The onus is falling on them to justify why monetary independence is self-evidently a good thing, and why central bankers should operate beyond democratic control.
The humbling of the Bank of Japan (BoJ) this week is just the start, as Bundesbank chief Jens Weidmann warned. “It is already possible to observe alarming infringements, for example in Hungary or in Japan, where the new government is massively involving itself in the affairs of the central bank, is emphatically demanding an even more aggressive monetary policy and is threatening an end to central bank autonomy,” he said.
One could say that “alarming infringements” are in the eye of the beholder. The European Central Bank that he serves is itself a political operator of unbounded power.
Professor Richard Werner, a monetary expert at Southampton University, says the men of Maastricht misread German history very badly when they created a central bank that answers to nobody. “They thought they were modelling the ECB on the Bundesbank, but they weren’t. They have instead replicated the Reichsbank, which was not accountable to any democratic institution, and led to disaster,” he said.
They might fare better to target nominal GDP growth of 4pc to 5pc and forget about the short-term ups and downs of inflation. Former rate-setter Adam Posen told Parliament on Tuesday that nominal GDP targeting would be a “serious mistake.”
That clinches the matter. Let’s do it.
Adam Posen, who stepped down from the Bank’s Monetary Policy Committee (MPC) last summer, attacked the excessive power wielded by the governor and his executive team, claiming it silenced all opposition and went unchallenged by the Treasury and the Bank’s supervisory panel, known as the Court.
Mr Posen added that the governor’s influence was so powerful that even Chancellor George Osborne and his predecessor Alistair Darling were “unwilling to take on the governor in either an internal or public fight” over the bank’s decision to limit its quantitative easing programme to gilt purchases.
“I have to say that was a recurrent problem,” said Mr Posen. “I complained directly to a couple members of the Court saying the governor is insisting that we should not [consider an alternative to gilts], I don’t think that is fair or right that the governor can just say that, and I was told by the Court that we cannot do anything about that until the governor leaves. That’s the way it is.”
What are the Bank of England’s diagnosis, prescription and prognosis for the UK economy?
At one level, the diagnosis is self-evident. Growth has been much weaker than most commentators expected. In fact, according to the official figures, there has been barely any growth at all over the past 2 ½ years. Unemployment, at a rate of almost 8%, is markedly higher than the level of around 5 ½% before the crisis. And inflation, despite its fall over the past fifteen months from over 5% to around 2 ½%, remains above our 2% target. Living standards have been squeezed for longer than at any time in living memory.
Much of this reflects the inevitable correction of exuberance on the part of borrowers and lenders, the conditions for which were created by the failure to tackle the global imbalances that left most major countries with unsustainable exchange rates, unsustainable paths of consumption, saving and borrowing, and unsustainably low long-term real interest rates. Our economy too needs to rebalance as it recovers, and that affects the pace of recovery. Although the downturn in UK GDP from the peak in 2008 to the trough in 2009, at around 6%, was broadly similar to that in most other industrialised countries, our recovery has been noticeably slower, with a cumulative rise in output from the middle of 2009 of only about 3 ½% compared with 6% or more in many other countries. But has the process of recovery and rebalancing been derailed or merely delayed? With the right prescription we can ensure that it has been only delayed.
Relying on generalised monetary stimulus alone, however, is not a panacea. Monetary policy works, at least in part, by providing incentives to households and businesses to bring forward spending from the future to the present. But that reduces spending plans tomorrow. And when tomorrow arrives, an even larger stimulus is required to bring forward yet more spending from the future. As time passes, larger and larger doses of stimulus are required. We are not in a typical post-war business cycle recession.
The Bank of Japan (BOJ) has agreed to double its inflation target to 2% and ease monetary policy, meeting key demands of Japan’s new government.
Japan’s central bank has guarded its independence and there were fears it may resist Prime Minister Shinzo Abe’s calls for it to do more to help growth.
But the BOJ has gone further than many analysts predicted, offering to do open-ended asset purchases from 2014.
The BOJ measures are expected to pump billions of yen into the economy.
“This is very good news,” said Brian Redican, from Macquarie in Sydney. “For once, the BOJ has been more aggressive than the market expected. The government is clearly forcing the pace of change, which is no bad thing.
“The BOJ has talked about targeting inflation for years without any success, but these changes are more credible.”