This week finance ministers and central bank officials from around the world will converge on Washington for the spring meetings of the World Bank and the International Monetary Fund. Discussions of monetary policy normalization are leading this year’s expansive schedule.
One notable item missing from the agenda is discussion of a worrying trend among the world’s advanced and emerging economies: diminishing central bank independence.
Over the past half-decade, leaders around the world have been criticized for perceived attempts to undermine the independence of their countries’ central banks. For instance:
- Since her election in 2010 Brazilian President Dilma Rousseff has battled to reduce the country’s historically high interest rates while refusing to grant the Banco do Brazil more independence. When the bank lowered its benchmark rate to near all-time lows in 2012, critics claimed that political pressure was behind the move.
- Turkish Prime Minister Recep Tayyip Erdogan has openly criticized the “interest rate lobby” in his country, a group he says has conspired to keep interest rates high and hold back Turkey’s economic growth. In the meantime, government ministers have chastised the bank for its conservativeness, so much so that the bank felt compelled to outline its philosophy of independence in a booklet for investors.
- Earlier this year, Nigerian President Goodluck Jonathan suspended the Central Bank of Nigeria’s governor after he exposed $20 billion in corruption at the state-owned oil company. This came after mounting claims that Jonathan’s administration has been the most corrupt in over a decade.
- In Japan, Prime Minister Shinzo Abe has also been accused of interfering with the Bank of Japan’s independence, calling for “unlimited” monetary expansion even before he was elected in 2012. Since then, Abe has appointed a new governor of the bank and successfully pressured policymakers into adopting a 2 percent inflation target, calling the move a “monetary policy regime change.”
All of these moves are worrying. An independent central bank prevents lawmakers from monetizing fiscal policy by printing money to fund deficits. Political interference can also encourage easy money at election time. Actions like this can lead to runaway inflation and government spending.
With the Federal Reserve continuing its taper, world monetary policy is sailing into uncharted waters. Policymakers gathered in Washington this week should take note.
Central bank independence is vital to long-term economic stability. Interfering with such independence at a time of global monetary policy uncertainty could exacerbate a global hangover from the Fed’s easy money. The world needs central banks that respond to market realities, not political ones.