Why central bank chiefs will have to brace for an onslaught of populist political attacks
- Nicholas Spiro says while the resignation of the Reserve Bank of India governor has shocked markets, the European Central Bank is likely to see the next intense clash between populism and monetary policy
These are tough times for the world’s major central banks. In advanced economies, a decade of cheap money is giving way to the gradual normalisation of monetary policy, led by the US Federal Reserve which is expected to raise its benchmark interest rate for the fourth time this year later this month. Yet the shift towards tighter policy is running up against economic headwinds that are exerting downward pressure on inflation rates that were tepid to begin with. Bond investors now doubt whether the Fed, the most hawkish among the main central banks, will raise rates at all next year.
In emerging markets, the Fed-induced tightening in financial conditions has forced many central banks – particularly those in vulnerable economies – to increase borrowing costs partly in order to shore up local currencies which have fallen steeply against the US dollar this year. This has proved politically unpopular in countries that are suffering sharp economic slowdowns. Turkey, which experienced a severe currency crisis earlier this year, has jacked up its main policy rate to a punitive 24 per cent amid a contraction in output in the third quarter.
As if these challenges were not daunting enough, central bankers are drawing the ire of populist and nationalist politicians as anti-establishment sentiment gains momentum following Britain’s decision to vote to leave the European Union and the election of Donald Trump as America’s president.
The latest manifestation of this came on Monday when Urjit Patel, the governor of the Reserve Bank of India, unexpectedly resigned amid mounting threats to the central bank’s autonomy. For some time now, Indian Prime Minister Narendra Modi’s nationalist government, which is gearing up for a crucial parliamentary election next year, has been chiding Patel’s team for not doing enough to stimulate growth, partly because of the central bank’s crackdown on bad loans in India’s ailing banking sector which has contributed to weak lending.
In a sign of the government’s hostility to the liberal economic policies that India has largely pursued since 1991, Modi appointed a firebrand to the board of the central bank in August, and has just nominated Shaktikanta Das, a loyal bureaucrat who oversaw Modi’s radical “demonitisation” of high-value banknotes in 2016, as Patel’s replacement. Vivek Dehejia, an expert on India at Carleton University in Canada, notes that India’s central bank has fallen victim to “the rise of a home-grown brand of unorthodox economics variously known as ‘Indic’ or ‘Hindu’ economics”.
In the UK, Mark Carney, the Canadian governor of the Bank of England, has been berated by Brexiters for presenting a series of worst-case scenarios analysing the impact of a “no-deal” Brexit which, according to the central bank, could lead to the sharpest drop in economic output since the second world war. Jacob Rees-Mogg, a leading Brexiter, has accused Carney of trying to intimidate the British electorate, calling him “the high priest of project fear”. Even Carney’s predecessor, Mervyn King, has claimed that UK monetary policy is being “unnecessarily” politicised.
More worryingly, given its role as the world’s most influential central bank, the Fed has suffered a series of stinging rebukes from Trump, the first American president in at least two decades to opine publicly on the conduct of monetary policy. In October, Trump accused the Fed of having “gone crazy” by raising rates and said the central bank was “a much bigger problem than China”. More ominously, he later expressed his regret over his choice of Jerome Powell as the new Fed chair.
Populist attacks on central banks – and on technocracy more broadly – are likely to intensify as the global economic outlook dims.
While Trump would find it very difficult to fire Powell, the president’s criticism is not without merit. Concerns about a US economic slowdown are increasing as interest-rate-sensitive sectors, in particular housing, come under strain. What is more, certain measures of inflation are falling, questioning the need for further rate hikes. Data on America’s headline inflation rate published on Wednesday showed that prices fell to 2.2 per cent last month, their lowest level in nine months.
Yet the region where the clash between populism and monetary policy is likely to be the most intense is the euro zone. The European Central Bank’s four-year-old quantitative easing programme, which is expected to cease at the end of this month, has drawn criticism from left- and right-wing populists alike. While the former believe the ECB should be doing more to boost growth, the latter accuse Europe’s central bank of bailing out heavily indebted economies and penalising savers by keeping borrowing costs at ultra-low levels.
Central banks were already under severe pressure before Brexit and Trump. The rise of populism only compounds their problems.
Nicholas Spiro is a partner at Lauressa Advisory