Central banks lift the veil on more of their secrets
Central banks used to hide their deliberations from public view more jealously than the papal conclave. Whereas the college of cardinals announced their decision to the crowds outside, traders once had to guess what decision the US Federal Reserve had made. In Britain interest rates were set on the whim of a chancellor with one ear to the Bank of England and the other directed towards Westminster. Monetary analysts needed as good a feel for party politics as the economic data.
Transparency is now much more the order of the day. From the early 1990s central banks started gaining more independence, better to resist the inflationary urges of politicians. With such responsibility has come the need for more accountability. Meetings take place to a regular schedule, with minutes published alongside voluminous reports explaining the bank’s economic analysis. Many central banks reveal how decision makers voted. The Fed goes further, producing “dot charts” showing where each committee member believes interest rates will go.
Even the European Central Bank is now contemplating greater disclosure. With its fondness for consensus over dispute, the ECB has hitherto kept its monetary deliberations secret. Now it is following the lead of others such as Sweden’s Riksbank and the Fed by publishing meeting minutes, albeit after a delay of a few weeks.
The Bank of England has never been a laggard in this regard, and under its energetic governor Mark Carney has been overhauling its procedures. Meetings to decide monetary policy will take place only eight times a year, down from 12. Minutes will be published at the same time as the decision taken, rather than with a two-week delay. The BoE will also release detailed transcripts after eight years, following a review by Kevin Warsh, a former Federal Reserve governor, into the BoE’s practice of destroying meeting records.
There are good economic reasons for casting more light in this area. Monetary policy steers the economy through its effect on sentiment as much as any financial channel such as interest rates. Bank-watchers are constantly weighing up the probability of different policy moves in the months ahead. When information dribbles out erratically, expectations can see-saw and loosen the bank’s hold on the reins. The BoE’s new approach should help by publishing its decision alongside the rationale. The challenge will now be to absorb this flood of information.
Yet transparency can be pushed too far. What works for setting rates may not be appropriate in credit policy. Central banks now have to intervene across the financial markets. It is difficult to imagine them handling a failing bank while having to deliver a running commentary on the rescue.
The unrivalled power of central bankers has become more evident as they have evolved from tweaking interest rates to introducing large-scale quantitative easing. Such power requires accountability towards politicians without caving in to their short-term needs. For the UK, this is straightforward. Members of the Monetary Policy Committee already speak in public and have shown they can resist political pressure. It could prove trickier in Europe, where dissenting voices may reflect the views of different nations. In the light of this, the ECB’s relative caution is understandable.
Central banks had an urgent need to review their procedures, because of a decade of financial mayhem and economic weakness that they were too slow or complacent to address. More information about how they operate is useful, so long as exposure to such scrutiny does not stifle the urge to voice uncomfortable opinions.