Or to be more accurate they should be unpopular for the right reasons, writes Brian Caplen, as a decade of easy money has undermined their credibility.
The Financial Times reports on a ‘global political backlash … against central banks’. The article cites interference or criticism by politicians in the US, India and Turkey as evidence that central bank independence is under threat. In each case, the moves reflect short-term political thinking coming up against a longer term technocratic view of what’s best for stability.
It is this tension and the need for the considered to triumph over the expedient that has been behind the championing of central bank independence over the past couple of decades. It is for this reason that it needs to be preserved and while a decision, such as to raise rates to guard against inflation, may be unpopular, it can be convincingly explained. This is being unpopular for the right reasons.
But maintaining central bank independence will be more challenging if central banks continue making themselves unpopular for the wrong reasons. This they have done by carrying on quantitative easing for far too long and becoming ‘the only game in town’ when dealing with a stagnant economy, as several observers have described it. These include former Pimco CEO Mohamed A El-Erian, now economic adviser to Allianz, and former Indian central bank governor Raghuram Rajan.
After all, the leading central banks failed to predict or prevent the financial crisis. They then responded with an unprecedented period of easy money and low rates which had the side effects of raising property prices, widening inequality and increasing indebtedness. The full ramifications of these measures have not yet played out and may make central banks even more unpopular in the future.
Yes they needed to prevent the world economy sinking into depression but by carrying on these policies for far too long they have now strained their credibility in the wrong way. The challenge will be to keep central banks independent as political tensions mount up in the future.
Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen
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