Central banks face rising pressure from politicians

WASHINGTON: When politicians tried to pressure former European Central Bank president Wim Duisenberg, he used to say: “I hear, but I do not listen.” These days, a growing number of central bankers worldwide are hearing a lot — and some are listening.

The Bank of Japan refrained from raising interest rates last month in the wake of government pressure. The autonomy of banks from Ecuador to India is under attack. French presidential candidates are demanding the ECB meet a goal for growth.

“Political pressure is definitely intensifying,” says Stephen Roach, chief economist at Morgan Stanley in New York. The central bankers under the gun have already helped deliver the strongest global expansion in 30 years and kept a lid on prices. “If they wind up running politically compromised monetary policies,” Roach predicts, “Ultimately, you’ll get more inflation.”

While lobbying central banks is one thing, meddling is another, says former Fed governor Laurence Meyer. “The danger here is to inflation expectations,” says Meyer, Washington-based vice chairman of Macroeconomic Advisers. “Market participants will have less confidence in central-bank independence in the face of political pressure,” he added.

The Bank of Japan’s standing has already suffered in financial markets after governor Toshihiko Fukui and fellow policy makers unexpectedly left the benchmark rate unchanged at 0.25% last month. That came after chief cabinet secretary Yasuhisa Shiozaki and other officials said the bank should consider the government’s view when setting rates.

“The government has been putting indirect pressure on the bank not to raise rates,” says Yasunari Ueno, chief market economist at Mizuho Securities in Tokyo. Shiozaki repeated his advice last week, and vice finance minister Hideto Fujii urged the bank to support economic recovery.

The perception that politics may be playing a role in monetary policy leaves traders in doubt about what the bank will do this week, says Peter Morgan, chief Asia-Pacific economist at HSBC Holdings in Hong Kong.

Interest-rate swaps suggest a 61% chance of an increase, according to Credit Suisse Group. Before the bank surprised investors by leaving rates unchanged last month, traders saw as much as an 80% chance of an increase at January’s meeting. “There’s a fair degree of confusion now,” says Morgan.

“The bank has denied it, but it’s hard to eliminate the suspicion there was some political pressure and that it’s still in place.” Monetary policy is becoming especially politicised in economies without a strong tradition of central-bank independence. In Europe, the central banks of Slovenia, which joined the euro last month, and Poland have become embroiled in political disputes over who should run them.