The long and worthy march to central bank independence is in trouble.
Central bankers who are paid to worry about inflation are going to start playing bad cop in the coming months, tightening the screws on the recovery with higher rates and reduced stimulus. As the process begins, politicians seem unable to resist the temptation to try to meddle. They're just doing what politicians do, because they know that higher rates and slower growth may make governing hard and staying in government even harder. But it's a disturbing trend.
The pace of would-be interventions in the operations of central banks seems only to be increasing in recent weeks.
The U.S. Congress is pushing for more influence over the Federal Reserve. The South Korean government is now planning to have a finance official attend Bank of Korea policy meetings as an observer, but many are viewing the move as a way to add pressure for lower interest rates for a longer time. Japan's new Finance Minister has issued barely disguised calls for low interest rates.
Argentina's President wants to fire the head of her country's central bank. A judge has ruled she can't, but she's still trying.
Once such attacks become mainstream, odds are there will be more.
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The big reason that proponents say central banks must be independent is that otherwise, monetary policy would be run for political gain, and the biggest gain comes from tailoring policy to debtors by keeping rates low. Those of us who owe money outnumber those of us who don't, so that's where the votes are.
Low rates are always popular, they encourage growth and jobs, even if it means inflation in the long run. And even inflation isn't so bad, from a debtors point of view. Rising prices are murder on lenders, because it devalues the money they are owed, and on the other side of the coin it lets creditors off the hook because they can pay back debts with money that's worth less.
Add to that the fact that governments are increasingly indebted themselves and meddling gets more tempting.
Consider that the Fed and the U.K. central banks are among the biggest buyers of their governments' bonds at the moment as they try to depress interest rates. Without that, many government plans in those countries go out the window.
There are two ways for governments to cope with the increase in debt-servicing costs that come with higher interest rates - spending cuts and tax increases. Both are political kryptonite.
It becomes pretty easy to make the case that any self-interested politician would be predisposed to lean on the central bank to keep interest rates low and inflate the debt away. Not that anybody's suggesting that politicians have their own interests at heart. But just in case, we have central bank independence.
It's a relatively new concept, gaining momentum mostly in the past two decades as more governments, including Canada, increased the autonomy of their central banks.
The governments still call the shots in the big picture, but the idea is to give the central banks a goal and then stay out of the way while they try to accomplish it. The ideal balance seems to be one that retains accountability, but gives the central bank a free hand day to day.
It seems to work. Research has showed that the more independent the central bank, the lower the average inflation rate in a country. Since 1991 when the Bank of Canada's mandate was officially deemed to be keeping inflation low and stable - the target is now between 1 and 3 per cent - the central bank has hit the bull's-eye year after year. Central banks that are stable and independent also tend to be associated with stable currencies.
As a result, central bank independence has become more and more an orthodoxy, but one that's now facing challenges.
In Canada, so far, we've been spared rhetoric from parliamentarians complaining that the central bank is "taking away the punch bowl" just as the economy gets rolling again and pushing for rates to stay low.
We're only a few months away from the likely onset of rising borrowing costs in Canada, as Bank of Canada Governor Mark Carney is sure to remind us today when the central bank announces its latest decision on rates.
What's more, we're only a year away from the expiry of the Bank of Canada's mandate to fight inflation at the expense of all other potential goals such as full employment or cheap homes. That means Mr. Carney and the government of the day will have to sit down and agree to renew the old mandate or hash out a new job description.
Mr. Carney may seek an even wider mandate. It's up to the government to decide if he should have it, but once that call is made, it falls to the Bank of Canada alone to decide how to accomplish it.
Jim Flaherty has proven a principled finance minister, willing to live with unpopular positions that he believes in, so if the Conservative government is still in place, there's a good chance that Mr. Carney will remain free to pursue the goals unimpeded.
If that's the case, he will be the envy of a lot of central bankers who aren't so lucky.