central bank independence

In exactly a week, Hungary’s MPC will meet for the final time before four of the seven policymakers retire. New legislation, which has yet to be approved by parliament, is likely to see the central bank governor stripped of his right to choose who fills two of those four seats. A deputy governor today urged parliament to respect the central bank’s independence and reconsider the legislation.

“The credibility of Hungarian economic and monetary policy would increase if political forces made clear their commitment to central bank independence (and) price stability,” Julia Kiraly said, according to Reuters news wire. “Predictable economic policy can lead to lower risk and lower funding costs, which will be felt by both the country as a whole and citizens servicing their debt,” she said.

Analysts worry that government influence at the Bank could lead to a pro-growth agenda, with too little attention given to fighting inflation. Hungary has been downgraded by all three main issuers since November of last year with government debt issues now rated BBB-/Baa3. Read more

For what might be the last time in a long time, Hungary’s central bank has increased rates by 25bp. The third rise since November takes the rate on the key two-week bill to 6 per cent.

The rise was expected, partly as a result of inflation and partly politics. Inflation was 4.7 per cent in the year to December, considerably above the target of 3 per cent. Politics, because it’s assumed the MPC would want to raise rates before a significantly altered rate-setting committee takes over in March. Read more

“The strongly increased risks of central banks may act as a constraint on the room for manoeuvre in future monetary policy.” That is the worst case scenario laid out by new research from the Bank of Finland. The thoughtful, comprehensive analysis of eight central banks looks at unconventional tools adopted during the crisis, concluding: “The actions by central banks during the crisis raise a number of questions concerning exit from the measures taken, the impact of the measures, central banks’ risks and independence and their governance structures.”

The turn of the year – and the final post on this blog for 2010 – make a summary of this paper seem appropriate. Which of the unconventional tools – if any – will be discarded in 2011? Read more

One wonders why they asked. Hungary has again requested a legal opinion from the ECB on a draft law; the opinion is again highly critical; and once again the opinion is likely to be roundly ignored.

On July 1, Hungary’s Ministry of the National Economy asked the ECB for advice on plans to limit central banker pay; the ECB issued an opinion saying this was a bad idea; the Hungarian cabinet disputed the opinion and one week later they passed a law cutting the governor’s pay by 75 per cent, which became effective in September.

Some interpreted the ECB’s defence of Mr Simor’s exceptionally high pay* as cronyism. The ECB’s argument, however, focused on central bank independence. A country can’t join the euro, ran the opinion, unless its laws are compatible with those of the ECB: Read more

The Hungarian cabinet has rejected the ECB’s opinion over a plan to cut central bankers’ pay, so the legislation will proceed to a vote next week.

The ECB feels the bill could compromise central bank independence. They argue the pay cut should only apply to successors of the current governor, Andras Simor, to allay concerns that the bill is intended to pressure current management. Adding to these fears will be the fact that the ruling Fidesz party has called for Mr Simor’s resignationRead more

The ECB has given a dressing down to the Hungarian government over plans to cut central bank salaries – and for failing to give the ECB enough notice to scrutinise the bill. A precedent was set a week ago, when the ECB scolded Romania for cutting its central bank staff salaries.

Two-thirds of the ECB’s strongly worded legal opinion reminded the Hungarian government about good time-keeping. The consulting authority, reads the document, may flag an issue as ‘urgent’ but “even in such cases a minimum one-month deadline applies”. Hungary apparently allowed less than three weeks for the process. The section ends: “The ECB would appreciate the Ministry for the National Economy giving due consideration to honouring its obligation to consult the ECB in the future.” Read more

Price stability is a function of two things: a central bank’s power to refuse to buy government bonds, and whether a governor can be fired (without cause). These two variables “have all the predictive power for inflation associated with central bank independence,” said the BoE’s Adam Posen in a characteristically punchy speech yesterday.

This simple formula is quite shocking. Many common indicators of independence are omitted. Central bank mandates have little explanatory power. Neither does a bank’s technical independence from the political process; legislation, after all, can be ignored or rewritten. Topically, a central bank’s purchase of government bonds has no impact on inflation, according to Mr Posen, as long as the purchase was voluntary. Indeed, more harm than good may come from a bank obstinately refusing to enter the fray Read more

Simone Baribeau

Since global central banks widely expanded their roles in the financial crisis, their leaders have been warning about the dangers of attacks on their autonomy. Earlier this week, Ben Bernanke, US Federal Reserve chairman, said that undue interference can “impair inflation-fighting credibility” and “worsen the economy’s longer-term prospects”.

And over the past few months central bank leaders warned of attacks in Argentina (where the central bank chief was fired after refusing to transfer foreign exchange reserves to the government), South Korea (where a vice minister attended a monetary policy meeting), Japan (where the central bank faced pressure to increase lending) and Mexico (where some viewed the appointment process of the new Bank of Mexico governor as politicised). Read more

New rules for Venezuela’s central bank will allow government use of ‘excess’ reserves, Bank financing of government-led projects, and a permanent seat on the Bank board for the Finance Minister.

From Bloomberg:

Venezuela’s National Assembly approved changes in the rules governing the central bank to increase the government’s influence on the institution and to allow it to finance state projects.

 Read more

Argentina’s expected co-operation with the government has been confirmed explicitly by the central bank president and the economy ministry. Bank president Mercedes Marco del Pont told reporters that the Banco Central will co-ordinate its policies with the country’s Economy Ministry, while economy minister Amado Boudou announced the formation of a new economic council, which will group officials from both institutions.

