The politicisation of central banks

The politicisation of central banks

Good morning and welcome to today’s foreign exchange market commentary on Tuesday, the 11th of December.

Even though economists disagree on a number of topics, there has been a near consensus over one thing; central bankers should be apolitical. Suddenly the independence of central banks has come under stack. The model technocratic independent central banker has been pushed out. Rather governments have started taking direct control of monetary policies, changing the rules of the game for investors forever.

Ben Bernanke may be a household name today globally, but before his predecessor Alan Greenspan, central bankers used to be fairly unknown figures even in their own countries. But today, central bankers are fighting political battles daily. Take the case of Europe. German politicians attack the Italian President of the European Central Bank Mario Draghi daily for covertly printing euro to rescue the currency bloc. In the US, Bernanke’s policies faced strong criticism from the Republicans before the elections and had Mitt Romney won, Bernanke was unlikely to have continued for long.

Britain on the other hand, have gone a step further and started importing talents from overseas. Canadian Mark Carney has been appointed with the hope that he’ll fix a economy that is beyond the realm of the natives. Carney is very much a political appointee and there can be a severe backlash when the Brits find out that some foreign star dust is not up to the challenge.

There are a couple of reasons why central banks have taken the political plunge.

First, the objectives of the central banks have changed. Gone are the days when central bankers used to be busy fighting inflation. Recession seems to be their main enemy now. The argument that independent central banks could make long-term decisions without worrying about short term political outcomes has suddenly become unimportant. Not that they have much credibility left now anyway. Nobody really believes what the BoE or the ECB says. In fact there’s little evidence to believe that an independent central banker would do a better job than an elected politician.

Second, the central banks have become overtly political themselves.

Consider near-zero interest rates for example. While they punish the retirees because their pension savings suddenly seem to be far lower than what they had expected, young earners planning to buy a home benefit from it.

Ditto for assets purchase programs run by central banks. It’s supposed to redistribute wealth among the masses. In reality it creates a far larger economy than would be otherwise possible, leaving the bills of current spending for future generations.

But the problem is that central bankers are not elected representatives and hence are easy targets because they have not won any legitimate mandate. The beleaguered current technocratic Prime Minister of Italy is the best example of that.

Neither, do they know the language of defending their decisions. That makes them sitting ducks again.

The era of independent central banks seems to be over forever. Rather expect tighter government control over monetary policies. The trouble is, governments operate under various political compulsions and hence don’t exercise power responsibly. That is likely to exacerbate market volatilities in future.

New age investing decisions will depend more on reading the politician’s mind correctly.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.2414

GBP/US$ – 1.6072

GBP/CHF – 1.5031

GBP/CAN$ – 1.5856

GBP/AUS$ – 1.5334

GBP/ZAR – 13.9482

GBP/JPY – 132.41

GBP/HKD – 12.4572

GBP/NZD – 1.9232

GBP/SEK – 10.7422

EUR: Euro had a mixed day yesterday, turning lower in early trading following Italian Prime Minister Mario Monti’s announcement that he’ll step down after the upcoming 2013 budget vote. Poor Italian and French industrial data didn’t help the common currency’s cause either with traders seeking the pound as a safe haven. The tide turned in the afternoon session amid growing rumours that the US Fed will continue with its assets purchase program, popularly known as the Operation Twist. The EUR/USD pair finished the session 50 pips up at 1.2942 and opens around that level today morning. We have the German ZEW economic sentiment data due today and any weakness will weigh on the single currency.

USD
: The greenback eased against most of its peers yesterday due to the continued budget logjam between the Democrats and the Republicans. President Obama wants the Republicans to accept higher tax rates for the country’s top earners before announcing any entitlement-related spending cuts. While lawmakers meet in Washington today hoping to strike a deal, the stalemate is expected to continue until the New Year. Meanwhile cable continued to remain range-bound against the US dollar despite full-time hiring hitting a one and a half year high in the UK. We have the US trade balance figure due today and any spike in deficit is sure to cause volatility in the currency markets. The GBP/USD pair opens around the 1.6080 level today morning.

Have a great day!

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