Jan 22 (Reuters) – Central bank independence – the ability to set interest rates free from political pressure – is widely seen as critical to a nation’s economic wellbeing, and it’s one reason why President Donald Trump’s attempt to fire Federal Reserve Governor Lisa Cook is drawing so much attention.
In places where central banks comply with the preferences of politicians, the outcomes tend to be poorer, including higher inflation and slower economic growth, academic research over decades has shown. Central bankers that operate independently have historically done better at keeping prices stable.
There are many examples of politically compliant central banks. Here are five notable ones:
TURKEY
Turkish President Tayyip Erdogan – a self-proclaimed “enemy of interest rates” – fired four central bankers from 2019 to 2023 for hiking borrowing costs or opposing the cuts he demanded and said would alleviate inflation. The opposite happened: inflation surged, the lira currency collapsed, and Turkish families struggled to afford the basics like rent and food.
In 2023 Erdogan pivoted, hiring U.S. finance executive Hafize Gaye Erkan who rapidly raised the central bank’s key interest rate to 45% from 8.5%. Her successor and current Governor Fatih Karahan tightened policy further before easing it more recently; inflation has abated from its peak of 85% in late 2022, but is still in the double digits.
ARGENTINA
Former Argentine President Juan Peron’s nationalization of the central bank in 1946 set the South American country on a course marked by repeated crises over the following decades, with the government printing money to fund spending and spurring successive waves of high inflation and hyperinflation as a result. Of the central bank’s 14 governors since 2000, several were forced out by politicians over policy differences, including Martin Redrado, who was fired as central bank chief in 2010 for refusing to carry out then-President Cristina Fernandez de Kirchner’s plan to use billions of currency reserves to pay down debt.
VENEZUELA
The South American country’s constitution guarantees a degree of independence for the central bank and bars it from financing government deficits. But Venezuelan leader Nicolas Maduro, who will stand trial on drug charges in New York after being captured recently by U.S. special forces, passed legislation to put the institution entirely under his control, with its leadership solely appointed by the president. After global oil prices collapsed in 2014, the central bank printed money to effectively fund massive deficits, fueling hyperinflation that peaked in 2018 at what some estimates at the time put at more than 1,000,000%.
ZIMBABWE
The Reserve Bank of Zimbabwe similarly printed money to fund spending by then-President Robert Mugabe’s government – including, the International Monetary Fund reported, election-related expenses, transfers to government-controlled entities, and subsidized equipment for farmers. Hyperinflation reached such an extreme that in January 2009 central bank chief Gideon Gono issued a 100-trillion-dollar bill.
UNITED STATES
While no Fed official has been fired for not abiding by a U.S. president’s demands on interest rates – Trump’s attempted firing of Cook revolves around unproven allegations of mortgage fraud – that doesn’t mean U.S. leaders have not tried, and sometimes succeeded, in exerting influence in other ways.
Former President Richard Nixon pressured Fed Chair Arthur Burns to keep borrowing costs low despite fast-rising prices to help him win his re-election in 1972. The episode is widely seen as having set the stage for an inflation surge that was only vanquished by the politically unpopular actions of a later Fed leader – Paul Volcker – to raise interest rates into the double digits. Volcker’s approach threw the country into recession but brought price pressures under control for the better part of four decades, in no small part because he re-established the U.S. central bank’s credibility as an independent policymaking body.
Nixon wasn’t the first president to try to get the Fed to do his bidding, however. In 1965 then-President Lyndon Johnson famously summoned central bank Chair William McChesney Martin Jr. to his Texas ranch and demanded that he stop raising rates, physically shoving and berating him. Martin refused – he was worried that Johnson’s fiscal stimulus would fuel inflation – but a couple years later he eased policy in exchange for the president’s promise to raise taxes, a deal he later felt contributed to accelerating inflation.
(Reporting by Ann Saphir;Editing by Dan Burns and Paul Simao)
