THE PARLIAMENTARY act that chartered the Bank of England in 1694 begins by describing the motivation of its authors, “to promote the publick Good and Benefit of our People”. Ideas about how best the bank can serve the publick have changed a bit over the centuries, from managing the market for government debt, to maintaining the value of sterling against gold, to, in recent decades, keeping inflation in the region of 2%. On March 3rd its mandate received another tweak, when Rishi Sunak, the chancellor, declared that it should conduct policy with an eye towards environmental sustainability. The adjustment is just one example of a wider phenomenon, in which central banks are told to accept, or themselves take on, tasks beyond the standard monetary ambit. The mission creep is enabled by a sense that central banks can and should do more, given their firepower and competence compared with some other government officials. But tempting as it is to allow authority to flow to those who use it well, adding to central-bank mandates poses both economic and political risks.
Though central banks have been around for ages, the idea that they should operate at a remove from meddling politicians is a fairly recent one, stemming from the experience of high inflation in the 1960s and 1970s. Economists worried that governments could not commit themselves to keeping inflation low, since they would be tempted to use an unexpected burst of monetary expansion to deliver a short-run jobs boom—even though this would ultimately leave inflation higher, while employment fell back to a more sustainable level. By delegating control over the money supply to central banks, governments freed themselves from temptation, and opened the door to lower inflation and a less volatile business cycle. From the 1970s to the 1990s most rich-world central banks were told to focus on price stability (alongside full employment in some cases, as with the Federal Reserve) and were granted some measure of independence to do the job.
Lately, however, the relationship between central banks and governments has grown complicated. To manage the global financial crisis and the covid-19 pandemic, central banks intervened in a range of financial markets, in some cases buying corporate bonds and equities. To stimulate economies and keep markets functioning they hoovered up massive amounts of government bonds, an action that could be confused for the monetary financing of public debt. At the same time, their struggles to revive inflation have turned some monetary officials into vocal advocates for fiscal stimulus—quite a reversal from past practice. The boundary between the fiscal and monetary spheres, once so clear, has blurred. That central bankers like Christine Lagarde of the European Central Bank (ECB) and Jerome Powell of the Federal Reserve are more politically polished than some of their more bookish predecessors further muddies the picture.
As all this has occurred, both governments and central bankers have also taken a more expansive view of the latter’s mission. Many central banks were handed new financial-stability responsibilities after the financial crisis. Now another rethink seems to be under way. Last month the Reserve Bank of New Zealand was instructed by the government to take account of house prices when setting monetary policy. Some monetary officials are paying more attention to inequality and the welfare of marginal workers. The Fed recently revised its policy framework, partly in recognition of the fact that premature tightening tends to impose disproportionate harm on black and Latino workers. Climate change has become a hot topic. In January Ms Lagarde said the ECB was assessing how it might contribute to European climate goals. Mark Carney, a former governor of the Bank of England, was also vocal on the matter of climate change. As a consequence of Mr Sunak’s announcement, the bank will adjust its corporate-bond-purchase scheme so as not to subsidise firms with large climate footprints.
Some of this new expansion of horizons is defensible. Where climate change poses financial-stability risks (by threatening systemically important insurers, say) central banks are right to take note. Had the Fed worried more about joblessness early in the 2010s it might have been less eager to tighten monetary policy—and more likely to hit its inflation target. But, where they were once granted independence because governments could not help but inflate, central banks now plead for more government spending to help reflate depressed economies. Meanwhile, central banks’ insulation from politics makes them a convenient place to delegate jobs that elected officials would rather not handle. Politicians seem as though they’re ducking their responsibilities—and, in the process, make central banks seem like political actors. The ambiguous and occasionally conflicting nature of tacked-on goals encourages a view of central bankers as multi-tasking dilettantes, rather than stolid guardians of the currency.
You had one job
To shift state power beyond the scope of democratic accountability is no small thing. If runaway inflation is less inevitable than once feared, then the independent central bank may appear to have outlived its usefulness. But perhaps not. Should America’s new willingness to pass fiscal stimulus prove a sign of things to come, then a credible promise to halt unacceptably high inflation by raising interest rates may still be essential. By keeping inflation expectations anchored, a central bank could limit the inflationary effects of stimulus, and perhaps also discourage fiscal excess.
Credibility depends, however, on the perception that central banks can indeed act independently. Expanding their remit to include policy issues like climate change or housing affordability not only places even more responsibility beyond the arena of democratic accountability. It also blurs the boundaries between governing and central banking. There are better ways to serve the publick Good. ■
This article appeared in the Finance & economics section of the print edition under the headline “Many hats”