Usefulness of Central Banks
Centrals Banks across the globe are coming under increasing scrutiny given what many consider the implementation of flawed monetary policies. With the possible exception of the US Federal Reserve which has an involved management structure and decision making process, central banks are creatures of elected politicians and are constrained to implement policies to buttress government’s agenda.
The ongoing conflict between Russia and Ukraine during a pandemic continues to disrupt global supply of food and fuel. A key fallout from the mess has been a spike in the rate of inflation in recent months. The ideologues and academics are squealing in glee from calculating the permutations of the real situation.
With inflation across the globe upwards to 9+%, the effect on SIDs like Barbados will be deleterious. In simple terms Barbados as a net importer will struggle with the consequences managing a trade deficit. However, of more immediate concern is how rising cost of living in developed countries- our source markets for tourism- will fair. Central Banks as agents of governments have been instructed to implement measures to force the inflation rate back to a stable 2%. We have seen the Fed already increased the interest rate by .75% and other major central banks are expected to follow suit designed to influence consumer demand for goods and services.
Back at home there is overwhelming evidence the Central Bank is a rubber stamp for government policy and there is no room for independent policy making. One blatant example which Walter Blackman reminded the public yesterday and has been mentioned in the BU space several times is how the central bank conspired with the previous government to force Barbadians to buy bonds by eliminating the minimum interest rate requirement on savings. It was obvious, it was blatant, it was a desperate attempt by former minister of finance Chris Sinckler supported by the central bank (who was the governor?) to ‘corral’ needed funds.
Unfortunately when elephants are rumbling it is the grass that suffers. SIDs like Barbados given the design of our economy means we are condemned to be price takers. Although government can try to shield the most vulnerable and keep public sector workers employed, it is a bandaid and the longer current state plays out we have the Freundel Stuart playbook to assist with understanding the outcome derived from diminishing cash resources.
Do we expect the Governor of the Central Bank to call a meeting anytime soon to announce some novel monetary policy to assist with improving the prevailing economic climate? A consequence of increase in interest rates by large countries is how it will effect Barbados with significant loan repayments of foreign loans.