Risky central bank politicisation

There is legitimate debate about the actual independence of modern-day central banks, but almost everyone agrees that overt politicisation of monetary policy — as we appear to be seeing in the United States — is dangerous. Why is that?

- Jamie McGeever

Central banks are essentially arms of government, and many worked in close conjunction with national Treasuries in response to the Global Financial Crisis and pandemic, so absolute independence is a bit of a myth.

But what US President Donald Trump is currently doing goes well beyond that. By threatening to fire Chair Jerome Powell, actively trying to sack Governor Lisa Cook, and attempting to fill the Board of Governors with appointees sympathetic to his calls for lower interest rates, he is shattering the Fed's veneer of operational independence.

Examples of the naked politicisation of monetary policy down the years show that it can, to put it mildly, deliver suboptimal results — loss of credibility, currency weakness, spiking inflation, rising debt, elevated risk premia, and, potentially, much higher borrowing costs.

These are certainly far from guaranteed outcomes in the US, but they show where excessive political interference in monetary policy can lead.

TURKEY

“Erdoganomics”, the unorthodox economic theories and policies of Recep Tayyip Erdogan, who has been president of Turkey since 2014, are a prime example of politicised monetary policy.

Mr Erdogan, an avowed “enemy” of interest rates, is on record as saying high interest rates cause inflation and that the way to reduce inflation is therefore to lower borrowing costs. He fired or replaced five central bank governors between 2019 and 2024, some for hiking interest rates or refusing to cut them.