When politicians tried to pressure former ECB President Wim Duisenberg, he used to say: „I hear, but I do not listen.”
These days, a growing number of central bankers worldwide are hearing a lot – and some are listening. The Bank of Japan refrained from raising interest rates last month in the wake of government pressure. The autonomy of banks from Ecuador to India is under attack. French presidential candidates are demanding the ECB meet a goal for growth. „Political pressure is definitely intensifying,” says Stephen Roach, chief economist at Morgan Stanley in New York.
The central bankers under the gun have already helped deliver the strongest global expansion in 30 years and kept a lid on prices. If they wind up running „politically compromised monetary policies,” Roach predicts, „ultimately, you'll get more inflation.” While lobbying central banks is one thing, meddling is another, says former Fed Governor Laurence Meyer. „The danger here is to inflation expectations,” says Meyer, Washington- based vice chairman of Macroeconomic Advisers LLC. „Market participants will have less confidence in central-bank independence in the face of political pressure.”
The Bank of Japan's standing has already suffered in financial markets after Governor Toshihiko Fukui and fellow policy makers unexpectedly left the benchmark rate unchanged at 0.25% last month. That came after Chief Cabinet Secretary Yasuhisa Shiozaki and other officials said the bank should consider the government's view when setting rates.
„The government has been putting indirect pressure on the bank not to raise rates,” says Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo. Shiozaki repeated his advice last week, and Vice Finance Minister Hideto Fujii urged the bank to support economic recovery. The perception that politics may be playing a role in monetary policy leaves traders in doubt about what the bank will do this week, says Peter Morgan, chief Asia-Pacific economist at HSBC Holdings Plc in Hong Kong. Interest-rate swaps suggest a 61% chance of an increase, according to Credit Suisse Group. Before the bank surprised investors by leaving rates unchanged last month, traders saw as much as an 80% chance of an increase at January's meeting.
„There's a fair degree of confusion now,” says Morgan. „The bank has denied it, but it's hard to eliminate the suspicion there was some political pressure and that it's still in place.” Monetary policy is becoming especially politicized in economies without a strong tradition of central-bank independence. In Europe, the central banks of Slovenia, which joined the euro last month, and Poland have become embroiled in political disputes over who should run them. Brazilian President Luiz Inacio Lula da Silva's advisers argue his push to quicken growth is hampered by the policies of central bank head Henrique Meirelles.
Ecuador's central bank last month took out newspaper advertisements defending its autonomy after President Rafael Correa questioned the need for its independence. Venezuela's President Hugo Chavez is also extending his control over its central bank. In Asia, Thailand's central bank now reports to military leaders who won power in a September coup. Indian Finance Minister Palaniappan Chidambaram this month urged banks not to raise mortgage rates, putting him in conflict with Reserve Bank Governor Y. V. Reddy's effort to slow the economy with higher borrowing costs.
Julian Jessop, chief international economist at Capital Economics Ltd. in London, says if political heat is building at a time of strong global growth, it will only intensify when the economy weakens. „The fear of politicians is that the boom will be brought to an end by aggressive central banks,” he says. Feeding those worries is a perception that the expansion has boosted asset values and corporate profits without providing similar benefits to workers, says Roach.
Among the G-7 major industrialized countries, labor's share of national income shrank to a record-low 54% last year, while the share going to profits rose to 16% from 10% five years ago, he calculates. Those pressures are currently on display in Europe, where the ECB is under fire as it signals plans to raise its benchmark rate from its current five-year high of 3.5%. But while French presidential candidates Segolene Royal and Nicolas Sarkozy both want the bank to meet a goal for growth as well as inflation, ECB President Jean-Claude Trichet is better insulated from such pressures than are other central bankers.
Power over the ECB is diffused among the 27 nations that constitute the European Union. It would require all 27 to renegotiate the 1992 Maastricht Treaty that created the ECB and set its goals. German Chancellor Angela Merkel said January 30 she supports ECB independence „with all my strength.” That hasn't stopped politicians from seeking other routes to influence monetary policy. Luxembourg Finance Minister Jean-Claude Juncker and his euro-area counterparts have been pursuing a bigger role alongside the ECB in managing the exchange rate. That would make it difficult for the ECB to raise rates if the finance ministers were trying to weaken the euro.
Even the US Federal Reserve, with its established tradition of independence, isn't immune; one casualty may be Chairman Ben S. Bernanke's goal of establishing an inflation target, says Alan Blinder, former Fed vice chairman and now an economics professor at Princeton University.
„It's possible that Democratic hostility to inflation targets will cause Bernanke to put the goal of an inflation target on hold,” he says. While Bernanke said at his Senate confirmation hearings last year that he thinks the Fed could adopt a target on its own, he has also has said he would „vet” any such shift with congressional committees that oversee the central bank.
The new Democratic chairman of the House Financial Services Committee, Barney Frank of Massachusetts, says he's leery of any change that might compromise the Fed's dual mandate of seeking both stable prices and maximum employment. „That's not going to happen when we're in power,” he told an audience at the National Press Club in Washington on January 3. „And we can prevent that from happening.” Frank told Bernanke at a hearing last week that he wants to be „kept involved” with the Fed's decision-making. „There are people in this country who think the Fed somehow should be above democracy,” says Frank.
„God forbid that anybody in elected office should talk about whether or not we need a 25-basis-point increase in the Fed. Somehow, that's sacrosanct. No, it isn't: It's public policy.” Harvard University's Kenneth Rogoff, former chief economist at the IMF, says that's an important point for central bankers keep in mind. „Central banks need to earn their independence every day,” he says. (Bloomberg)