Central banks and governments are on a collision course in their efforts to bolster economic growth and contain inflation
“I don’t remember an emergency ECB meeting being called to address unusually high inflation rates. You can see what the ECB’s priorities are,” said Joerg Kraemer, chief economist at Commerzbank in Frankfurt.
Central banks around the world have varying degrees of statutory independence. Congress can in theory take back power from the Federal Reserve and the U.K. government can instruct its central bank on monetary policy. Nonetheless, governments starting in the 1990s moved to grant them de facto independence by assigning an inflation target.
“Central banks do have a mandate to combat inflation, but in practice it’s hard for them to do so at all costs,” said Stefan Gerlach, a former deputy governor of Ireland’s central bank. “They may worry about the government’s ability to pay interest on the public debt if rates are too high, and the ability of households to service their mortgages.”
Central banks’ defenders argue they can still make targeted interventions in line with their responsibility for financial stability without compromising their independence. For instance, the Bank of England and European Central Bank could offset the stimulative impact of targeted bond buying through sales of other assets, open-market operations, or by raising short-term interest rates more than otherwise planned.
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