Should the Central Bank be Independent

For the effectiveness of the financial market, traders need to have a close look at the monetary policies of the Central bank. It is essential as it might impact the interest rate and policy moves leading to Quantitative Easing that affects the assets prices, bonds along with commodity prices. The question is about the independence of the Central bank, and in most of the advanced economies, the decisions are taken up by the independent central bankers without interferences. There are arguments about the political influences upon Central banks, which are not welcomed as it might affect the traders. The independence of the central bank has many advantages; however, in the modern business environment, the democratic system is being considered upon for the growth of the monetary policies (The Financial Times, 2012).

Central Banks faces several criticisms, and recently politicians, along with the financial experts, are stating their disapproval about the decisions and practices of the central bank policies. It is argued that central banks should be independent as it is failing to design any neutral systems owing to the political pressures. For the effectiveness of the policies and to ensure better decision making, central banks need to be independent. Contextually, the central bank should be separate so that the focus is upon the stable monetary policies other than unemployment reduction. It is argued and claimed that an independent central bank leads to less inflationary fiscal policies. There is a correlation between inflation and central bank independence (Debelle & Fischer, 2000). Critically the aim is to insulate the systems of money from the interferences of political parties to attain short term economic growth. The independence of the bank is vital to protect against the monetization of debts. Arguably, central bank independence is supported to lower the cost of reducing inflation as it is not always essential to raise the rate of interest. For example, it is noted that banks have two modes ‘goals’ and ‘operational,’ and the European Central bank is one such instance where the independence of the bank is enshrined in a treaty. The freedom of the bank is vital to avoid the interference of the political parties to attain votes. Independence ensures and increases the trust over the central bank, and this can be well stated through the instance of the global crisis (The Financial Times, 2012). The crashing down of the economy in the year 2008 did not turn into another Great Depression with the help of the Central bank. Independence of the central bank led to the slashing of the interest rates, and electronic money taps were done through quantitative easing. On the other hand, it is argued that a central bank need not be independent as the central bank failed to stop the asset price bubble in the 2000s.

Central bank independence case is being considered upon, but the supporters of the bank are horrified owing to the attack that was done by Trump on the Fed. Trump stated that the Fed is “not doing a good job,” adding that the Fed’s policy of raising interest rates and cutting back on QE had gone too far and was “insane.” Two months later, he said: “The only problem we have is Jay Powell and the Fed,” adding that “so far he has called it wrong and only let us down” (FX Publications Inc, 2019).

Subsequently, stating about central bank independence, several advantages and disadvantages affect the process of decision making. From the literature and the study, it can be critically notified that independence will free the bank from conducting monetary policies without political interference. The bank might be able to deliver better inflation outcomes without impacting economic growth. Another positive outlook owing to central bank independence is that it is insulated from nationalism and populism. It is stated that the freedom of the central bank is now in a few countries, but for the UK it was since 1997. The bank was granted operational independence over the monetary policies. Today people are supporting the freedom of the central bank, and it is argued that “the control of the amount of credit in the economy and the control of the banking sector more generally is intrinsically political. … The idea that control of this sector should be removed from government and thus ultimately from accountability to those that the system is supposed to work for (the general public) is economically ludicrous … and politically terrifying”( FX Publications Inc, 2019). However, from the gathered records, it is remarked that the case of central bank independence is weaker today. The intention to have an independent central bank is vital as politicians across the globe are concerned about power. Therefore, they might try to influence bank decisions.

On the other hand, the independence of the bank will allow it to work as per the business cycles, thus reducing the conflicts of interest. Central bank independence will allow making decisions that are regardless of elections, thus positively or negatively influencing the economy. The main aim of the bank is to control inflation; therefore, decisions taken will not be based upon the government requirements. The main intention is to control the economy without resorting to any discrimination (Guardian News & Media Limited, 2020).

It is vital to state that governments across the globe are fond of populist projects which require economic fundamentals. The case of the FIFA cup in Brazil says the interferences of the government that indulged in deficit spending. The separation of the government and financial bodies tends to improve the health of the state. On the other hand, it is contradicted that independent central banks might be led to secretive aspects. The actions by the bank might be unexpected; thus, the bank also needs to follow smooth transactions and ensure better policies. Thus, independence of the central bank refers to the freedom that is attained while making monetary policies. The argument is about the dependence and independence of the bank, but the core fundamental aspect is to have a stable economy for the effectiveness of people across the globe (Debelle & Fischer, 2000). Independence of the central bank will ensure the inflation averseness for the effectiveness of society.

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References

Debelle, G. & Fischer, S., 2000. How Independent Should a Central bank Be? [Online] Available

FX Publications Inc, 2019. Central Bank Independence: The Cases For and Against. [Online] Available

Guardian News & Media Limited, 2019. Central banks were always political – so their ‘independence’ doesn’t mean much. [Online] Available at: