Australia and the World Past and Present

Most central banks around the world have a very limited brief.

Usually that brief is to ensure that prices remain stable and that inflation is kept at bay.

This is pretty much how the Reserve Bank operates in Australia.

Central banks are supposed to free of political influence from the government of the day. If the Treasurer of Australia were to ring the Reserve Bank Governor and state that interest rates were too high and should be lowered, there would be an outcry from the political opposition, economists, journalists and the public.

If you were to assume that the Central Bank of Argentina operates in the same way as the Federal Reserve, then you would be mistaken.

Each country has its own institutions which are products of a particular history. To a large extent, the leaders of each country are free to choose how these bodies operate. But we can still try to assess whether the rules under which they operate are producing good results or whether there are fundamental problems.

Argentina’s Central Bank (Banco Central de la República Argentina or BCRA) has historically operated under significant political influence.

It has often prioritised government needs over monetary orthodoxy.

Founded in 1935, the governing charter has been revised several times.

In 1992 the BCRA was granted more autonomy and barred from financing the fiscal deficits of government.

This was during Carlos Menem’s presidency. While starting out as a Peronist and self-identifying as such, many on his left accused him selling out and of even turning neoliberal. Observers of central banks around the world would probably have a kinder assessment of Menem’s Central Bank reforms and would likely see them as standard monetary policy.

In 2012 Cristina Fernández de Kirchner changed the Bank’s charter once more. The charter now became more expansive. There was a broader mandate. In addition to price stability, the Bank also had objectives in regard to employment, economic development and financial inclusion. This had the potential to muddy the waters. What if these differing objectives came into conflict? Which would should be prioritsed and which would win out?

She also allowed the BCRA to issue loans to the Treasury – against the standard practice of central banks worldwide.

Kirchner’s administration was exercising fiscal dominance over the BCRA. Monetary policy was subordinated to the needs of government finance.

Former governor, Martin Redrado, was removed in 2010 because he resisted using reserves to repay debt.

In Australia, Reserve Bank leaders are technocratic, career economists. They are number boffins.

In Argentina, the governor operates in a more highly politicised role. Many Argentinians understand this to be the case and so are not necessarily surprised if the Governor is suddenly removed and another appointed in their place.

Mauricio Macri had wanted to increase the BCRA’s independence.

The flip-flopping of approaches by different administrations continued when Alberto Fernández rose to the presidency. He returned the Bank to a more subservient role and the BCRA embarked on an expanded money printing program during the Covid-19 pandemic.

Then along came Javier Milei. More of a disruptor than his predecessors – he sees the Central Bank as the chief culprit for decades of inflation.

Under Milei, the BCRA is not so much independent as it is constrained.

The Central Bank of Argentina is forced to follow the framework set by government. And this tends to change every so often. There is a clear difference in the way that presidents of the left and presidents of the right approach the Bank. Those such as Cristina Fernández de Kirchner see the Bank as a safety net for government finances. The remit of the Bank tends to be wider under leftist presidents. Menem and Macri supported a narrow focus around price and inflation control and greater autonomy for the Bank to make its own decision free from political interference.

It seems that if leaders believe the Bank will prop up government finances when they fail, this leads to a certain laxness in government budgeting. If failure means that you will fall off the cliff and onto the jagged rocks below, it is more likely that care and prudence will be taken.