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Political meddling in monetary policy raises risks

Tuesday, August 27, 2019

Subject

Politicisation of central banking.

Significance

Political leaders have actively interfered with or threatened the independence of central banks this year in Algeria, Argentina, Brazil, Colombia, the EU, India, Indonesia, Malaysia, Mexico, Myanmar, Philippines, Russia, South Africa, Thailand, Turkey, the United States, Venezuela and Zimbabwe, according to an academic study that tracks quarterly trends.

Impacts

  • If political pressures on central banks lead to higher prices, it could take years of tighter policies and slower growth to curb inflation.
  • Decades of low inflation are embedded in expectations, but political interference could begin to unravel those beliefs.
  • Some commentators will continue to suggest that politicians are right to transfer attention from inflation towards jobs and other goals.
  • Economists largely agree on the importance of curbing price gains and see run-away inflation as the cost of prioritising political needs.
  • Low-to-middle-income countries are more susceptible to political interference in central banking and will struggle to escape it.
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