Central Bank Autonomy Faces Challenges in Three Emerging Markets

(Bloomberg Businessweek) -- Central bank independence, a totem of economic respectability, is being challenged in some key emerging markets as the Covid-19 pandemic rages toward its second anniversary.

Autonomy in setting interest rates has become almost holy writ the past few decades. Countries whose policymakers can act without political encroachment are widely considered to be better managed, with superior long-term growth and inflation that’s under control. The idea is that central bankers can act in a nation’s long-term interest without deference to government leaders; the latter by instinct tend to shy away from tough decisions.

That philosophy is now under stress in important economies in three hemispheres. In Brazil the central bank is confronted with skyrocketing prices and a headstrong president running for reelection next year. Indonesia, which refashioned its institutions along Western lines after a late 1990s financial meltdown, is undertaking a meshing of fiscal and monetary policy once frowned upon in polite circles. Turkish President Recep Tayyip Erdogan finally got the rate cut he demanded, even as inflation surges.

Brazil President Jair Bolsonaro signed a bill into law earlier this year that formalized autonomy. The Central Bank of Brazil has taken the freedom to heart, raising rates dramatically in a bid to crush inflation. It comes at a cost, however; gross domestic product shrank in the second quarter. Bolsonaro has denied an Associated Press report that he regrets giving the approval to independence. If the economy continues to head south, the president will look for a scapegoat and blame the central bank.

In Indonesia, officials have committed the central bank to directly financing the budget for three years. Bank Indonesia will buy $15 billion of bonds directly from the state this year and a similar sum next year. Although monetary authorities the world over have engaged in unconventional practices to help combat Covid, so-called debt monetization is a step few have been prepared to make.

Turkey’s central bank, which says it sets rates at arm’s length from the government, clearly keeps at least one ear attuned to politics. Erdogan is on his fourth monetary chief since 2019. When he fired Naci Agbal in March for hiking rates to counter inflation, it was only a matter of time before newbie Sahap Kavcioglu undid at least some of the work. Kavcioglu made his move on Sept. 23 when he cut the benchmark rate by a full percentage point.

There’s plenty of room for flexibility in a time of severe economic and social stress. After all, the Federal Reserve and European Central Bank have said they will tolerate higher inflation in the short term—provided it settles to within their targets. But as three important emerging economies have indicated, there is a risk that independence is only for the good times. Yet it might be the really tough days when it is needed most.
 
Moss is a columnist for Bloomberg Opinion.
 
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