Skip to main content

Stephen Poloz should count his blessings.

The Bank of Canada Governor gets to do his job in relative peace and obscurity compared with the politically fraught environment facing some of his fellow central bankers in other countries.

Reserve Bank of India boss Urjit Patel abruptly quit this week after months of haranguing from Prime Minister Narendra Modi’s government that he wasn’t doing enough to boost the economy as general elections loomed.

Story continues below advertisement

Frustrated at a lack of interest-rate relief, Turkish President Tayyip Erdogan installed his son-in-law to oversee economic policy at the country’s central bank earlier this year.

In Britain, hardcore Brexit backers in Parliament accused Bank of England Governor Mark Carney of meddling in the messy departure from the European Union with his assessment of the economic downsides.

Closer to home, U.S. President Donald Trump has made Federal Reserve chairman Jerome Powell a regular target of his outrage, calling him “crazy” for killing the stock market boom with higher rates.

Tension between politicians and central bankers is par for the course. Political leaders always want the economy running hot on their watch. But the independence of central banks is under assault in some countries. It’s open season on central bankers.

So, why now?

In part, it’s a side effect of a low-for-long interest rates. Central banks, particularly in advanced economies, have become victims of their own success. They tamed the rampant inflation that prevailed at the end of the last century. Their challenge now is dealing with slow growth, stagnant wages and persistently weak inflation. After dropping rates to near zero, many central banks are still struggling to reverse engineer the process, and get inflation back up to their targets.

It’s more apparent than ever that central banks don’t have all the answers. And with rates still low, they’re at risk of being powerless when the next recession hits.

The experience of the 2008-09 financial crisis shattered the notion that monetary policy can fix all economic problems. The easy money policies of central banks helped save lenders, but the benefits were less obvious to the millions of Americans who lost their savings in the housing crash.

Emerging economies, such as those of India and Turkey, are facing additional stresses as the U.S. Federal Reserve and other central banks reverse course. Higher interest rates and the strong U.S. dollar are impairing their ability to pay off their foreign loans.

This uncertain aftermath of the crisis has become fertile ground for populist leaders, who are eager to challenge various institutions that stand in their way, including central banks. Mr. Trump, for example, is convinced his own appointee to the Federal Reserve is undoing the benefits of his tax cuts and get-tough trade policies by tightening monetary policy too rapidly and killing the stock market boom.

“There is a trend [of populism] across countries where politicians think they are empowered by the people and therefore have a mandate to do whatever they want,” Raghuram Rajan, a University of Chicago economist and former head of the Reserve Bank of India, told Barron’s recently. “As a result, the institutions that constrain them are up for questioning.”

The notion of central bank independence is a relatively new phenomenon – a legacy of the inflation battles of the 1970s. The fear was that too much political influence over monetary policy would inevitably lead to higher inflation. So central banks instituted measures to shield themselves from the worst instincts of their political masters, including longer terms for bank officials and multiyear mandates for monetary policy objectives. (At the Bank of Canada, for example, the governor is appointed for seven years by the bank’s board of directors – in consultation with cabinet – not by the government. The bank’s guiding inflation-control agreement is renewed every five years with the government).

Being independent of government means central banks can take away the punch bowl when the party gets too lively – even when doing so may be unpopular.

Story continues below advertisement

Mr. Trump and Mr. Modi have clear political motives for wanting their economies to grow faster in the short-term, regardless of the damage this might cause longer term.

One of the reasons why central banks are so effective is that the rest of us know that they will step in to stop prices from accelerating too fast.

It’s a question of credibility. And without it, people may be confused about who is in charge, and what the goal of monetary policy really is.

Report an error Editorial code of conduct
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Discussion loading ...

Cannabis pro newsletter