The global financial and economic crisis has weakened central bank independence, a report suggests, as bankers’ increased responsibilities have earned them higher profiles and politicised their work.
Most of the world’s central banks have in recent decades been granted power to set monetary policy as they see fit, rather than bend to the demands of politicians to lower interest rates before elections.
But the downturn has weakened their operational independence as it has left them filling in for governments unable, or unwilling, to prevent an economic slowdown, a report, due to be published on Tuesday, has said.
“Today, in many countries, [central bank heads] are as well known as the government leaders they serve, and their words and deeds are the subject of heated debate in newspapers, bars and taxicabs,” said the report, co-authored by Ernst & Young, a consultancy, and OMFIF, a forum for central bankers and the private sector.
“From acting largely behind the scenes, central banks have now entered the political arena in a very public manner. Whether as principals, agents or advisers, it is unimaginable that there would no longer be a strong political dimension to the activities of central banks.”
Political pressure is likely to mount in the years ahead as central banks take on more responsibility for stabilising financial markets, the report suggested. Stephen Cecchetti, head of the economics and monetary department of the influential Bank for International Settlements, the so-called central bankers’ bank, and one of 50 people interviewed for the report, said: “As they are given more responsibility, they may end up with less independence.”
Others interviewed for the report include Charles Bean, deputy governor at the Bank of England; Ewald Nowotny, head of Austria’s central bank and a member of the European Central Bank’s governing council; and Donald Kohn, a former vice chair of the Federal Reserve.
Central banks in the world’s advanced economies have all come under increased political pressure. In recent weeks, Shinzo Abe, Japan’s opposition leader and favourite to become the next prime minister, has attacked the Bank of Japan for failing to do enough to fight deflation in the world’s third-largest economy.
The UK Treasury this month apportioned £37bn of the gains from the BoE’s asset purchase programme, known as quantitative easing. This amounts to monetary stimulus because it cuts government borrowing, leaving more cash to be spent on other types of financial assets.
Ben Bernanke, the chair of the Federal Reserve, has faced criticism from some in the Republican Party over the Fed’s crisis response.
Mario Draghi, ECB president, and Jens Weidmann, his counterpart at Germany’s Bundesbank, have fought over Mr Weidmann’s concerns that ECB policy has allowed governments to shirk their responsibilities at the expense of central banks’ independence.