Central bank independence under increasing threat, says Fitch

Slowing global growth could threaten central bank independence and bring calls to expand remits beyond inflation targeting, according to Fitch Ratings. “Investors would be wise to consider the potential implications of mounting political pressures for greater contributions from monetary policy to support economic growth, possibly by unconventional means,” said James McCormack, Global Head of Sovereign Ratings at Fitch. Central banks “are being increasingly viewed by governments as ripe for a broadening of their remit.”

Central banks in developed economies are hitting pause, or even rewinding, their plans to tighten monetary policy as growth slows. What’s more, they have little ammunition in the traditional sense to combat any downturn. IMF managing director Christine Lagarde warned last week that the loss of momentum leaves the world economy in a “precarious” position.

In the US, the debate over Modern Monetary Theory shows the mounting pressure on central banks, McCormack said. While it probably won’t be adopted any time soon as a policy, it shows that calls for institutions to do more will continue to grow, he said. MMT’s proponents reject the modern consensus that economies should be steered primarily by the raising and lowering of interest rates, and say that the central bank should create base money to do the bidding of its treasury.

In the UK, the opposition Labour Party has also floated the idea of expanding the Bank of England’s remit to include a productivity target. Policymakers say it doesn’t have the tools for that.