The heat on the ongoing tussle between the central government and the Reserve Bank of India seems to have cooled for now. But is India the only country where central bank is battling for autonomy and independence in decision making power on monetary issues?
Across the world, there are several countries which are in the midst of raising clash between the government and their central banks. However, the worst case has been that of Turkey in recent past. Its economy is increasingly going downhill, resulting in inflation rate touching as high as 25 per cent, while current account deficit surged to over $31.2 billion. For this, authoritarian rule of Turkish President Recep Tayyip
Erdogan is held responsible as he persistently meddled with the country’s central bank by demanding lower interest rates. He has done so to keep his populist measures going on. But Lira is in free fall against US Dollar and debt has become unmanageable in the country.
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Similarly, US President Donald Trump doesn’t want to bring any change in his style of functioning. In accordance with my way or highway attitude, he compels the US Federal Reserve to support his economic policies. His criticism of the Federal Reserve over interest rates is unstoppable. Since January 2017, the US central bank has increased its interest rate benchmark five times and is expected to do so once more this December. In the US, the GDP for the second quarter registered 4.1 per cent gain while the unemployment rate is also 4.1 per cent. Trump doesn’t want any disruptions in the US market. He is also under pressure from economists on the rising US Dollar exchange rate and its debilitating impact on developing economies.
There is a fear that if the US Dollar exchange rate rises higher, it would add to buying costs of the heavily indebted global economies. While the US central bank has not so far given into Trump’s pressure, will the US Federal resist for a long time a push from the President on the lowering of interest rate cut is a big question. However, US Federal Reserve Chairman Jerome Powell’s decision to keep interest rate high goes by his thinking over long-term economic growth and financial stability in the US market.
But Trump, as a politician, believes in quick fix; he wants the central bank to go by his government’s economic and monetary policies, a dictate that ex-US President Richard Nixon used to pass against the US Federal bank in the 1970s. President Nixon didn’t believe in the morality of the nation’s prosperity. He wanted to have a strong economy and low unemployment rate to show off his macho leadership to the people. To achieve this objective, he fired then Federal reserve bank chairman William McChesney Martin and brought in Arthur Burns as the new Fed chairman. Burns did, in fact, support President Nixon’s economic policy by keeping interest rates relatively low, but it proved to be disastrous. Instead of pushing America’s economic growth, it ushered in a period of high inflation and high unemployment across the US.
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It is ongoing turf war between the Bank of Italy and the country’s government that knows no end. The Italian Government led by Prime Minister Giuseppe Conte and the Bank of Italy, which is the central bank of the country, are in eyeball-to-eyeball position over rising government bonds yield. Bank Governor Ignazio Visco feels rising government bonds yield would impact common people and firms in the country, as such the government should try to restrain high rise in bonds’ yield. He is of the view that Italy could withstand a rise in interest rates so long as budgetary policy remains anchored to stability and reforms should aim at strengthening of the economy. But the Conte government argues that to checkmate economic slowdown and prevent the country’s sluggish economy from getting into a recessionary trap, big spending is essential.
In Japan, it is the government’s responsibility to protect the country’s central bank from any kind of pressure on its autonomous decision making power on the monetary front. But this spirit has often been given a go by the government. Faced with challenges posed by years of ultra-low interestrate and its impact on Japanese banks’ profits, the Bank of Japan recently warned the country’s government that if the latter continued to intervene in the affairs of the central bank, it would hurt the country’s economy.
It reminded people about the famous 2011 spat between the Japanese Finance Ministry and the Bank of Japan. Highly concerned about the monetary situation of the country, Japanese Finance Minister headed by Yoshihiko Noda held the Bank of Japan responsible for rising Yen’s high interest rate and consequent impact on bank’s profit. Noda had told his country’s Parliament that his ministry would take decisive action against excessive exchange rate volatility. Despite the Bank of Japan’s attempt to maintain its independent position, the Japanese Government intervened into the affairs of the bank and forced it to lower interest rate which latter backfired the Japanese economy.
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Overall,independence of a central bank on implementing an effective monetary policy is prerequisite. If a government, under which a central
bank works, tries to intervene in decision-making power of the bank, it has often resulted in destabilisation of the economy. Given the fact, is the Indian political leadership ready to learn from the experience of these nations?