Political interference in central bank policymaking could harm plans to bring down inflation, the head of the European Central Bank (ECB) has said.
In a veiled warning to Donald Trump, after the US president last week demanded the Federal Reserve “immediately” lower interest rates, the ECB president, Christine Lagarde, said meddling by politicians could lead to greater economic volatility and sharply rising prices.
Trump said last week that the Fed boss, Jerome Powell, should cut the cost of borrowing to boost economic growth. The US president also said he was ready to force a cut in oil prices to bring down inflation. This move would allow central banks to reduce interest rates “all across the world”.
While Trump’s comments repeat his battle with Powell during his previous term in office, there is widespread concern the Fed chief may choose to resign, potentially spooking financial markets.
Lagarde told a Hungarian central bank conference: “While recent research suggests that de jure central bank independence has never been more prevalent than it is today, there is no doubt that the de facto independence of central banks is being called into question in several parts of the world.”
The Fed is expected to keep interest rates on hold this week while the ECB is forecast to cut. Fed officials are likely to argue that inflation has declined at a slow pace and that some policy proposals of the Trump administration could actually increase price pressures, argument likely to draw criticism from the White House.
Hungary’s prime minister, Viktor Orbán, recently appointed his political ally and former finance minister, Mihály Varga, to be the bank governor in Budapest from March.
György Matolcsy, the outgoing central bank chief who clashed with Orbán, also backed independence.
“Sometimes there will be fights, skirmishes, debates, but you have to be adamant for keeping your central bank independent,” Matolcsy told the conference.
On Europe’s doorstep, Turkey a succession of central bank governors have resigned or been dismissed in recent years. Last week the central bank in Ankara cut interest rates despite annual price inflation remaining above 40% and amid claims it was acting on instructions from the government.
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In the UK, former prime minster Liz Truss blamed the Bank of England for failing to anticipate the market turmoil that followed her “mini-budget”, saying it was part of “the deep state” putting limits on government policymaking.
Lagarde said the return of higher interest rates made voters more aware of the cost of borrowing, ending a period between the 2008 financial crash and the end of the pandemic of “rational inattention”, when interest rates stayed low from year to year.
However, governments should protect central banks from persistent political pressure or risk the kind of exchange rate volatility and international attention that raises government borrowing costs, she said.
In this situation it becomes more difficult to keep inflation down, raising concerns that independent central banks are failing to deliver on their mandates, Lagarde added.
Such a sequence of events, she said, could then undermine the social consensus and further amplify volatility in the economy.
