Turkey shows why a central bank’s independence is central

The dismissal of a central bank chief does more than put an economy at risk. Democracies now depend on these deliberative bodies for long-term stability.

People wait at a foreign currency exchange shop in Istanbul March 22 after the firing of the central bank governor.

One relatively new pillar among democratic nations, cemented as a global norm only in the 1990s, is an independent central bank. These official guardians of market stability are deliberative bodies of experts with long-term views, wielding financial tools such as the setting of interest rates. For elected leaders with an eye on the next election, interfering in a central bank’s work is akin to meddling in a case before a court. Both rule of law and rule of accepted economic truth are seen as ballasts of modern democracy.

This helps explain the shock in both financial markets and Western capitals over the firing of Naci Ağbal, Turkey’s central bank governor, by President Recep Tayyip Erdoğan on March 19 after less than five months on the job. Turkey now has its fourth central bank chief in less than two years, yet another indicator of its drift toward authoritarian rule.

Mr. Ağbal, a former finance minister, was ousted after trying to tame Turkey’s rampant inflation by raising interest rates. Against all conventional economic logic, President Erdoğan says high interest rates actually cause inflation. He calls them the “mother and father of all evil.” His new appointee is a newspaper columnist who agrees with his view. The markets obviously do not. After the announcement, Turkey’s currency and main stock index plunged.

Another reason for global concern about Turkey is that many other central banks could be under pressure during the COVID-19 pandemic.

Last year, most of them effectively coordinated across borders to lessen the financial fallout from the coronavirus. They fulfilled their role as “lenders of last resort” to the financial system. And for the first time, those in emerging-market and developing economies resorted to large-scale market interventions, notes economist Olivier Jeanne at John Hopkins University.

But now many politicians may want central banks to take actions that risk long-term inflation, such as absorbing huge loans from failing businesses. “Political pressures are likely to rise in favor of rolling back central bank independence in all countries,” says Mr. Jeanne. “Central banks should not just lay low and wait for threats to their independence to pass.” Based on numerous studies, countries with more independent central banks experience less inflation.

Central banks are not only high-level institutions of economic expertise. They are also usually models of deliberation and patient reflection. They test data, enjoy wide debate and dissent, and ask questions before giving answers. They look for light through individual contemplation and shared reasoning. Lately, to become more accountable to the public, many have been transparent about their thinking and forecasts.

For decades, democracies have set up central banks in large part because of those qualities of deliberation. The sudden dismissal of any central bank chief is seen as a setback to democracy. Such drastic action rarely reflects a dispute over economics. It hints at whether leaders want to seek out opposing views and respectfully listen to them. What’s more democratic than that?

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