(Bloomberg) -- The “heyday of central bank independence now lies behind us,” Pacific Investment Management Co.’s Joachim Fels declared Saturday.
He is not alone among economists in delivering the last rites after Turkish President Recep Tayyip Erdogan fired his country’s top monetary policy maker and President Donald Trump continued to attack Federal Reserve Chairman Jerome Powell for raising interest rates too high.
Even the European Central Bank, which is generally viewed as the institution most protected from politics, felt a bit of heat over the weekend as the head of Germany’s ruling Christian Democratic party said incoming ECB chief Christine Lagarde should shift monetary policy to make it comply with the bank’s inflation-targeting mandate.
“Like it or not, get used to the new normal of dependent central banks, perpetually low interest rates and quantitative easing,” Fels, Pimco’s global economic adviser, said in a report.
Here are links to our QuickTake on why monetary institutions are becoming political punching bags, and a recent analysis by Bloomberg Economics.
What follows is a country-by-country guide:
Powell has endured increasingly harsh criticism from Donald Trump, the first American president in almost three decades to lash out publicly at the Fed. In remarks that seem aimed at setting the Fed up to take the blame if the economy falters as he seeks re-election, Trump has called on the central bank to slash interest rates and resume bond purchases. On Sunday, Trump said if the Fed “knew what it was doing” it would cut its benchmark rate. Last week he nominated economists Judy Shelton and Christopher Waller to seats on the Fed’s board of governors. Both are thought likely to back lower interest rates, and a person familiar with the matter said either may be in line for the Fed’s top job at some point.
Breaking a long-standing norm of international economic diplomacy, Trump also urged the Fed to join his trade war with China, calling on it to “match” steps he said Beijing will take to offset the hardship caused by tariffs. He’s also said China and Europe are pushing their currencies lower and the Fed should do more. U.S. central bankers say they ignore political considerations and focus on their mandate for stable prices and maximum employment.
Turkish markets have been rattled repeatedly by President Erdogan’s forceful opinions on monetary policy, which culminated in the firing Saturday of Murat Cetinkaya, whose four-year term was due to end in 2020. Cetinkaya had overseen a pause in interest rates that lasted for more than nine months, despite high inflation. But Erdogan, who has called himself an “enemy of interest rates,” told lawmakers from his ruling party that politicians and bureaucrats all need to get behind his conviction that higher rates cause inflation. Deputy Governor Murat Uysal was named as a replacement, but the lira dropped.
BOE Governor Mark Carney has long faced accusations of bias from pro-Brexit politicians, who say he is overly negative about Britain’s future outside the European Union. Lawmaker Jacob Rees-Mogg dubbed him the “high priest of project fear.” Carney denies the charge, but was assailed again last year after the BOE published scenarios showing that a no-deal Brexit could unleash a savage recession and a collapse in the pound.
At the ECB, outgoing president Mario Draghi recently opened up about his concerns on attacks on independence. His own institution is relatively well safeguarded by an EU treaty that is hard to change, but he’s been lambasted in countries such as Germany and the Netherlands over the impact of his ultra-loose monetary policy on savers. He’s also been criticized in his home country, Italy: Deputy Premier Luigi Di Maio said he’s “poisoning the climate” by weighing into the debate about the nation’s budget. The appointment of Christine Lagarde as Draghi’s successor has also prompted criticism, given she was a former finance minister and not a trained economist, though her helming of the International Monetary Fund is viewed as a plus. But 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.
Bank of Italy Governor Ignazio Visco, who overcame a bruising public debate in 2017 to win a second term, saw his number two Salvatore Rossi leave his job after the ruling populist coalition demanded change at the top of the institution.
Bostjan Jazbec resigned as Slovenian central bank governor last year after coming under pressure for his role in a 2013 bank bailout. The European Commission has sued the country for seizing ECB documents in a raid on his office and a local court moved to inspect central-bank books in relation to the probe. Jazbec’s successor, Bostjan Vasle, has slammed a draft law that could leave the central bank liable for investor losses from the bailout, saying it would break the rules on monetary financing.
Latvian Governor Ilmars Rimsevics is the target of a corruption investigation that saw him briefly detained. He’s back at work after the European Court of Justice overruled his suspension, in a case that pitted the ECB against Latvian law enforcement. Rimsevics says the accusations against him are orchestrated by well-connected banks angered by his anti-money-laundering efforts.