Focus at the central bank will be on company output rather than inflation, said Ms Marco del Pont: “We want to focus on price stability but from a different, non-orthodox view, from the supply side.” Annual inflation is running at 32.1 per cent, according to a report by Graciela Bevacqua, the former head of the consumer price department at the national statistics institute. Read more

South Africa’s finance minister has announced a significant shift in central bank policy in a radio interview. His comments will raise more questions about the bank’s independence.

The South African Reserve Bank will adopt a flexible approach to inflation. The bank will be allowed ‘temporary deviations’ from its target of 3 – 6 per cent in the pursuit of growth, reports Business Week.”[Inflation will not be] the sole focus of what the bank does,” said Finance Minister Pravin Gordhan. “We’re very mindful of growth.” Read more

Simone Baribeau

Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia, today warned (again) of the risks of increased political oversight of the Fed and (again) suggested that the Fed should give up some of its emergency powers in order to maintain its independence.

Specifically, Mr Plosser called for the Fed’s balance sheet to contain only Treasury securities (rather than MBS backed by GSEs) and for it’s ‘unusual and exigent’ lending authority to be either ‘eliminated or severely curtailed.’

Like Ulysses and the Sirens, the Fed could help preserve its independence by limiting the scope of its ability to engage in activities that blur the boundary lines between monetary and fiscal policy.

It’s not a new argument, but it’s an interesting one. Read more

Robin Harding

A trope of current writing about the BoJ is that it is coming under increasing political pressure from the Democratic party government to ease monetary policy. Pressure, maybe, but it’s an arm around the shoulders rather than a cattle prod in the back.

Public government pressure takes the form of regular comments by finance minister Naoto Kan. Here is a sample, via Reuters:

“They are holding a policy board meeting today and the BoJ has reiterated it would keep very easy monetary conditions … To be honest, I feel they could do more, but we are following the same policy direction by communicating with each other.”

It’s not very scary stuff. There are also other reasons why the BoJ feels nothing like the political pressure to act on deflation that it did back in 2001. Read more

In a move that has surprised markets, Mercedes Marcó del Pont has been chosen as the new Argentinian central bank chief with immediate effect. Markets had expected the interim governor and former chief, Mario Blejer, to remain in office until September, when ousted chief Martin Redrado’s term was due to end.

The appointment heightens fears for central bank independence in the country. “Ms Marcó del Pont is seen as very close to the government, which means that the central bank will continue to be virtually subordinated, in terms of policy directives, to the government,” said Alberto Ramos, an economist at Goldman Sachs. Ms Marcó del Pont previously headed the state-run Banco de la Nación. (More from the paper)

Well, so much for central bank independence fears in Mexico, Argentina and South Africa: the UK Tory party has just pledged to work hand-in-hand with the Bank of England should it win the upcoming general election. This is becoming a global trend. Will the markets price in higher UK inflation tomorrow?

George Osborne, chancellor-in-waiting, wants to keep interest rates lower for longer by cutting the record budget deficit faster than the ruling Labour party. He played on voters’ fears by using the ‘G’ word – Greece – to describe the possible fate for Britain if the deficit is not addressed. Read more

Central bank governor Martin Redrado has gone, but the story continues. It transpires the Argentine President may seek changes to the central bank’s charter to allow the government to tap the institution’s reserves, an Argentine newspaper has said.

Cristina Fernandez de Kirchner and her husband, lawmaker Nestor Kirchner, want to be able to use the reserves to help create jobs or finance infrastructure projects, said La Nacion, without stating its source. Apparently the proposal may be sent to Congress next month.

Debate on the nationalisation of the South African central bank has been reignited after the head of the ANC submitted a document questioning the bank’s current ownership, raising fears of higher inflation.

ANC Secretary-General Gwede Mantashe asked: “Why have we been reluctant to even open the discussion on the role of the state in the banking industry? [We should also ask] why the South African Reserve Bank is one of less than five central banks in private hands in the world.”

A change to state ownership of the shareholder-owned bank could mean higher inflation. The left has complained that the bank focuses too narrowly on maintaining low inflation. They want policymakers to consider employment and growth when setting interest rates. Read more

Swiss central bank governor Phillip Hildebrand has taken a somewhat political stance, defending the universal banking model in an interview with Swiss daily Le Temps. A form of the Glass Steagall Act would not work in Switzerland, he said: wealth management and commercial banking should not be split.

The former banker explained: “The universal banking model represents a form of risk diversification,” quoting difficult periods in the 1980s when one side of the bank had been able to bail out the other. He added that ultra-rich customers needed the full range of investment banking services, for instance to help with mergers and acquisitions involving companies they owned. Read more

OK, two datapoints doesn’t make a trend. But it’s two datapoints this week and the list will grow.

President Cristina Fernandez is trying to oust the (nominally independent) central bank governor, who is last reported sitting at his desk, refusing to go. She has neither legal nor moral authority to fire him. After all, he is refusing to spend Argentina’s foreign exchange reserves, and he might well be right. Read more

Krishna Guha

Ben Bernanke today warned lawmakers not to strip the US Federal Reserve of the powers and independence it needs to promote growth and price stability at the start of what promised to be a contentious confirmation hearing in the Senate.

His comments came as Chris Dodd, chairman of the Senate banking committee, praised Mr Bernanke as “the right leader for this moment in our nation’s economic history” – but said he intended to pare back the Fed’s role to focus it more narrowly on monetary policy. Read more on ft.com.