In principle, the job of a central banker is simple. He or she often has an assignment and has all kinds of (powerful) instruments at his disposal to successfully complete that assignment. To ensure that politicians (with other interests) cannot influence him or her, the appointment of a central banker is often long-term, one-off and cannot be opened in the interim.
A director of the European Central Bank (ECB) is appointed for a period of 8 years. His colleague at the FED is even appointed for 14 years. Since they cannot be reappointed, they do not have to give in to politicians (read: keep interest rates low) to get a new contract. Once appointed, they cannot be dismissed. A central banker is therefore better protected than most endangered animal species.
Anyway, back to that clearly defined assignment. This often reads 'ensure that there is low inflation every year'. In practice, this is defined as price increases of 2 percent. Both the ECB and the British central bank have that task.
Task not completed
You might therefore expect that economists from those banks themselves indicate that inflation will be too high in the next 1 or 2 years. The central bank can then intervene to prevent that prediction from coming true. How? By making borrowing money more expensive. This ensures that households spend less and save more, so that demand will rise less rapidly. Supply does not change as quickly, resulting in slower price increases. After all, demand is decreasing while supply remains unchanged.
The economists of the British central bank have calculated, for the bank's interest rate committee, that inflation in the coming quarters (if interest rate policy remains unchanged) will amount to 2,7 percent. That's way too high. The law requires the bank to ensure that inflation remains at 2 percent. However, at the meeting of the interest rate committee, she decided not to increase the interest rate.
Eurozone is experiencing the same thing
We are experiencing the same thing in the eurozone. A few years ago there was no inflation in euro countries. Prices even fell slightly on an annual basis. Economic growth was very poor and the danger of recession was high. So the ECB decided not only to cut interest rates to zero percent, but to pump 80 billion euros into the economy every month. In this way to raise inflation to 2 percent. After all, that is the bank's job
We find (2 years later) the currency depreciation in the eurozone at almost 2 percent. The bank's economists say that inflation will be between 2019 and 1,5 percent until 2 (if policy remains unchanged). Knowing that the ECB has a very poor track record with regard to inflation forecasts (the forecast is always lower than it ultimately turns out to be), you would expect the board to slowly tighten the monetary reins.
The ECB interest rate is still zero percent and the bank spares no opportunity to emphasize that the interest rate can be lowered even further. That 80 billion euros per month has now been reduced to 60 billion euros and will continue until the end of this year. Although the ECB hints every week to increase that amount and to do so for longer than the end of the year. To justify why interest rates remain at zero percent, the ECB is now putting forward a very curious and illegal argument. More about that in a later article.
It's impossible to keep your back straight
The question is of course why they choose to do so. After all, as mentioned before, the central bankers in Frankfurt and London are excellently protected against any attempt by politicians to influence them. The answer is that they do not follow the policies that society needs or that protected status and independence have little effect in practice.
There is something to be said for both answers. I cannot escape the pressure that the ECB is keeping interest rates low, because the governments in many eurozone countries understand this well. And since many central bank board members are ex-politicians or ex-civil servants or come from related sectors, I can also imagine that they have not really been very independent.
The irony is that some politicians are telling the ECB President to stop his policy as soon as possible, as the boss of the ECB was also told in the House of Representatives. The counterargument, however, is that one cannot even say that, because the bank is independent.
Meanwhile, "the common man" is screwed. His pension and savings suffer as a result. The objection 'yes, but with higher interest rates his mortgage interest rate will also increase' is only partly true. Many have a fixed-interest mortgage for a longer period of time, so that option does not apply to a very large group.
While many are excited about 50 billion euros per year in European subsidies for the agricultural sector, governments and banks in the euro zone receive a multiple of that in support per month. And anyone who says something about it is told that they should not interfere or that it is an excellent policy.
Strange birds
The central bankers who can and dare to keep their backs straight and who also dare to take unpopular measures (even when politicians do not like them) are also called hawks. We call those bankers who are receptive to the wishes of politicians pigeons. The first bird is hard to spot in the monetary world. It is teeming with pigeons. They are strange birds.
In concrete terms, the above means that interest rates for all maturities and certainly the EURIBOR rates will remain at current levels for a very long time.