Too much independence is bad for central banks
MODERN economies shouldn’t be run by cult figures.

The ability of central banks to respond to shifts in prices and employment, as well as combat financial disasters, has become synonymous with autonomy.

Monetary authorities derive power from lawmakers, but must be considered above politics. Their credibility and effectiveness depends on perceptions of omnipotence – sometimes to an unhealthy degree.

So the Australian parliament is doing everybody a favour by resisting significant shifts in how the Reserve Bank of Australia (RBA) operates.

The changes are pushed by the Labour government after it commissioned an external review that was critical of the bank’s culture and urged big changes, some with much merit. Others, which require legislation, are more trouble than they are worth.

Recent testimony from a former treasurer and two ex-RBA governors was scathing of planned revisions that, among other things, would remove the ability of the minister overseeing the economy to veto the central bank’s decisions.

You might think that RBA alumni would be all for ditching the ability to overrule policymakers. Not so, and in arguing against the move, the duo have struck a sensitive nerve. No unelected body ought to have overweening power and primacy over the representatives of voters. In other words, there is such a thing as too much independence.

The previously obscure part of the law that contains the veto has produced an unlikely coalition.

Neither the centre-right conservative bloc nor the Greens – who don’t usually find themselves in alignment – is a fan of the mooted change.

But it’s the opposition of respected one-time RBA bosses Ian Macfarlane and Bernie Fraser, who were chiefs during the economy’s three-decade run without recession, that is the most damning.

They have sat in the chair, pulled the lever on borrowing costs, and dealt with politicians.

That’s led them to reflect on the nature of power in a democracy: Who has it and what constraints should those who wield it be subjected to?

The veto has never been used since the RBA was established in the early 1960s, and the bar for doing so is extremely high.

Until the review, few people had even heard of the clause. Champions of pure central bank independence want it abolished, nonetheless.

Realists, who appreciate that autonomy has always been relative, want to keep it. The latter group is correct. For all the totemic value assigned to independence in places like the United States and Europe, it is never absolute.

Nuance is a feature, not a bug, of arrangements. The European Central Bank is closest to absolute singularity, though it safeguards the euro, which is a child of politics.

The Federal Reserve worries more about Congress than ties with the White House; Chair Jerome Powell begins every press conference by emphasising the mandates bestowed by Capitol Hill.

Former chair Ben Bernanke’s advice to Janet Yellen as she prepared to succeed him in 2014: “Congress is our boss.”

Government observers attend Bank of Japan meetings, as is the case with the Bank of England (BoE).

If the BoE misses its inflation target, the governor must write a letter to the Treasury explaining what happened. Thailand’s leader has a point when he says a sluggish economy warrants an immediate interest-rate cut; the central bank refuses to go along.

“We have to recognise that central banking independence, as good a thing as it is – and no-one has promoted it as much as I have – is not God given,” Macfarlane told senators on Feb 22.

“It was delegated to central banks by elected governments because they concluded it would lead to better decision-making. But conflicts can arise, usually small ones ... At the end of the day, the elected government has to have priority, if the issue is big enough.”

Macfarlane and Fraser aren’t completely altruistic. They told legislators that if the relevant section of the act was removed, future leaders could impose something far worse to assert dominance. Fraser invoked the specter of a second presidential term for Donald Trump, who considered firing Powell in 2018, so great was his distaste for rising US rates.

“There would be no process; you’d have to establish a process. It’s likely to be ad hoc,” Fraser said. In other words, better the devil you know.

There are other aspects of this RBA overhaul that are running into trouble in parliament.

Treasurer Jim Chalmers wants a new policy panel devoted to setting the price of money and leaving the management of the bank to a group resembling the existing board. He is seeking support across the aisle.

But the opposition coalition is pushing for members of the existing board, which has traditionally run the bank and sets rates, to merely transition to the new grouping.

This seems like an issue of process, but a criticism of the status quo is that the board comprises too few people with the chops to challenge the RBA bureaucracy.

The reverence for the RBA is gone. Perhaps bipartisanship a year before a national election on something as sensitive as monetary affairs was too much to hope for. The kerfuffle does bring at least one windfall.

People who have steered the economy in the past have been clear: The public shouldn’t abdicate to monarchs of monetary policy.

The major interventions in the economy since the global financial crisis of 2007-2009 mean central banks belong to everyone now. Formidable, certainly. Deities? Not so much. — Bloomberg

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. The views expressed here are the writer’s own.
Commentary,CentralBankAutonomy,MonetaryPolicy,RBAReview,PublicAccountability,UnelectedPower,EconomicStability,PoliticalInfluence
Modern economies shouldn’t be run by cult figures. The ability of central banks to respond to shifts in prices and employment, as well as combat financial disasters, has become synonymous with autonomy.