Bundesbank chief issues warning

Jens Weidmann, president of German Bundesbank.

Bundesbank chief Jens Weidmann expressed concern Monday about threats to the independence of central banks, particularly in Japan and Hungary, which he warned could sharply politicise exchange rate policy.

“We are witnessing disturbing abuses, for example in Hungary or in Japan, where the new government is interfering massively in the affairs of the central bank, calling forcefully for a more aggressive monetary policy,” Weidmann said at a new year reception at the Frankfurt stock exchange's operator, Deutsche Boerse.

Central banks of major industrialised countries were granted independence from government control in the 1970s and 1980s in order to break double-digit inflation.

The German central bank is traditionally a hawk against inflation risks, but Weidmann also warned an unintended consequence of governments dictating monetary policy “could be a much stronger politicising of exchange rates.”

“Up to now the international monetary system has weathered the crisis and avoided a devaluation race and I hope very much that will remain the case,” he added.

The monetary easing policies undertaken by the central banks of numerous industrialised countries during the crisis, primarily aimed at unfreezing financial markets, have also tended to lower the value of their currencies.

While a number of emerging nations such as Brazil were unhappy and spoke of “currency wars”, independent central banks have not engaged in devaluations to improve the competitiveness of their nations' exports.

The Bank of Japan was due to conclude Tuesday its first policy meeting since Prime Minister Shinzo Abe took office with a pledge to pressure it into aggressive monetary easing to revive the long-suffering economy.

The two-day meeting is widely expected to see the central bank launch another round of easing, and bow to government demands that it set a two-percent inflation target in a bid to vanquish the deflation that has haunted the world's third largest economy for years.

Abe has not hidden he aims to appoint a replacement to the current head of the central bank, whose term ends soon, that shares his government's views.

His comments have led to a significant weakening of the yen in recent weeks, a boon to Japanese exporters.

In Hungary, conservative Prime Minister Viktor Orban will also soon have the opportunity to appoint a new central bank head, and is widely expected to appoint one of his loyal allies.

Last year he packed MNB's monetary policy committee with his supporters, which have outvoted the independent members to push through cuts in interest rates despite rising inflation, which at 5.7 percent in 2012 was the highest in the European Union.

The EU and International Monetary Fund have expressed concern about the loss of central bank independence in Hungary and have not moved forward with providing Budapest with a 15-billion-euro ($20 billion) precautionary credit line. - Sapa-AFP