???The only good central bank is one that can say no to politicians,??? half-joked the The Economist famously in 1990. The myth still lives on. Central bankers, so the argument goes, must be insulated and detached from public policy to prevent governments from using monetary policy to run up out-of-control deficits, and thus stoke high levels of inflation, which is indeed bad for everyone???s pocket book. Instead, monetary policy should be run in a disinterested, objective and scientific manner, independent of political winds, by an impartial and technocratic central bank. Central banks should be in essence ???benevolent dictators.???
Did you know? Reality Check
The decisions of central bankers can have more impact on jobs and growth in times of recession than many of the policies debated by our elected legislators. Monetary policy, conducted by central banks, directly affects the resources available for the realization of economic and social rights, especially the right to work and in many countries the right to housing. It does this by influencing interest rates, exchange rates and the amount of credit available in the economy. Higher interest rates discourage borrowing and make credit more expensive. As a consequence, economic activity slows when central banks raise interest rates, and there is less job creation. When central banks choose to only prioritize low inflation over all other considerations including employment, such as the ECB???s target of 2 percent, and they raise interest rates to achieve this single-minded goal, it can wreak havoc on growth rates on the real economy, pushing needed commercial loans out of reach for companies and worsening unemployment.
Despite the human rights principles of public participation, transparency and accountability throughout the economic policy cycle, furthermore, monetary policy decisions are largely made without democratic input, oversight or control. Independent from public scrutiny and accountability, a small, secretive group of central bankers are taking economic policy decisions which have clear and far-reaching impacts on the fulfillment of economic and social rights, with little to no public participation or scrutiny. While central banks have achieved relative autonomy from influence by governments and demands from citizens for greater deficit spending or higher employment, central banks have not insulated themselves from being heavily swayed by the interests of the financial sector they are responsible for regulating. As one former IMF economist concluded, ???in practice, unfortunately, the New York Fed and the Board of Governors are quite deferential to financial-sector ???experts.??? Bankers are persuasive; many are smart people, armed with fancy models, and they offer very nice income-earning opportunities to former central bankers.???
???Independence,??? writes one commentator, ???is politically viable only with accountability, and the best way to enhance accountability is for central banks to become more transparent and forthright about their objectives and tactics.???
Human rights response:
Central banks are in the end government bodies, and therefore subject to human rights obligations under international law. Taking these obligations into account when formulating monetary and financial regulation policies would as a first step require an open-book and transparent process, biased away from financial sector influence, and more influenced by public participation and public goods in the overall design of policy priorities. Channels of accountability would also need to be established to ensure that central bank decision-makers face consequences for failing to take into account their human rights obligations. Taking human rights seriously would also temper a single-minded obsession with inflation-targeting with the need to support decent work opportunities. Finally, meaningful human rights protection as a central policy priority of central banks would require the prevention of future financial crises through effective regulation in the public interest. To do so, governments and central banks need the freedom to use all of tools available to implement policies in favor of the progressive realization of ESC rights.