When a head of government criticises a central bank's policies it conjures up images of Turkey or Argentina and episodes of high inflation. Political figures from powerful factions of government calling for the resignation of a governor carry echoes of Raghuram Rajan's problems in India earlier this year. But the latest central bank to find its independence under attack is the Bank of England (BoE).
Rumours flew back and forth over the weekend – first that BoE governor Mark Carney is set to announce a 2018 departure date this week and then that he will reveal plans to spend a full eight-year term at the central bank, taking him to 2021. Carney would undoubtedly have faced questions to this effect at the BoE's inflation report press conference on November 3, and he looks set to make an announcement as soon as today.
The governor has been in hot water ever since the debate over the UK's relationship with the European Union got going properly early this year. At a press conference in May, after being asked repeatedly by journalists, he said a "technical recession" is one of a "range of possible scenarios" should the UK vote to leave the EU. He made similar remarks to the Treasury Committee.
Leading figures in the Brexit camp soon called for the governor's resignation, including Nigel Lawson, a former chancellor. Carney also clashed on numerous occasions with Jacob Rees-Mogg, a eurosceptic Conservative MP on the Treasury Committee, who accused the BoE of becoming embroiled in politics. In October, prime minister Theresa May stoked the bonfire by promising "change" to the BoE's monetary policy, particularly quantitative easing, which she criticised for harming savers.
The sustained attack shows just how vulnerable the BoE's independence is. Although chancellor Philip Hammond came to Carney's defence and clarified the government would not meddle in central bank policy, he too is under threat from the eurosceptic wing of his party. Right or wrong, Carney may have misjudged the dangers awaiting him when he weighed into the debate.
In such a toxic environment, the governor's choice this week matters for much more than his own career. Choosing to step down in 2018, even if that was his original intention when he signed on, would appear to hand the Brexiters a victory and embolden the BoE's would-be attackers.
Worse, the UK government is already fumbling its way half-blindly through the process of exiting the EU, dragged on by its eurosceptic wing, which has been resurgent since the referendum result. The danger of a more pliable governor than Carney being chosen to take his place remains a real one.
But if Carney decides to stay until 2021, that locks in his independence until the EU exit negotiations are (hopefully) concluded. Politically, it may also rein in some of the Brexiters who are increasingly running amok. May's spokeswoman today hinted that the prime minister would be amenable to such a decision, after Carney joined her for a lengthy meeting this afternoon.
Carney choosing to stay would by no means end the story. Central bank independence is under threat in other parts of the world as well, and May's criticism of quantitative easing points to a wider problem of monetary policy being seen as overreaching. Carney staying would restore a degree of sanity. But bigger problems loom on the horizon.