One of the Reserve Bank’s most senior officials has warned the public’s anxiety about low interest rates and their affect on the distribution of wealth is posing a “new threat” to central bank independence.
Guy Debelle, RBA deputy governor, issued the warning to central bank colleagues in London overnight.
In a speech entitled Central bank independence in retrospect, he said the Reserve Banks of Australia, New Zealand, the UK and Europe, had generally performed well since they were given independence in the 1980s and 1990s to pursue inflation targeting goals, solving the problem of high inflation.
But he said the legitimacy and effectiveness of central bank independence was now under scrutiny, because people were increasingly blaming central banks for their economies’ woes.
He said growth had been unsatisfactory since the global financial crisis, nominal wages had been stagnant and governments had been unwilling to use fiscal policy to boost growth substantially, and this could also be contributing to the public’s scepticism in central bank independence.
He warned the current focus on the distributional consequences of monetary policy, in this weak growth environment, posed a “new threat” to central bank independence.
“My view is that inflation targeting and central bank independence are being blamed for economic outcomes that are not a consequence of either of them, but rather of our understanding of the way the economy operates,” Debelle said.
“The concerns around income distribution are much starker ... when nominal wages are stagnant for a significant share of the population.
“Another possible explanation is that if a primary transmission channel of unconventional monetary policy is through asset prices (including house prices), then the wealth channel may be playing a disproportionately larger role than in the past.
“The distributional impact of the wealth channel may well be larger than that of other channels of monetary policy transmission.
“If the distributional impact of monetary policy channels is larger now than it was in the past, this can compromise the legitimacy of instrument independence,” he said.
Debelle said another complicating factor for central banks was their increasing pursuit of financial stability goals since the GFC.
He said their pursuit of financial stability goals raised serious questions about how those goals were interacting with inflation targets.
If central banks were going to keep pursuing financial stability goals, he said, they ought to consider if they will need independence to define those goals, or instrument independence to pursue those goals.
“The goal of financial stability has generally been left vague,” Debelle said.
“It is much harder to get agreement on what are the important elements of financial stability and how central banks should go about achieving them.
“Does the goal of financial stability need to be better defined than it is at the moment? If so, by whom? Should the central bank have complete independence to pursue its goal of financial stability with whatever instruments it so chooses, including when the distributional implications of some of those instruments are much starker?
“The questions do not have a straightforward answer. I would hope they would be a hot topic for PhD students today in the way that central bank independence was when Adam Posen and I were PhD students,” he said.
