Central Bank Spotlight

Mon 08 Jul 2019

• In the past few decades, one of the policy decisions that were key for investors was central bank independence. In the past, central banks constituted the arm of the Treasury. Run by top notch economists, their ability to review economic conditions independently has given them the power to reduce economic volatility by making sure that the economy did not overheat, and subsequently a crash could be avoided. After 2008, their role in the global economy became paramount, especially when they circumvented political gridlock and printed an unprecedented amount of money to shore up the financial system. For the past decade they have been the custodians and underwriters of economic stability and growth, as well as architects of one of the longest, most impressive and correlated risk asset rallies in history.
• It would not be an exaggeration to say that investors have looked to the central banks much more than fundamentals for well over a decade. However, this status quo is now coming under threat.

• Their power is not compatible with democratic mandates. In their efforts to shore up the financial system, central banks have taken decisions which hurt savers and put more risk on retirees. Lower structural growth and rising inequalities (exacerbated by central banks printing money mainly for the benefit of holders of financial assets- usually the wealthiest part of the population) have brought populist politics into the mainstream. Populist politicians, elected with a mandate to shake the status quo, target central bankers. As long as inflation is in check they can demand low rates to keep their economy competitive. Lack of a strategic, cooperative and long term perspective means that they can attempt to curb central banker’s attempts to avoid overheating of the economy. This is why candidates with a political background, rather than economists, are now chosen as the heads of the world’s largest central banks. The Fed’s
  Jay Powell and the ECB’s -nominated- Christine Lagarde are politicians, more prone to serve political ends and balances, rather than try to avoid an overheating economy. The decade-old safety net of central banks may now be in peril. The risk is clear. Whereas in the wake of 2008 central bankers communicated to curb systemic risks, those more susceptible to please politicians and markets, could exacerbate nationalistic and economic mercantilism, even trigger currency wars.