­tary Ya­suhisa Shiozaki di­rectly told BoJ gov­er­nor Toshi­hoko Fukui that the Bank “should con­sider the gov­ern­ment’s view when set­ting rates”. • In the United States, the Democrats have taken con­trol of Congress. Their mus­cle-flex­ing very much ex­tends into the eco­nomic arena, even if all the high­pro­file fo­cus now is on Iraq.

The new chair­man of the House of Rep­re­sen­ta­tives’ Fi­nan­cial Ser­vices Com­mit­tee, Bar­ney Frank, has al­ready warned US Fed­eral Re­serve chief Ben Ber­nanke that his party will not ac­cept any change that gives in­fla­tion-re­straint more em­pha­sis than eco­nomic growth.

A Bloomberg news re­port quotes Frank: “That’s not go­ing to hap­pen when we are in power. And we can pre­vent it.”

An­a­lysts reckon this could well make it im­pos­si­ble for Ber­nanke to carry through his long-promised com­mit­ment to in­tro­duce for­mal in­fla­tion tar­get­ing (as SA has, al­beit rather loosely) in the US.

The Euro­pean Cen­tral Bank has also ef­fec­tively heeded de­mands from France and some other Euroland mem­ber-na­tions to throt­tle back on in­ter­est rate rises.

That in turn, in­ci­den­tally, has led to much wan­ing con­fi­dence in the ECB in Ger­many, cer­tainly in the dom­i­nant for­mer West Ger­many where strict con­trol of in­fla­tion has long en­joyed mass pop­u­lar sup­port.

The fact that the main­stream can­di­dates in the com­ing French pres­i­den­tial elec­tion – Ni­co­las Sarkozy (con­ser­va­tive) and Se­go­lene Royal (so­cial­ist) – are both press­ing the ECB to fo­cus more on growth and less on in­fla­tion fu­els Ger­man con­cerns. But we must not over­state the is­sues. Sarkozy, the strong favourite now to suc­ceed Jac­ques Chirac to the pres­i­dency, will surely prove quite dif­fer­ent in of­fice than on the po­lit­i­cal hus­tings.

Re­mem­ber, too, that to­wards the end of 2006 the Or­gan­i­sa­tion for Eco­nomic Co-op­er­a­tion and De­vel­op­ment, a sup­posed bas­tion of fi­nan­cial or­tho­doxy, urged Bri­tain to leave the bank rate un­changed at 5,00%.

In Jan­uary, how­ever, the Bank of Eng­land’s mone­tary pol­icy com­mit­tee (MPC) – which con­tains sev­eral mone­tary “per­mis­sives” – voted to push the rate up to 5,25%.

Vi­tally, in the US the Fed is in­deed di­rectly charged both with con­tain­ing in­fla­tion (no pre­cise level stip­u­lated) and cre­at­ing a fi­nan­cial en­vi­ron­ment con­ducive to growth and job cre­ation.

Crit­i­cally, too, the Fed has nearly al­ways ac­cepted that it has to carry broad po­lit­i­cal and pub­lic opin­ion with it.

The leg­endary Alan Greenspan was a Repub­li­can ap­point­ment – but he was soon held in as much es­teem among Democrats as among his orig­i­nal back­ers.

Frank has also put for­ward a view that I have some agree­ment with.

He said, ac­cord­ing to Bloomberg: “There are peo­ple in this coun­try who think the Fed should some­how be above democ­racy. Heaven for­bid, they say, that any­body in elected of­fice should talk about whether or not we need a 25 point in­crease in in­ter­est rates. That’s sacro­sanct.”

Frank ob­served: “No, it isn’t. It’s pub­lic pol­icy.”

Greenspan al­ways un­der­stood that he could only see the US through dif­fi­cult times when sig­nif­i­cant in­ter­est rate rises were needed if he had first demon­strated his clear com­mit­ment to growth and jobs.

Ber­nanke is now hav­ing to learn that les­son for him­self.

There are dis­putes, nat­u­rally, about how much po­lit­i­cal pres­sur­ing and in­ter­fer­ence there is in SA with the Re­serve Bank.

On the sur­face, Gov­er­nor Tito Mboweni ap­pears to go his own way.

In prac­tice, though, he too must some­times trim his sails to the wind.

Per­haps the clas­sic re­minder of where power re­ally lies was in the My­burgh Com­mis­sion set up in 2002 by Pres­i­dent Thabo Mbeki to see whether lo­cal or for­eign banks had vi­o­lated SA ex­change con­trols and con­spired against the rand.

The com­mis­sion re­ported in the neg­a­tive – but its very ex­is­tence was a snub to Mboweni.

It re­flected the hard fact that in SA, as al­most ev­ery­where, cen­tral bank in­de­pen­dence is in the crunch sub­ject to po­lit­i­cal rule.

Dif­fi­cult to in­tro­duce for­mal in­fla­tion tar­get­ing. Ben Ber­nanke

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