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Central banks and the power of personality


1 December 2016, London

OMFIF Bulletin December 2016-cover (4)

Central banks are under fire, not for the typical reason of high interest rates, but because of low ones. Following the expected US rate rise in mid-December – only the second formal Federal Reserve credit tightening in 10 years – the heat is not likely to die down, points out Darrell Delamaide. OMFIF’s November edition was dedicated to an international shift to tighter monetary and looser fiscal policy – now apparent after the election of Donald Trump. The December Bulletin focuses on another turning tide: greater constraints on central bank independence.

Central banks are guided not just by statute and practice, but by the power of personality. As David Marsh notes, governments will have an unusual opportunity to stamp their mark on monetary decision-making. In the next three years, governors of the top six worldwide central banks – the Fed, People’s Bank of China, Bank of Japan, European Central Bank, Bank of England, and Germany’s Bundesbank – reach the end of their terms and may be replaced by new faces.

Trump’s criticism of Fed Chair Janet Yellen has generated headlines even before he moves into the White House. Reginald Dale, Brian Reading and John Kornblum, reflect on Trump’s victory and the nature of the presidential campaign.

Andrew Large, former deputy governor of the Bank of England, investigates the problem of central banks’ enlarged mandates. Øystein Olsen, governor of Norges Bank, explains the complications for central banks stemming from lack of support in other policy areas. Mojmir Hampl, deputy governor of the Czech National Bank, discusses how central banks must explain their changing roles to the public. Focus on weakening the exchange rate raises the risk of currency wars, warns Linda Yueh.

In our section on emerging markets, Meghnad Desai reflects on India’s demonetisation experiment. DeLisle Worrell, governor of the Central Bank of Barbados, writes that, for small open economies, the benefits of dollarisation outweigh the costs. Miroslav Singer writes on currency relations between China and eastern Europe in the light of the renminbi’s introduction into the IMF’s special drawing right. Norman Lamont considers the potential impact of Trump’s presidency on the US-Iran nuclear deal.

The UK’s 1976 sterling crisis, the 40th anniversary of which is marked by OMFIF Press with Richard Roberts’ When Britain Went Bust, was a watershed not just in the balance between Keynesian and monetarist policies, but also for central bank independence. The book is being launched on 8 December at the UK Treasury, with Johannes Witteveen, former IMF managing director. As William Keegan writes in his review, ‘The book could hardly have appeared at a more appropriate moment.’

Other highlights of the December 2016 edition:

  • Carlo Cottarelli discusses the overhang from financial markets’ absorption of government debt and the consequences of ‘accidental financial repression’.
  • Peter Warburton analyses the increased cost of US Libor borrowing for foreign financial institutions.
  • Danae Kyriakopoulou addresses the autumn statement of Philip Hammond, the UK chancellor of the exchequer, and Brexit’s fiscal hangover.
  • Jeff King writes on the legislative circumstances surrounding the UK’s impending negotiations with the EU and the need for parliamentary debate.
  • Ben Robinson outlines the increased significance of the UK’s renewable energy sector after the vote to leave the EU.
  • The Monthly Focus is dedicated to a review of the past 12 months, measuring the OMFIF advisory board’s 2016 predictions against the course of events.

The Bulletin is available to OMFIF members, and to non-members on a subscription basis. To subscribe please contact: membership@omfif.org