© Reuters. Powell Just One Global Central Banker Under Political Pressure
(Bloomberg) — Federal Reserve Chairman Jerome Powell is not alone among central bankers in feeling political heat.
The independence that monetary policy makers have traditionally enjoyed from politicians is under threat worldwide as much as it is in the U.S., where Powell repeatedly runs into tweeted attacks from President Donald Trump.
Central banks from Turkey to India are regularly under pressure and even the Bank of England and European Central Bank aren’t immune to attacks from elected critics. Unsurprisingly, the aim of the politicians in most cases is for their central banks to favor supporting economic growth over fighting inflation.
The interference may have a cost though. Financial markets risk being unnerved if investors suspect policy makers will bow to the lobbying and take their eye off inflation. That could push up long-term interest rates. Conversely, officials might feel the need to stamp their authority by raising short-term borrowing costs higher than they would otherwise.
A study in the 1990s by economists Alberto Alesina and Lawrence Summers concluded that independent central banks were better at controlling inflation without causing damage to output or employment.
“If the central bank is not independent, then people may well think that monetary policy decisions follow political advice rather than objective assessment of the economic outlook,” European Central Bank President Mario Draghi said in April. “I’m certainly worried about central bank independence in other countries.”
Here’s our QuickTake on why monetary institutions are becoming political punching bag and a recent analysis by Bloomberg Economics. What follows is a country-by-country guide:
Powell has endured increasingly harsh criticism from Trump, the first American president in almost three decades to lash out publicly at the Fed. In remarks that seem aimed at setting the Fed up to take the blame if the economy falters as he seeks re-election, Trump has called on the central bank to slash interest rates and resume bond purchases. In December, Bloomberg News reported Trump had even discussed firing Powell. That’s despite solid U.S. economic growth driving unemployment to the lowest in half a century.
The president also has sought to install political allies to the Fed’s Board, though two recent picks — Herman Cain and Stephen Moore — both withdrew when even fellow Republicans in the Senate balked. Breaking a long-standing norm of international economic diplomacy, Trump also urged the Fed to join his trade war with China, calling on it to “match” steps he said Beijing will take to offset the hardship caused by tariffs. U.S. central bankers say they ignore political considerations and focus on their mandate for stable prices and maximum employment. They have, however, paused their rate-hike campaign.
BOE Governor Mark Carney has long faced accusations of bias from pro-Brexit politicians, who say he is overly negative about Britain’s future outside the European Union. Lawmaker Jacob Rees-Mogg dubbed him the “high priest of project fear.” Carney denies the charge, but was assailed again last year after the BOE published scenarios showing that a no-deal Brexit could unleash a savage recession and collapse in the pound. With his departure due in January, there is speculation that the Brexit views of any candidate to replace him may play a role in determining a successor.
At the ECB, Draghi recently opened up about his concerns on attacks on independence. His own institution is relatively well safeguarded by an EU treaty that is hard to change, but he’s been lambasted in countries such as Germany and the Netherlands over the impact of his ultra-loose monetary policy on savers. He’s also been criticized in his home of Italy — Deputy Premier Luigi Di Maio said he’s “poisoning the climate” by weighing into the debate about the nation’s budget.
Italian Governor Ignazio Visco, who overcame a bruising public debate in 2017 to win a second term, saw his number two Salvatore Rossi leave his job after the ruling populist coalition demanded change at the top of the institution.
Bostjan Jazbec resigned as Slovenian governor last year after coming under pressure for his role in a 2013 bank bailout. The European Commission has sued the country for seizing ECB documents in a raid on his office and a local court moved to inspect central-bank books in relation to the probe. Jazbec’s successor, Bostjan Vasle, has slammed a draft law that could leave the central bank liable for investor losses from the bailout, saying it would break the rules on monetary financing.
Latvian Governor Ilmars Rimsevics is the target of a corruption investigation that saw him briefly detained. He’s back at work after the European Court of Justice overruled his suspension, in a case that pitted the ECB against Latvian law enforcement. Rimsevics says the accusations against him are orchestrated by well-connected banks angered by his anti-money laundering efforts.
Lithuanian Governor Vitas Vasiliauskas has just survived a parliamentary resolution that called on him to quit or be dismissed for allegedly not cooperating adequately with a parliamentary probe into the 2008 crisis. The resolution failed, despite being backed by the prime minister.
Yannis Stournaras, the governor of the Bank of Greece, has been targeted several times for alleged wrongdoings including a case involving Swiss drugmaker Novartis AG — which he says was concocted to force him out — and accounts of inaccuracies in his property declarations. The latest scandal concerns a leaked phone conversation between the governor and Alternate Health Minister Pavlos Polakis, who demanded the governor probe loans to opposition politicians, parties and media.
