After significant political pressures, central banks mounted a multifaceted, though uncoordinated, counteroffensive last week. But their pushback could prove to be just a brief interruption to a political phenomenon that could even gain further momentum, especially if higher and more inclusive growth outcomes continue to elude so many countries.
Central bank policies are under political attack in both emerging and advanced countries. Governments, including in Russia and Turkey, seem to have become more outspoken about how these monetary institutions should implement their policies. In the U.S., the Federal Reserve’s interest rate hikes have been criticized by President Donald Trump. And in Europe, ECB President Mario Draghi and his colleagues on the Governing Council are continuously defending the bank's large-scale purchases of securities and its maintenance of negative interest rates.
And it’s not just the policies that are under fire. Legal and institutional arrangements that protect the operational autonomy of central banks are also being questioned, along with some practices. A particularly vivid example is South Africa, where the Reserve Bank has repeatedly had to fight off challenges to its ownership structure, as well as its responsibilities and tools. In the U.K., Bank of England Governor Mark Carney has been criticized by some members of Parliament for publicly giving his opinion on various Brexit scenarios.
But the central banking community appeared to successfully resist these pressures last week.
Only hours after Turkey's president, Recep Tayyip Erdogan, called interest rates a “tool of exploitation,” the country's central bank hiked rates to 24 percent from 17.75 percent, a move that went beyond consensus market expectations. The Russian central bank also surprised markets by raising rates despite both implicit and explicit government pressure to lower them.
In the U.S., Fed officials continued to make their case for tighter monetary policies. Governor Lael Brainard, usually among the most dovish voices on the Open Market Committee, stated that “the shorter-run neutral rate, rather than the longer-run federal funds rate, is the relevant benchmark for assessing the near-term path of monetary policy.” She added that “it appears reasonable to expect the shorter-run neutral rate to rise somewhat higher than the longer-run neutral rate.”
Finally, in the U.K., Carney risked the renewed wrath of some Cabinet ministers by delivering a “chilling” warning that economic chaos could follow a disorderly Brexit.
It is tempting to think of these actions as a shift in the trend toward greater actual and attempted political interference in the business of central banking. In other words, success by central banks in resisting a push for changes that would erode the flexibility and effectiveness of an essential element of the policy-making apparatus. But that conclusion would be premature.
Central banks continue to struggle with the twin realities of hard-to-explain policies and few, if any, political advocates and lobbies. Their situation gets even more tricky when they find themselves in the business of either resisting government pressures to artificially boost demand (as is the case in Russia), “taking the punch bowl away” as the economic and financial party appears to be in its later stages (in the U.S.), or adopting dramatic contractionary actions to counter currency disorder that risks widespread damage, as in Turkey.
And then there is the more generalized institutional pressure from anti-establishment and populist tides, with the related loss of public confidence in technocrats and in expert opinion in many countries.
Rather than mark a new rise of central banks, last week is more likely to be a temporary aberration. Until higher and more inclusive growth and genuine financial stability become the norm around the world, rather than the rare exception, these crucial institutions will continue to face enormous political pressures. And since they alone cannot deliver the needed economic and financial improvements, their effectiveness and reputation will remain at the mercy of the actions and whims of others.
Mohamed A. El-Erian is a Bloomberg Opinion columnist. He is the chief economic adviser at Allianz SE, the parent company of Pimco, where he served as CEO and co-CIO. His books include “The Only Game in Town” and “When Markets Collide.”
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