All major central banks have come under pressure to adjust their monetary policy and to meet all sorts of demands that don't fall under their mandates. The dangers are there for all to see.
Observers were taken aback when Swiss Finance Minister Ueli Maurer issued some guarded words of criticism about central bank policy in June of 2018: the amount of money that the bank had accumulated to keep the franc from appreciating had reached the limits of what was tolerable, he said. The Swiss government doesn't normally comment central bank policy.
Maurer isn't alone in his opinion of course. And still, Swiss National Bank's (SNB) Governor Thomas Jordan and his colleagues remained unfazed. The mandate of the SNB is to safeguard price stability and to keep an eye on economic growth.
Rich Pickings
But that is exactly wherein the problem lies: the bank has spent an enormous amount of money to keep the franc steady. The exchange rate is crucial for the economy at large because it is so export-dependent. The assets the bank bought in exchange for newly issued francs and now holds in the form of foreign reserves and securities offer rich pickings – and presumably prompted Maurer to intervene.
As an old political hand he knew well what allure the mountain of money held. After all, Maurer each year says he will post a deficit and each year returns with a huge profit – a ritual that prevents parliament from spending too much money on new programs during the year.
Pile of Money
With the simple act of creating a pile of money – which in essence is based on the assumption that Switzerland will remain a safe haven – the bank has kindled hopes on all sides. The demand that received the biggest attention was for the creation of a state fund akin the Norwegian oil fund. The idea was to put SNB money aside, earmarked to safeguard the state pension for decades to come.
A promising idea for sure but also the beginning of a dangerous development. Most economists agree on this. The central bank has no mandate to use assets reserved to enforce monetary policy for other purposes.
How the State Fails in Other Areas
A further conflict of interest is about to emerge in the climate protection policy. Demands from politicians have been voiced that the bank should link its investment policy to climate protection targets. Not such a good idea, according to Dirk Niepelt, professor of economics at University of Bern and director of Study Center Gerzensee, a foundation of the SNB.
«Increasing demands on central banks reflect the failure of other state organs,» he told finews.asia in an interview. «A sensible climate protection policy will use fiscal instruments to internalize external effects. With such a policy, all walks of life would be affected and all investors would be forced to better take into account costs and benefits for the society when making a decision.»
A Crazy Idea?
The pressure on the SNB will likely increase further if the situation in the U.S. is anything to go by. U.S. President Donald Trump didn't mince his words when he tried to prevent the Federal Reserve (Fed) from raising rates. Before the decisive rate decision in December Trump said pointedly that even the idea of pondering a further increase was crazy. His words were of no avail as we now know.
With his intervention, Trump crossed every line of what is appropriate if the delicate balance between institutions is to be kept. If central bankers have to start taking into account what the political masters are saying, they may worry less about their real mandate – making the best monetary policy in keeping with price stability and economic growth in line with a country's potential.
Politically Fraught
«Independence has increasingly come under pressure and this pressure will remain,» said Niepelt, who sees a certain Zeitgeist at work. «What has been considered as reliable and normal for two or three decades, today increasingly is being questioned.»
The reliability and normality is to be found in a separation of monetary policy and politics and a ban on government interference. Of course, monetary policy, with its analysis of economic performance and options of influence isn't an exact science as such and at times highly political. Nonetheless, the Western world for decades was supportive of this separation between monetary policy and politics.
The Policy of Scapegoating
With populist movements getting into powerful positions, such certainties have been swept away. Their world is one of scapegoats and central banks are ideal scapegoats. They tend not to make political statements (not in their mandate...) and express themselves in a mostly ultra dry, yet elegant fashion – and with this type of communication they never reach beyond the interested elite.
India has recently shown what can happen if the government has its way: Urjit Patel, the governor of the country's central bank, resigned on December 10, 2018, shortly before a scheduled meeting with Prime Minister Narendra Modi. The head of government repeatedly had urged the bank to make lending cheaper. Patel wasn't swayed by his arguments and preferred to take his hat before compromising on policy.
Emerging Markets: Different Type of Pressure
In emerging markets with their relatively high share of poor people, the question arises if central banks should be run according to the same rules as in the West, given the demands by the poor for state support measures. Governments can ill afford to ignore the protest by the masses.
«Of course, central banks have to keep an eye on the interaction between income and wealth distribution on the one hand and monetary policy on the other,» said Niepelt.«But this doesn't mean that central banks have to adjust monetary policy to a distribution effect.» In other words, central banks shouldn't have to be the ones that get the blame if there is no progress in social, economic or environmental policies.
And What About Europe?
Switzerland, the U.S. and India may present a random seletion, but don't be surprised if more such examples are forthcoming in the near future. The European Central Bank (ECB) for sure is in the focus of attention as populist governments such as Italy's oppose the stringent rules.
The ECB may be fairly well protected by its institutional framework, with a set mandate, duties and rights. This institutional safeguard has helped both the SNB and Fed to withstand political pressures. But, as Niepelt said, what has been tried and tested for years is now questioned again.