The Riksbank, the world’s oldest central bank, has come under intense criticism as its key rate remains stuck far below zero and the krona has sunk. Parliament is reviewing the inflation targeting regime, and some politicians, including the finance minister, argue that policy makers should abandon their strict focus on price stability and look more at the broader economy.
Any changes in the mandate will probably be muted, given there’s a large consensus that the almost three-decade-old regime overall has served Sweden well. The review was also told not to come with recommendations for a so-called dual mandate, but there’s wiggle room within the current framework to put more emphasis on growth and the labor market.
The Swiss National Bank is frequently in the crosshairs, partly because its balance sheet has ballooned to 120% of economic output. Lawmakers regularly suggest its reserves be turned into a sovereign wealth fund and national plebiscites have — unsuccessfully — targeted its gold holdings and even questioned the fundamentals of banking.
Since an attempt by South Africa’s anti-graft ombudsman two years ago to have the Reserve Bank’s mandate altered, Governor Lesetja Kganyago rarely lets a speech or interview go by without making the case for central bank independence. He successfully fought off the attempts to change the inflation-targeting remit, but the institution faces at least two more possible threats to its independence this year.
First, the ruling African National Congress may move forward on its plan to nationalize the Reserve Bank, one of only a handful of central banks in the world still owned by private shareholders. While the shareholders have no say over policy, Kganyago has warned that the move could mask another attack on independence.
President Cyril Ramaphosa also has to decide who he wants to head the Reserve Bank. Kganyago’s first term runs out in November and Deputy Governor Daniel Mminele’s second five-year term ends next month. Both can be reappointed and Kganyago has said he would be willing to stay. With economic growth below 2% since 2013, there may be pressure on Ramaphosa to consider central bank leaders who will take a less harsh stance on inflation and help to boost output.
India’s new central bank governor, Shaktikanta Das, is seen as someone more amenable to the government’s requests on relaxing tough regulations imposed on struggling banks and easing monetary policy to boost growth. He succeeded Urjit Patel, who resigned after a public row with Prime Minister Narendra Modi’s government, and has already overseen 50 basis points of rate cuts this year.
Das has also taken a more conciliatory approach toward the banking sector and businesses, many of whom are struggling to repay loans. Patel wanted to clean up the banking system, and repeatedly clashed with the government about relaxing lending rules for some weak state-run banks. Das has eased those curbs in recent months.
While President Andres Manuel Lopez Obrador has stayed away from criticizing Banxico despite the fact that interest rates are at a 10-year-high, one of his appointees, Gerardo Esquivel, took issue with a recent central bank statement, calling it too hawkish. By the end of next year, Lopez Obrador’s appointees will hold a majority of Banxico’s board, and the bank may lean toward helping the president reach his growth goals.
Argentina’s bid to create an independent central bank — something the IMF wants as part of its loan agreement with the country — is mired in political uncertainty as the nation faces a presidential election in October. President Mauricio Macri sent a bill to Congress in March, but its prospects aren’t clear amid the tight electoral race and Argentina’s recession. He proposed last month that all election candidates sign a 10-point plan that includes a commitment to an independent central bank. So far, none of Macri’s potential opponents have signed on or signaled they would.
One monetary institution may actually get a break from politics. Brazil’s central bank has enjoyed de-facto autonomy on interest rates, but no legal guarantees protecting its board against political meddling. That may change if Congress approves President Jair Bolsonaro’s bill granting formal autonomy to the institution. According to the proposal, expected to be voted on this year, the central bank chief could no longer be fired by the president, and board members would have four-year terms approved by the Senate.
The central bank has been at the forefront of dealing with the nation’s budget deficit blowout by the most aggressive rate hikes and currency devaluation in Asia. Its independence has come into question after Prime Minister Imran Khan replaced the governor in May as part of an overhaul of his economic team for not performing. Late last year, he announced plans to make the central bank report any currency adjustments to a committee after a fifth devaluation of the rupee in 2018.
The central bank is now led by Reza Baqir, a former IMF official. Pakistan this month secured a $6 billion bailout from the fund, which wants a “strengthening” of the institution’s “operational independence and mandate.”
Turkish markets have been rattled repeatedly by President Recep Erdogan’s forceful opinions on monetary policy, with the president describing himself as “an enemy of interest rates.” Erdogan tightened his grip on power and at times led investors to question the central bank’s independence because of his calls for lower interest rates even amid runaway inflation.
He revived his unorthodox theory on the relationship between prices and the cost of money days before municipal elections in March, saying inflation will slow if Turkey lowers interest rates. Aside from that, he has mostly kept mum since warning after an increase in September that “there is a limit” to his patience.
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