Independence of central banks in question


RUMBLINGS of concern over central bank independence have erupted into full-blown debates on attempts by populist leaders to influence decision-making at central banks.

Certainly worried about central bank independence is European Central Bank president Mario Draghi, who in a rare move, voiced his concern “in the most important jurisdiction in the world”.

Long considered the global role model for central banks especially in terms of apolitical policy-making, the Federal Reserve (Fed) is under attack by President Donald Trump for having “mistakenly raised interest rates”.

The Fed had raised rates nine times since 2015, the last seven during Trump’s presidency.

After the sugar rush from short-term US fiscal stimulus, which was accompanied by rapid rate hikes, there are calls for rate cuts and re-flooding of markets with monetary stimulus called quantitative easing.

On top of that, a global slowdown triggered by a trade war between the United States and China, which is threatening to spill over to the European Union, has dented confidence and business sentiment.

Cries for help now converge on the Fed, which increasingly looks like a political punchbag, with Trump even wanting to nominate those who are aligned to him onto the board.

There are other leaders in this populist assault on central banks, said The Washington Post.

Turkish President Recep Tayyip Erdogan had issued a presidential decree last year that allowed him to directly appoint central bank leaders.

Indian Prime Minister Narendra Modi has succeeded in finding a central bank governor who could, apparently, help him in the ongoing elections; he has cut rates twice.

In the Philippines, the newly-appointed head of the central bank is regarded to be a close political ally to the president.

The leadership of the Bank of Italy is under attack by the ruling coalition which is also questioning the bank’s stewardship of US$100bil of gold reserves.

In South Africa, there are upcoming changes possibly in the structure and ownership of the central bank which has been private and “fiercely autonomous”.

The Fed may have been too aggressive in raising rates but constant hammering of this influential central bank could erode its credibility and affect the value of the dollar, a popular global currency.

Investors’ perception of a strong central bank may change if it is felt that the bank is operating on short-term plans to juice the economy and to boost re-election chances.

The concern is that political considerations may prevent central bankers from doing their job to pierce bubbles where historically, the mopping up of burst bubbles had been messy.

We need no reminder that the bursting of the subprime bubble had nearly triggered a financial Armageddon worldwide between 2007 and 2009.

The real estate bubble in the 2000s was fuelled largely by easy mortgage approvals; home prices had begun tumbling in certain parts of the United States in 2006, and by 2008, there was a full-blown economic meltdown.

Banks that had too much money tied to securities backed by these shaky loans, went bust.

The earlier bursting of the huge dotcom bubble in 2000 had led to the recession in 2001.

The bubble that was formed by the dotcom stockmarket surge from 1995, was fed by easy money, exuberance and speculation on future earnings.

Over the five years, the Nasdaq exploded from under 1,000 to above 5,000; the crash saw the Nasdaq tumble 77% from its peak of 5,048.62 on March 10, 2000, to 1,139.90 on Oct 4, 2002.

In the recession that followed the tech sell-off, the Bay Area in California which was home to Silicon Valley, the global centre for high technology, saw the highest unemployment rates in decades.

There is currently a bubble on Wall Street that needs to be pricked but slowing growth is prompting a pause in rate hikes and calls for rate cuts.

This dilemma partly arises from the Fed having kept rates too low for too long.

“By the time the concurrent data showed a boom was in full swing, it would not raise rates and when it did move, the economy had gone into a speculative stage.

“Then, the Fed kept raising rates. By the time it saw evidence of the effects of its rate hikes and stopped, a slowdown cycle was already firmly set in place,’’ said Pong Teng Siew, head of research, Inter-Pacific Securities.

While central banks should not compromise on their independence in ensuring financial and price stability, the timing and accuracy of their actions is important.

“If they are behind or ahead of the curve, it can lead to unwarranted effects on the economy,’’ said Lee Heng Guie, executive director, Socio Economic Research Center.

Columnist Yap Leng Kuen notes that central banks must be independent and also make the right moves.