global perspectives
inequality, populism and central bank independence.
Populism, fuelled by rising inequality, is on the rise and continues to shape political outcomes in key economies.
There is an argument that the policy actions taken by central banks in the aftermath of global financial crisis have been a strong contributor to widening the gap between the ‘haves’ and the ‘have-nots’ as rising asset prices is a key channel through which monetary policy works.
Notably, ex-Fed chair Ben Bernanke has been writing on this topic and, not surprisingly, defended the policy stance adopted 10 years ago. He argues the effects on inequality are not clear. Similarly, a recent study by the ECB concluded that the massive asset purchase programs helped reduce inequality by supporting employment growth. However, this topic has been a major source of debate, especially after Thomas Piketty’s well-argued case showed that, contrary to traditional wisdom, developed economies don’t automatically gravitate towards more egalitarian societies.
An important side-effect of rising populism and its appeal, in our view, has been an increase in aggressive rhetoric being adopted by governments on central bank policy making. This was first evident in the Eurozone following the 2011/12 crisis, and now appears more widespread. President Trump has recently criticized Federal Reserve policy, breaking with presidential norms. Even in emerging markets, central bank independence is under pressure. In India, there is a serious clash between the Reserve Bank of India (RBI) and the government, and independence has completely reversed in countries such as Turkey.
In our view, monetary policy will need to be sensitive to factors that fan populism, and accept the impact of monetary policy on inequality. Even if policy makers can rightly claim that distribution of wealth is outside the scope of their mandate, the political outcomes inequality-shaped populism can generate have a huge influence on the functioning of the monetary policy regime. Central bank independence has been a dominant theme over the last 30 years, but, given rising populism and increasing skepticism about the value of expert-led institutions, we think we are now past peak independence in central bank policy-making in the developed world.
Consider, for example, the rise in populism evident in Germany, which is now shaping political outcomes, and could affect who is chosen as the next ECB chair. Meanwhile, in the US, it is totally conceivable that tensions between the president and the Federal Reserve will rise further if the US economy slows down. As the divided Congress limits the scope for further government spending or tax cuts, public pressure will begin to focus on monetary policy, particularly on the level of interest rates.
Overall, as populism continues to rise and multilateralism and globalization lose support, we think central banks need to reconsider their narrow focus on inflation and, in the case of the Federal Reserve, unemployment-based objective functions. This has clear parallels with the movement in the investment industry to rethink how global sustainability challenges, including rising inequality, are impacting the way we manage and assess assets across time and geographies.
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