The issue of central bank independence has gained a lot of attention recently as Donald Trump attacks and threatens to interfere in the United States Federal Reserve, trying to get them to lower interest rates.
Peter Nicholl
Many global central bankers including our new reserve bank governor, Anna Breman, stressed the importance of keeping central banks independent from political interference in their policy-decision making. She was criticised by some of our politicians for doing that and must be a bit confused about what those politicians understand the word independent means.
Central bankers are right to be concerned that a return to giving politicians the levers for day-to-day monetary policy decisions is likely to lead to a return to global inflation. The numbers behind this view are quite staggering. I looked at our data. The reserve bank was given an inflation target and operational independence in 1990. I was in the bank at the time.
Our annual inflation rate since then has averaged around 2.5 per cent and the price level – a snapshot of the aggregated cost of living – has risen about 137 per cent.
From 1955 to 1990 when monetary policy decisions were determined by politicians, our average annual inflation rate was around eight per cent and the price level rose a whopping 1370 per cent – 10 times higher than in the last 35 years.
Most central banks, including ours, claim the credit for this inflation outcome – and they deserve a lot of the credit. But they did get help from things like technological change, such as the internet, and the emergence of China as an exporter of cheap manufactured goods to the rest of the world.
So, central banks are right to stress the risks to global inflation of back-tracking on central bank policy independence. But no public agency should be given independence without a robust form of accountability. That is equally important, or central banks will gradually lose their focus. Central banks don’t talk as much about their accountability as they do about their independence. So others need to make sure central bank accountability gets as much attention as their independence.
Frankly, the performance of our reserve banks has not been that great over the last few years. In my view their monetary policy performance has been poor, the costs of their interventions related to the Covid pandemic were huge and the large growth in their staff numbers was outrageous. But what happened to the bodies that were supposed to be holding the reserve bank accountable during that time? The first line of accountability for its performance should be its board. The second line should be the treasury and the third the finance minister. Until the last year, these bodies were very quiet and did little or nothing to hold the bank accountable for its performances.
In my view, this has been the major weakness in our monetary policy framework over the last several years.
