BUDAPEST (Reuters) -Central bank independence is being questioned in parts of the world and greater political influence over policy could undermined their ability to keep inflation down, European Central Bank President Christine Lagarde said on Monday.
U.S. President Donald Trump said last week he would demand that the Federal Reserve lower borrowing costs, claiming that he knew interest rates much better than people in charge of making that decision.
“While recent research suggests that de jure central bank independence has never been more prevalent than it is today, there is no doubt that the de facto independence of central banks is being called into question in several parts of the world,” Lagarde told a Hungarian central bank conference.
The Fed is expected to keep interest rates on hold this week even as the ECB is likely to cut, arguing that inflation is coming down only slowly and that some policy proposals of the Trump administration could actually increase price pressures, likely drawing criticism from the White House.
Lagarde meanwhile warned that political interference could lead to a “vicious circle” that might result in central bank independence being undermined.
“Political influence on central bank decisions can also contribute substantially to macroeconomic volatility,” Lagarde said in a video address to Hungary, where Prime Minister Viktor Orban’s political ally, former Finance Minister Mihaly Varga, was appointed as the bank’s next governor from March.
Lagarde said that persistent political pressure on a central bank increases exchange rate volatility, and raises bond yields and the risk premia.
This sort of volatility could make it more difficult to keep inflation down, raising concerns that independent central banks are failing to deliver on their mandates, Lagarde said.
Such a sequence of events, she said, could then undermine the social consensus and further amplify volatility in the economy.
