Almost a third of European economists believe that central bank independence will come under increased pressure over the next four years, according to a new survey.
32 per cent of economists polled in a survey by the Centre for Macroeconomics and the Centre for Economic Policy Research (CEPR) think politicians will try to gain more control over the Bank of England (BoE) and the European Central Bank (ECB).
However, only four per cent of the economists surveyed believe central bank independence is not a good thing.
The findings come at a time when prominent politicians have questioned the role of central banks. German politicians have become increasingly critical of the ECB’s accommodative monetary policy, while US President-elect Donald Trump has criticised the Federal Reserve for creating a “false economy”.
Prime Minister Theresa May was heavily criticised in October after suggesting the Bank of England’s (BoE) monetary policy has widened the gap between rich and poor. In her maiden speech as Prime Minister to the Conservative party conference she said: “A change has got to come” in policy that may harm savers.
The BoE was made independent in 1997, and since then has been mostly free from political interference in how it aims for its inflation target.
Meanwhile, the erstwhile consensus amongst economists that less central bank independence leads to inflation is disputed, with only a 14 per cent net agreement among the economists surveyed.
Pro-independence economists argue that political control of interest rates leads to monetary stimulus even when it is not needed, leading to money falling in value and rising prices.
What the experts said
Jonathan Portes, a fellow at the National Institute of Economic and Social Research, said: “In the UK, decisions on monetary policy will inevitably be seen through the prism of the highly politicised Brexit debate, so although the underlying framework is robust some degree of increased politicisation seems probable.”
Martin Ellison of the University of Oxford, said: “The worry is that central bank independence has not been fully institutionalised, but rather has rested on the strong personalities of central bankers. The taking on of additional responsibilities by central banks and the blurring of the boundaries between monetary and fiscal policy can only add to the pressures on central bank independence.”
“I take some comfort from the decision by Governor Carney to remain at the Bank of England until June 2019, by which time Britain may have rediscovered its taste for experts,” he added.
Patrick Minford, an economist at Cardiff Business School and a prominent pro-Brexit voice in the EU referendum campaign, said: “Governments in the EU and the UK have many other problems to cope with and are unlikely to tangle with these bureaucracies, when they would like their cooperation over economic growth.”
Simon Wren-Lewis of the University of Oxford said: “The criticism of the BoE has come from the same quarter as gave us Brexit, so their political influence will decline as the folly of Brexit becomes clearer.”
Fabrizio Coricelli of the Paris School of Economics said: “The risks of breakdown of the Eurozone will force the ECB to be less independent. However, beyond the issue of independence, credibility of ECB policies are undermined by the past several years of erratic policy and several commitments to do ‘whatever it takes.’”
Panicos Demetriades of the University of Leicester said: “Unfortunately, the independence of central banks has been eroded through political capture of central bank boards and other indirect actions by governments. If anything, central banks' widened roles require more, not less independence.”
Andrew Mountford of Royal Holloway is a rare dissenter on the question of central bank independence. He said: “Central bank independence only makes sense within a mindset of a stable balanced economy where the only implication of too lax a credit policy is inflation. This mindset was never grounded in reality but recent events have shown just how wide of the mark this vision of the macroeconomy is.”
Perhaps the last word should go to Albert Marcet, at Madrid’s Institut d’Analisi Economica, CSIC. He said: “Because of the crisis all institutions are in question, including central banks, but I doubt a clear constituency against their current role will emerge. But then, so many weird things have been happening in politics that who knows.”