Independent central banks are under threat. Fear the possible consequences
like to say that its abstract theories lack real-world pay-offs. There is a glaring counter-example: the global rise of central-bank independence in the past 25 years. In the 1970s it was normal for politicians to manipulate interest rates to boost their own popularity. That led to a plague of inflation. And so rich countries and many poorer ones shifted to a system in which politicians set a broad goal—steady prices—and left independent central bankers to realise it.
Today this success is threatened by a confluence of populism, nationalism and economic forces that are making monetary policy political again. President Donald Trump has demanded that interest rates should be slashed, speculated about firing the boss of the Federal Reserve and said he will nominate Stephen Moore and Herman Cain, two unqualified cronies, to its board.
The fraying of central banks’ independence has several causes. One is populism. Leaders like Mr Trump combine the politician’s desire for low interest rates with a reckless urge to undermine institutions. Another is the scope of central banks’ activities, which expanded after the financial crisis. Most now hold huge portfolios of government bonds while, at the same time policing the financial industry. And the record of central banks is far from perfect.
Pressure is manifesting itself in different ways in different places. Mr Trump has launched an attack on the Fed. Although his legal authority to sack Jerome Powell, its chairman and a Trump appointee, is not clear, if he wins re-election in 2020 he will be able to nominate a new Fed chairman and two more governors. In Europe a flurry of job changes threatens to lower the calibre of decision-making at theand feed underlying disagreements.
Perhaps global inflation will rise again from its grave, in which case weaker central banks may struggle to kill it off. More likely is an economic downturn. The world economy has decelerated this year—on April 9th theThis is what makes today’s politicisation so dangerous. Technocrats face a difficult challenge. The rich world has hardly any room to cut interest rates before hitting zero, so central banks will once again have to turn to unconventional stimulus, such as bond-buying.
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