Central Banks’ independence under threat
Political pressure mounts against inflation-targeting
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