Principle of central bank independence could falter, survey suggests

9 Jan 17

The independence of central banks in Europe could undergo significant changes in the future, according to a survey of economists on the continent.

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A number of survey respondents noted that the European Central Bank had been criticised for overstepping its mandate, had lost its credibility or had taken on a growing number of obligations that could impact its independence.


Central banks around the world have increasingly opted to employ unconventional policy tools to deal with the impacts of the financial crisis. But as a result they have received growing criticism for going beyond their mandate.

This is putting pressure on their independence, which has gone largely unchallenged for the past three decades, economists said. Meanwhile, further afield in countries like Japan, the central bank is already subject to a high degree of interference.

The survey, conducted by the Centre for Macroeconomics and the Centre for Economic Policy Research, canvassed the views of 70 European economists on the issue.

Asked whether central bank independence will decline over the next 48 months, a majority (45%) disagreed or strongly disagreed, while a further 22% had no opinion.

However, another 32% either agreed or strongly agreed that this would be the case – a figure CFM described as “remarkable” given that central bank independence has been largely uncontroversial for a long period.

Overall, CFM said most respondents agreed that there was pressure on central bank independence, but their views varied on whether this would be strong enough to have an impact.

Populism, a loss of credibility, and changing circumstances and responsibilities were some of the key challenges to central bank independence identified in the survey.

One of the main tenets of central bank independence is that their setting of interest rates helps to control inflation. But today, inflation in the eurozone and the UK is too low, not too high.

Raising inflation might require a more active fiscal policy, which could effectively reduce independence, while conventional theory suggests that if central bank independence should decline, inflation should rise, the survey noted.

At the same time, central banks have taken on a greater range of responsibilities since the financial crisis. These new roles require cooperation with other public authorities, which CFM said could influence independence.

The European Central Bank, for example, has taken on a host of new objectives since 2008, including financial stability, the prevention of speculative attacks on sovereign debt, liquidity provision to national banks and quantitative easing.

Some of the ECB’s unconventional policy instruments, including its bond buying programmes, have proven controversial. A faction of German critics, for example, mounted a legal challenge to oppose measures it thought were tantamount to illegal financing, violated German law and represented the ECB overstepping its mandate.

A survey by the Eurobarometer found that only 30% of Germans trust the ECB. One respondent to the CFM-CEPR survey, Fabrizio Coricelli, associate chair at the Paris School of Economics, noted: “[The] credibility of ECB policies is undermined by several years of erratic policy and several commitments to ‘do whatever it takes’.”

Patrick Minford, of Cardiff Business School, also highlighted that central banks more widely allowed a “sizeable credit boom” to build in the run up to the financial crisis and made a number of subsequent mistakes during, leaving confidence in their competence “badly shaken”.

Overall however, the vast majority of respondents agreed central bank independence is a good thing. This is because it prevents concerns around political manipulation and because banks are geared to the medium term and tend to be better prepared and better informed, survey respondents said.

“Their responses to the financial crisis were, with all their flaws and shortcomings, still much better than that of almost all other policy institutions,” noted Ricardo Reis, a professor at the London School of Economics.

Most agreed, however, that the influence of their independence on inflation has diminished. Per Krusell, from Stockholm University, said: “The difference is likely to be small, given that the central banks have shown limited ability to affect inflation in the current low interest rate regime.” 

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