Architect of Bank of England Independence Ed Balls Urges Rethinkby
Monetary officials must give up some autonomy to governments
Central bankers must still be able to meet goals on their own
The notion of central bank independence needs an update, said Ed Balls, one of the creators of the independent Bank of England two decades ago.
Central banks should sacrifice some political autonomy in order to preserve their operational independence to meet their targets with whatever tools they see fit, especially when interest rates are very low, Balls wrote in a paper published on the Harvard University website. Making that distinction will allow central banks to protect their popular legitimacy, according to the paper.
“If things start to go wrong, that’s quite politically dangerous for the central banks,” Balls said in an interview with BBC Radio 4 on Thursday. “There’s not sufficient accountability, not a clear target, an they’re making decisions with distributional impacts. There’s a gap in the system.”
The BOE, the U.S. Federal Reserve and the European Central Bank have all come under attack in recent months by politicians arguing that years of ultra-loose monetary policy has helped enrich asset holders while hurting savers. Balls said that the new responsibilities central banks have acquired since the financial crisis have “hugely concentrated” their power and that the striking the right balance between operational and political independence is “unfinished business.”
BOE Governor Mark Carney said this week that the focus on monetary policy as the source of the ills in the global economy is a “massive deflection exercise.” Balls said that low-rate policies have been “the only thing that’s stopped the economy sliding back into depression,” and that if the U.K. government had spent more on infrastructure, it would be easier for the BOE to bring inflation back to target.
Balls -- currently more famous in the U.K. as a contestant on a televised ballroom dancing show -- was one of then-Chancellor of the Exchequer Gordon Brown’s key advisers when the BOE’s nine-member Monetary Policy Committee was formed in 1997. He was the opposition Labour Party’s spokesman on Treasury issues from 2011 until last year.
Former U.S. Treasury Secretary Larry Summers has said that central bank independence, conceived as a way to stop governments from stoking inflation with measures designed to gain electoral support, is an outdated concept. Governments and monetary policy makers need to cooperate to ensure the maximum effectiveness of stimulus in a world where demand is chronically deficient, he said in a speech at the International Monetary Fund this month.
The Harvard paper says that while the existing monetary-fiscal framework in most countries is likely to be effective in normal times, an alternative is needed for extraordinary phases. It recommends a coordination mechanism with three key principles: it should be triggered by the central bank, protect democratic control over fiscal policy, and be limited to the zero lower bound.
Carney also said this week that there’s “merit” in having a periodic review of the BOE’s remit, but noted that the time should be set in advance, so it’s not interpreted as a knee-jerk reaction to an unpopular monetary policy stance.
Balls said that operational independence is important for controlling inflation, whereas political independence may not be. Giving up some political independence will make governments more accountable for policy as well.
“The case for independent central banks is as strong as it’s ever been,” he said on the radio. “We don’t want them to be politically criticized. What we’re saying is we need a better dialog.”