central bank independence

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.