Once accused of partly precipitating the rise of far-right wing Eurosceptic groups in German local politics by German finance minister Wolfgang Schäuble, ECB President Mario Draghi responded:
“We obey the law, not the politicians, because we are independent, as stated by the law.”
One of the crucial conditions for central banks and their policies to work as designed and achieve or even overperform designated targets is its independence. Central banks should not seek nor take any instruction, either formal or informal, from any institutions, bodies, offices or agencies. Likewise, these institutions, bodies, offices and agencies should not seek to influence the decision-making process of central banks. If both conditions are fulfilled, we say central banks maintain its independence and credibility hereinto. The ultimate purpose of maintaining central banks’ independence is to better implement the banks’ mission without unwarranted intervention and conflicts of interests. In most cases, this mission is to maintain the financial and monetary stability of the corresponding countries/regions.
However, things may get tricky when the so-called independence is intertwined with the mission of central banks. For Bank of England, this is exactly what it’s facing during the highly debated EU referendum. Jacob Rees-Mogg, a MP from the Leave campaign, accused Mark Carney, the governor of BoE of behaving in a way that is “speculative and beneath the dignity of the Bank of England,” while Nigel Lawson, Baron Lawson of Blaby and former Chancellor of the Exchequer during the 1980s, blamed Mr Carney of being “quite wrong to enter the political fray in this way.”
Granted and as always, BoE must maintain its independence and credibility by not getting involved too much in such kind of political campaign. But it is equally paramount for the central bank to fulfil its mission “promote the good of the people of the United Kingdom by maintaining monetary and financial stability” and speak up in the referendum even at the expense of stirring up new quarrels.
The first part of BoE’s mission, maintaining monetary stability, is achieved by preserving stable and reasonably low prices, in which the UK interest rates play a significant role. Given the weak economy growth worldwide, as well as the slowdown and overcapacity in some key industries such as oil and steel, economic situations at the UK is already seeing troubles. It’s the first time the UK had failed to witness a positive annual inflation for over 50 years when CPI in February this year was no higher than that in February 2014. Tata Steel is desperately looking for buyers and it is now facing another new problem with its suppliers’ insurer. Negative interest rates in Eurozone and Japan are putting pressure on the sterling. Many information is demonstrating the uncertainty and anxiety within the economy, and Brexit could only deepen this worry. This, in turn, may further push the country into the territory of lower growth and higher unemployment, threatening prices stability.
On the other hand, the ultimate goal of maintaining financial stability is to reinforce the resilience of the UK’s financial system in general and promote the safety and soundness of financial firms. Now, this may become a difficult job as firms are pulling back their recruitment and many positions become unfilled due to non-UK employees’ uncertainty about the country’s status with the EU. Uneasiness in commodity trading and London’s position as a stepping stone into Europe because of potential tariffs and possibly deteriorating financial and economic relationships with Germans and Frankfurt are also postponing international investments. If Brexit happened, the cost of transitioning, both procedurally and functionally, would wear out these companies. International confidence in the local market and business are not easy to quickly restore as if nothing has taken place.
Consequently, the BoE is by no means a bystander of the referendum as its potential consequences and uncertainty that already being brought up are challenging the mission of the Bank. Analysing and publicising the implications of the referendum for monetary and financial stability is by the duty of the BoE. Shrinking back from likely political criticism does no good for BoE as a transparent and potent central bank, and may even threaten its ability to properly and timely carry out its function. Speaking up in the referendum is not threatening BoE’s independence and credibility, flinching because of possible criticism is.