Against Central Bank Independence

by David Webb

Hungary has come under EU pressure to reverse its attempt to bring its central bank under democratic control. I suppose you could say the  EU is consistent in that it wants monetary affairs conducted away from the glare of publicity–there is no democratic input into the European  Central Bank either. Of course, Hungary is not a member of the eurozone and so should be free to do as it pleases in monetary affairs, but, given its financial difficulties, the country is vulnerable to EU pressure not to dismantle the undemocratic technocracy, of which independent central banking is one element.

Interestingly, I once (ca. 2000) went for a job with Business for Sterling and was interviewed by Nick Herbert, the current police minister. I was quizzed on many political issues in the interview, and I mentioned that the independence of the Bank of England was the only good thing Labour had done. Mr Herbert–correctly in my current view–was strongly of the view that the government of the day must be accountable in parliament for interest rate decisions.

I suppose I thought that the Bank of England might correct Gordon Brown’s excesses, by raising interest rates if fiscal policy were too loose. I hadn’t factored in the deliberate stoking of a property boom via the device of linking interest rates to a measure of inflation (the CPI) that did not include property prices. It turns out that the government should be accountable for interest rates to parliament–at least, where official rates are centrally set, and not (as may be more acceptable to libertarians) set by each commercial bank without guidance or manipulation by a central bank–and that the last government quite wrongly sought to blame bankers for a crisis created by the government’s own decision to stoke the boom by ignoring asset  prices.

There is no reason at all why Hungary should not bring its central bank under democratic control. Indeed, Hungary’s proposed reforms to bring the judiciary under democratic control also have positive aspects too, as an independent judiciary only works where the judges interpret the law without making it. It is frustrating for the UK to be a member of a body like the EU, so insistent on imposing unaccountable government on a whole continent.

2 responses to “Against Central Bank Independence

  1. 1. “I suppose I thought that the Bank of England might correct Gordon Brown’s excesses, but raising interest rates” should read “by raising interest rates”.

    2. I see George Osborne wants the power to order the Bank of England to act in a crisis. See

    “The Financial Services Bill will be put to Parliament on Friday morning alongside a memorandum of understanding between the Treasury and the Bank that will set down how the authorities should respond to another financial crisis.

    It will make clear that responsibility lies with the Chancellor whenever taxpayers’ money is put at risk to avoid a repeat of the Northern Rock fiasco when Alistair Darling found he could not order the Bank to act.

    … It will also enshrine in law the principle that the regulator can seize a failing lender and wipe out shareholders to protect financial stability.”

  2. You make some good points, but I’m rather certain that neither bankers nor governments will ever take responsibility for the unintended consequences of interest rates “decisions”. Markets will be blamed for any crisis that may erupt, whatever its real cause, and whether the central bank is “independent” or not.

    The libertarian answer should, imo, always be to abolish the central bank! Abolish the government!