Howard Davies argues how central bank actions and need to be independent is being increasingly questioned. More ironically. most of these pressures are coming in economies which have lectured the other world on need for central bank independence.
He says reaching out to people is one way to keep pressures off:
There is a powerful argument to be made that central banks, insulated from short-term political pressures, have been careful stewards of price stability, and have served the global economy well. It is not obvious that returning to politically administered interest rates would have any benefits beyond the immediate term.
Still, we must accept that central banks’ large-scale quantitative easing takes them into uncharted territory, where the boundary between monetary and fiscal policy is blurred. In the UK, for example, the Treasury decides on the level of economic intervention, while the BoE determines the timing and method of implementation. So, the central bank’s independence is not absolute.
Central bankers must demonstrate that they understand the political pressures and unusual circumstances that zero, or even negative, interest rates create. Savers are bitterly complaining that they are being penalized for their prudence; refusing to debate this and other implications of current monetary policies is not an acceptable response.
Independence demands higher degrees of accountability and transparency, whereby policies are explained to the public. To its credit, the BoE has been showing the way forward with a series of open forums around the UK. Taking monetary policy to the people is time-consuming, but it is essential if the necessary political consensus to sustain independence is to be maintained.
First central banks make policies which increasingly hurt people and then reach them to keep pressures from government at bay. But how much can public understand what is really going on? Monetary policy has become so technical that even experts find it difficult to explain what they are doing.
Bank of England open forums are welcome though. It has led to some interesting pieces of information especially on history. They have acted as a good fodder for this blog…