By Francesco Canepa, Howard Schneider and Leika Kihara
FRANKFURT/WASHINGTON/TOKYO, Feb 27 (Reuters) – Under pressure from politicians, central bankers are fighting back. However, their efforts are exposing a delicate trade-off: defending independence may preserve inflation credibility, but at the cost of appearing political themselves.
Mainstream centrist politicians the world over are facing an onslaught from less conventional, often populist rivals who have their own ideas about what central banks should do, and who should run them.
In the United States, the pushback has meant digging in. Federal Reserve Chair Jerome Powell has weathered repeated attacks from U.S. President Donald Trump, who accused him of undermining growth by keeping interest rates too high.
In Europe, resistance takes a more paradoxical form: stepping down early to deny eurosceptic leaders the chance to influence who runs the central bank.
Bank of France Governor François Villeroy de Galhau will leave months before elections expected to be won by the far right. Villeroy insisted this was his decision but a source said the move was driven partly by a desire to preserve continuity at the bank.
European Central Bank President Christine Lagarde, also French, is reportedly considering a similar move. She has said her “baseline” is to complete her term but has not excluded the possibility of an early exit.
The Bank of Japan has repeated its pledge to keep raising rates even after Prime Minister Sanae Takaichi appointed two dovish economists to the BOJ’s board, seen as an attempt to stop hikes.
With sovereign debt at record highs, central bankers fear sound monetary policy will be sacrificed at the altar of cheap borrowing as governments demand lower interest rates.
At stake is their ability to control inflation — and the credibility rebuilt since the price shocks of the 1970s. Turkey and Argentina show what can happen when governments force monetary policy into submission: inflation spikes, investors flee, trust evaporates.
Yet in pushing back, central bankers risk appearing political themselves.
“Central bankers are being drawn into a fight between the establishment and populists. They’re being drawn into the ring and they should try to do everything they can to stay out of it,” said Carsten Brzeski, global head of macro at ING.
CRISES PUSH CENTRAL BANKS INTO SPOTLIGHT
The pushback should not come as a surprise. ECB founding president Wim Duisenberg once likened a good central banker to whipped cream: “the more you whip it, the harder it gets.”
His own early resignation in 2003, part of a deal between Germany and France to hand the baton to Jean-Claude Trichet, showed that, even if appointments are political, the job needn’t become so.
Contemporary models of central bank governance assume officials will act independently once in office, regardless of who installed them.
But the past decade has blurred that line. In Japan, former PM Shinzo Abe installed Haruhiko Kuroda at the BOJ to fuel his stimulus agenda.
Massive bond-buying across advanced economies — encouraged by governments during the global financial crisis and the pandemic — also brought central banks closer to fiscal policy, a precedent France’s far-right now cites approvingly.
Public confidence wobbled after the post-COVID inflation surge. Limited forays into climate policy — particularly at the ECB and Bank of England — fed accusations of mission creep.
Jakob de Haan, a professor of political economy at the University of Groningen, said central banks “increasingly have moved beyond their mandate”, raising questions about their own independence.
INDEPENDENCE VS PUBLIC ACCOUNTABILITY
Central banks are insulated from day-to-day politics, often via legal provisions such as the European treaties governing the ECB.
But they are not shielded from democratic expectations. They answer to Congress in the U.S. and the European Parliament in the euro zone — and to public perceptions.
This is where their rearguard action may expose a flank.
“I don’t see any process fouls here,” said Nathan Sheets, global chief economist at Citi. “But it does cause one to reflect on whether we have that balance between independence and accountability right.”
Resignations by Villeroy and, potentially, Lagarde in France could be seen as attempts to give President Emmanuel Macron one last say over appointments before voters possibly shift to the Rassemblement National.
Economists warn this may backfire.
“The manoeuvre could slightly compromise the independence of the central bank itself,” said Marco Valli, chief European economist at UniCredit.
MARKETS MAY HAVE FINAL WORD
Government debt may be the fiercest arena.
The U.S. government must refinance nearly a third of its $36 trillion debt this year. How the Fed under Trump’s appointee Kevin Warsh manages rates and its $6.6 trillion balance sheet will be crucial.
Europe faces rising defence spending atop already-high debt in Italy and France. French far-right leader Jordan Bardella has called for opening discussions with the ECB over financing.
“From a political point of view, the best way to finance it is to be able to count on the central bank’s printing press,” said Enrico Colombatto, a professor emeritus of economics at the University of Turin.
Markets, though, may have the final word. Central banks can suppress bond yields but not stop investors fleeing — weakening currencies and pushing up inflation.
Japan shows fears of market bumps can be central bankers’ best allies.
“The relentless yen slump taught the administration a lesson on how brutal markets could become if it tried to push back against the BOJ’s interest rate hikes,” former BOJ board member Makoto Sakurai said. “Market forces helped the BOJ fend off political pressure.”
(Additional reporting by Bill Schomberg in London; Editing by Toby Chopra)
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