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S. Balakrishnan

Monetary policy seems to have no hard and fast rules - at least not yet. It is still evolving — although more than one economist might feel that this is a cavalier statement. Absent are neat formulas to calculate how much a 25bps increase or decrease in interest rates will reduce inflation or stimulate growth. Thus,the Bank of Japan has struggled to lift the economy above deflation territory with a prolonged zero and ultra-low interest rate policy. After a decade, the jury is still out.

It is to make life easier for central banks that many have been told to mind just inflation - we will look after the rest, say their governments. Barring the US, all G-7 countries are in this mode.

An unambiguous inflation mandate is no doubt preferable to multiple goals. Even adding the promotion of employment alone to a central bank's responsibilities complicates things. It must then take its eyes off the sole objective of inflation control.

The ECB is the one central bank, which is so transfixed on inflation that it has dual indicators - money supply data, apart from prices to guide it.

Besides, it monitors energy prices, wage settlements, budget balance, et al, to assess inflation risk. It would be no exaggeration to state that it sees danger lurking in every corner.

What is more, there is a remarkable degree of unanimity in its board's inflation views and rate decisions. Many would argue that the ECB's (and its previous avatar, the Bundesbank's) hawkish stance has prevented Europe's economy from performing to its full potential.

While the ECB has been given complete independence (and has pretty much exercised and jealously guarded it), it has not been spared suggestions and advice from governments to keep rates low in difficult times. Those mostly fell on deaf ears. Still, even independent central banks cannot entirely disregard the legitimate concerns of elected governments.

In the G-7, the Bank of England wins the best marks for its responsible independence, clarity of communication and transparency. Divergent views in its Monetary Policy Committee (MPC) meetings are not uncommon. The UK's current Chancellor of the Exchequer, Mr Gordon Brown, too has kept away from gratuitous advice to the bank.

Reading the MPC's minutes, it is clear that, while meeting inflation targets is its focus, a host of other data and indicators do play a significant role in determining rates and its stance.

Is monetary policy so esoteric or loaded that the people's representatives should have no say at all?

A longtime US Congressman, Mr Barney Frank, vehemently disagrees with the idea that the only remit of central banks is meeting agreed inflation numbers.

What about growth and jobs, he asks? What if zealous monetarists kill inflation but at too high a cost? He has a point. The debate on central banks' independence and their mission is far from over.

More Stories on : Monetary Policy | Economy | Financial Scan | RBI & Other Central Banks

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