CENTRAL BANK INDEPENDENCE DOEN´T MATTER -- UNTIL IT DOES / THE WALL STREET JOURNAL

Central Bank Independence Doesn’t Matter—Until It Does

Philippine President Rodrigo Duterte has appointed a central banker from the cabinet. Investors may rue the decision one day.

By Mike Bird


Philippine President Rodrigo Duterte appointed a political ally as head of the country’s central bank. Photo: mark r cristino/Shutterstock


Central bank independence is under threat as politicians around the world meddle more in monetary policy. Investors, so far, haven’t seemed to care too much. By the time they miss it, it may be too late.

Philippine President Rodrigo Duterte—no stranger to controversy—on Tuesday handed control of the Asian country’s central bank to a political ally, Benjamin Diokno. Mr. Diokno is a professional economist and technocrat. But he’s also the first person to go directly from the Philippine cabinet to helming the central bank since it became independent in 1993, having previously been Mr. Duterte’s budget supremo.

In that role, he advocated for a larger budget deficit, so it’s little wonder Mr. Duterte would back him for the job. Central bankers who are likely to keep interest rates low to facilitate borrowing are music to the ears of populist leaders who want to keep on spending.

Still, if the appointment poses a threat to economic stability in the Philippines, markets seem little bothered. The dollar rose marginally against the Philippine peso on Tuesday, gaining 0.7% to 52.2. The country’s benchmark equity index, the PSEi, fell 0.1%.

Likewise, investors cared little when India’s former central bank head resigned late last year after months of tension with the government, to be replaced by someone more to Prime Minister Narendra Modi’s taste. Closer to home, the market has largely shrugged off President Donald Trump’s public disagreements with Federal Reserve Chairman Jerome Powell.

In recent years, some markets even rallied when a political leader appointed a like-minded ally to run the central bank. Japan’s benchmark Nikkei Stock Average surged about 80% during Japanese Prime Minister Shinzo Abe’s two-year first term, during which he elevated Haruhiko Kuroda to head of the Bank of Japan .

Investors should care more about this erosion of central bank autonomy even so. For sure, when a major economy like Japan is struggling to escape deflation, investors rightly care more about returning it to strength than the country’s institutional integrity.

The Philippines, which clocked an inflation rate of as high as 6.7% in 2018, doesn’t have that problem though. A more relevant warning for Manila comes from Turkey, where a politically compromised central bank’s lack of action against raging inflation and a tumbling currency left the MSCI Turkey index down 45% in dollar terms last year.

When an economy comes under pressure, investors need a monetary authority they can trust to do the right thing, regardless of political pressure. In those circumstances, knowing that a central bank will take necessary and painful measures to stem capital outflows and protect the value of a currency matters a great deal.

Investors may not feel able to price in a future monetary emergency today. They should still worry about what this latest chipping away of central banks’ independence means for the future.