The Days Of Central Bank Independence Are Over

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It’s looking more and more as though the days of “independent” central banking are truly over.

In fact, after Turkish president Recep Tayyip Erdogan fired his country’s top monetary policy maker, and as Donald Trump continues to criticize Fed chairman Jerome Powell, “the heyday of central bank independence now lies behind us,” PIMCO’s Joachim Fels said, according to Bloomberg.

Fels continued: “Like it or not, get used to the new normal of dependent central banks, perpetually low interest rates and quantitative easing.”

Even the ECB was feeling the heat over the past weekend as the head of Germany’s ruling Christian Democratic party said that incoming ECB chief Christine Lagarde should “shift monetary policy to make it comply with the bank’s inflation-targeting mandate.”

On a country by country basis, the shift away from independence is becoming more and more clear.

In the United States, Fed Chair Jerome Powell has been a consistent punching bag for president Donald Trump, who has become the first American president to lash out at the Fed publicly in almost 30 years. Trump has continually called on Powell to cut rates and resume bond purchases, stating this past weekend that if the Fed “knew what it was doing”, it would cut rates. Trump also nominated Judy Shelton and Christopher Waller to the Fed’s board of governors – both of whom are likely to back a plan for lower rates.

Trump has also encouraged the Fed to join his trade war with China, asking it to match steps that he believes Beijing will take to offset hardships caused by US tariffs. He’s also said that China and Europe are pushing their currencies lower and that the Fed should combat this. Meanwhile, the Fed in the United States continues to claim that it ignores political considerations.

In Turkey, markets have been shaken up by President Erdogan’s views on monetary policy, which resulted in him firing Murat Cetinkaya, who was in the final year of a four-year term. Despite high inflation, Cetinkaya had overseen a pause in interest rates that Erdogan did not approve of.

In the United Kingdom, BOE governor Mark Carney has been long suspected of pandering to the bias of pro-Brexit politicians. He’s even been called the “high priest of project fear” by lawmaker Jacob Rees-Mogg. He was criticized last year after the BOE published scenarios showing that a Brexit no-deal could unleash a significant recession and collapse in the pound.

In the Euro Area, outgoing president Mario Draghi has been outspoken about attacks on Central Bank independence. Even though he is relatively well safeguarded by an EU treaty that’s difficult to change, he has still endured criticism from countries like Germany and the Netherlands over the impact of his ultra loose monetary policy.

In his home country of Italy, Deputy Premier Luigi Di Maio said he’s “poisoning the climate” with his policy. The appointment of Christine Lagarde as his successor has also prompted criticism, given that she’s not a trained economist, despite her time at the IMF being viewed as positive.

Annegret Kramp-Karrenbauer, who took over as CDU party chief from Angela Merkel last December, said last week that inflation is “well below” the ECB’s target. A spokesman later clarified her remarks to say she expects Lagarde to cautiously adjust policy as the ECB strives to achieve price stability so that it can move away from ultra-low interest rates.

In Italy, Bank of Italy Governor Ignazio Visco saw his number two Salvatore Rossi leave after the ruling populist coalition demanded that change take place at the top of the institution.

In Slovenia, Bostjan Jazbec resigned as Central Bank governor last year after coming under pressure for a 2013 bank bail out. The European Commission has sued the country for seizing ECB documents in the raid on his office and Jazbec’s successor has criticized a draft law that could leave the central bank liable for investor losses related to the bail out.

In Latvia, Governor Ilmars Rimsevics has been the target of a corrupt investigation that saw him detained at one point. After the European Court of Justice overruled his suspension, he is back at work and says that the accusations against him have been orchestrated by well-connected banks that are angered by his anti-money laundering stance.

Lithuanian central bank Governor Vitas Vasiliauskas recently survived a parliamentary resolution that called for him to quit or be dismissed for failing to cooperate with a parliamentary probe into the 2008 crisis. This resolution failed, but was backed by the prime minister.

In Greece, Yannis Stournaras, the governor of the Bank of Greece has been targeted for alleged wrongdoing involving a case involving Novartis. He claims that the allegations are to force him out, and the latest chapter in the scandal involves a leaked phone conversation between him and Alternate Health Minister Pavlos Polakis, who demanded the governor investigate loans to opposition politicians, among others.

In Sweden, the world’s oldest central bank has been criticized for having its benchmark rate remaining far below zero while the krona has weakened. Parliament is reviewing the inflation targeting regime and the finance minister, along with some politicians, have argued that policymaker should abandon its focus on price stability and look at the broader economy. Despite this, there is a consensus in the country that the regime, which is almost 3 decades old – has served the country well.

The Swiss National Bank has seen its balance sheet balloon to 120% of the country’s economic output and is often criticized for it. Lawmakers have suggested that 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. 

In South Africa, Governor Lesetja Kganyago rarely has really let a speech or interview go by without making the case for central bank independence, especially after an attempt to have the reserve bank’s mandate altered several years ago. Kganyago has fought off attempts to change the bank’s inflation targeting stance, but the institution faces more threats to its independence this year, as Bloomberg explained:

First, the ruling African National Congress may move forward on a 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 in policy, Kganyago has warned that the move could mask another attack on independence.

Secondly, Deputy Governor Daniel Mminele’s second term ended on June 30 and he retired from the central bank. There are now two vacancies on deputy governor level. While Ramaphosa has met with the central bank’s board, Kganyago and the deputy finance minister to discuss vacancies in its executive, he is yet to announce who will fill them.

In India, new central bank governor, Shaktikanta Das is somebody who will be friendlier to government requests. The country has already seen rate cuts of 50 bps this year under prime minister Narendra Modi.

Das has taken a more conciliatory approach to the banking sector, a contrast to his predecessor, who wanted to clean up the banking system and often clashed with the government about relaxing lending rules for state run banks.

Argentina has seen its bid to create an independent central bank mired in political uncertainty amidst a coming 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 has signed on, or signaled they would.

Mexico has interest rates at a 10 year high and while the President has refrained from being critical of Banxico, one of his appointees, Gerardo Esquivel, has recently called the bank too hawkish. President Lopez Obrador’s appointees will hold a majority of Banxico’s board next year. 

Finally, in Pakistan, the country’s central bank has been at the forefront of dealing with the country’s budget deficit blowout. Prime Minister Imran Khan replaced the bank’s governor in May and the central bank is now led by Reza Baqir, a former IMF official.

The country secured a $6 billion bailout from the IMF this month. The IMF wants a “strengthening” of the institution’s “operational independence and mandate.”

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