By: The Economist
April 3, 2019
Critics of economics like to say that its abstract theories lack real-world pay-offs. There is a glaring counter-example: the global rise of central-bank independence in the past 25 years. In the 1970s it was normal for politicians to manipulate interest rates to boost their own popularity. That led to a plague of inflation. And so rich countries and many poorer ones shifted to a system in which politicians set a broad goal—steady prices—and left independent central bankers to realise it. In a single generation billions of people around the world have grown used to low and stable inflation and to the idea that the interest rates on their bank deposits and mortgages are under control.
Today this success is threatened by a confluence of populism, nationalism and economic forces that are making monetary policy political again. President Donald Trump has demanded that interest rates should be slashed, speculated about firing the boss of the Federal Reserve and said he will nominate Stephen Moore and Herman Cain, two unqualified cronies, to its board. Brexiteers rubbish the competence and motives of the Bank of England, while in Turkey President Recep Tayyip Erdogan has been in a tug-of-war with the central bank. India’s government has replaced a capable central-bank chief with a pliant insider who has cut rates ahead of an election. And as we report this week, many top jobs at the European Central Bank (ecb), including the presidency, are up for grabs, and some could become part of a wider political struggle over who runs Europe’s institutions (see article). There is a genuine need for reflection on central banks’ objectives and tools. But dangerous forces are afoot that could have alarming consequences for economic stability.