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November 08, 2005
Why Central Banks Are Independent
It appears that eurozone Treasury officials and the European Central Bank are not quite on the same page. From the Financial Times:
Eurozone finance ministers on Monday night locked horns with Jean-Claude Trichet, president of the European Central Bank, to warn that an early interest rate rise could hit the region's fragile economic recovery.
The ministers' case leans heavily on the divergent behaviors of "headline" and core inflation:
Ministers said higher oil costs were not yet feeding through into increased prices in the shops or wage rises, and inflation remained under control...
A Eurostat flash estimate for last month put the rate at 2.5 per cent, although core inflation - excluding energy prices - was about 1.5 per cent.
Jean-Claude Juncker, the Luxembourg prime minister and eurogroup president, said there was not yet evidence of second-round inflationary effects from oil prices. The European Commission said core inflation, excluding energy prices, were about 1.5 per cent. "The spillover from high oil prices has been largely absent so far," it said.
To be sure, the finance ministers' comments are being offered as friendly advice..
Mr. Juncker's spokesman said they were not trying to tell the bank what to do. "The idea is that the ECB should listen to what ministers have to say and to take decisions after listening to the debate," he said.
... but the Wall Street Journal reports (page A14 in the print edition) at least some sentiment for a more active intervention:
Some finance ministries are even advising the Commission and the ECB to give Eastern European countries more leeway to miss inflation targets. New EU members must meet strict criteria on inflation, which poses a problem for countries such as Estonia that are growing strong but have high inflation.
Modern central banks are public institutions, and as such are accountable to the people's representatives. So it is hard to argue with the sentiment expressed by Mr. Juncker's spokesman, or the legitimate role of the broader government in determining the long-run objectives of monetary policy. But, in the midst of such debates, it is always a good idea to keep in mind why central banks are created to an arms length from day-to-day political pressures.
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