The Lithuanian central bank governor, Vitas Vasiliauskas, recently survived a parliamentary resolution that called on him to quit or be dismissed for allegedly failing to cooperate adequately with a parliamentary probe into the 2008 crisis. The resolution failed, despite being backed by the prime minister.
Yannis Stournaras, the governor of the Bank of Greece, has been targeted several times for alleged wrongdoing including a case involving Swiss drugmaker Novartis AG -- which he says was concocted to force him out -- and accounts of inaccuracies in his property declarations. The latest scandal concerns a leaked phone conversation between the governor and Alternate Health Minister Pavlos Polakis, who demanded the governor probe loans to opposition politicians, parties and media.
The Riksbank, the world’s oldest central bank, has been criticized as its benchmark rate remains stuck far below zero and the krona has weakened. Parliament is reviewing the inflation targeting regime, and some politicians, including the finance minister, argue that policy makers should abandon their strict focus on price stability and look at the broader economy.
Any changes in the mandate will probably be muted, given there’s a large consensus that the almost three-decade-old regime overall has served Sweden well. The review was also told not to come back with recommendations for a so-called dual mandate, but there’s wiggle room within the current framework to put more emphasis on growth and the labor market.
The Swiss National Bank is frequently in the cross-hairs, partly because its balance sheet has ballooned to 120% of economic output. Lawmakers regularly suggest 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.
Since an attempt by South Africa’s anti-graft ombudsman two years ago to have the Reserve Bank’s mandate altered, Governor Lesetja Kganyago rarely lets a speech or interview go by without making the case for central bank independence. He successfully fought off attempts to change the inflation-targeting remit, but the institution faces at least two more possible threats to its independence this year.
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.
India’s new central bank governor, Shaktikanta Das, is seen as someone more amenable to the government’s requests on relaxing tough regulations imposed on struggling banks and easing monetary policy to boost growth. He succeeded Urjit Patel, who resigned after a public row with Prime Minister Narendra Modi’s government, and has already overseen rate cuts of 50 basis points this year.
Das has also taken a more conciliatory approach toward the banking sector and businesses, many of which are struggling to repay loans. Patel wanted to clean up the banking system, and repeatedly clashed with the government about relaxing lending rules for some weak state-run banks. Das has eased those curbs in recent months.
The central bank then took another hit when Deputy Governor Viral Acharya, one of its most outspoken officials, unexpectedly announced in June that he was standing down.
While President Andres Manuel Lopez Obrador has stayed away from criticizing Banxico despite interest rates at a 10-year-high, one of his appointees, Gerardo Esquivel, took issue with a recent central bank statement, calling it too hawkish. By the end of next year, Lopez Obrador’s appointees will hold a majority of Banxico’s board, and the bank may lean toward helping the president reach his growth goals.
Argentina’s bid to create an independent central bank -- something the IMF wants as part of its loan agreement with the country -- is mired in political uncertainty as the nation faces a 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.
One monetary institution may actually get a break from politics: Brazil’s central bank has enjoyed de-facto autonomy on interest rates, but no legal guarantees protecting its board against political meddling. That may change if Congress approves President Jair Bolsonaro’s bill granting formal autonomy to the institution. According to the proposal, expected to be voted on this year, the central bank chief could no longer be fired by the president, and board members would have four-year terms approved by the Senate.
The central bank has been at the forefront of dealing with the nation’s budget deficit blowout by the most aggressive rate hikes and currency devaluation in Asia. Its independence has come into question after Prime Minister Imran Khan replaced the governor in May as part of an overhaul of his economic team for poor performance. Late last year, he announced plans to make the central bank report any currency adjustments to a committee after a fifth devaluation of the rupee in 2018.
The central bank is now led by Reza Baqir, a former IMF official. Pakistan this month secured a $6 billion bailout from the fund, which wants a “strengthening” of the institution’s “operational independence and mandate.”
(Updates South Africa section.)
--With assistance from Anirban Nag, Walter Brandimarte, Patrick Gillespie, Rene Vollgraaff, Ismail Dilawar and Nasreen Seria.
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