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11 17 2015 | by Victor Xing | Central Banks

What is monetary policy autonomy?

Central bank independence, or monetary policy autonomy refers to a central bank’s ability to conduct monetary policy without political interference, that monetary policy decisions are made purely based on economic and financial conditions to achieve publicly-stated objective(s) of a central bank.

The best comparison I can think of is the difference between the Federal Reserve (as well as Bank of England and the ECB) vs. People’s Bank of China (PBOC).  The PBOC is not an independent central bank, because some of its policies are influenced by macro objectives of the State Council as well as the Politburo.  Head of the Federal Reserve may get grilled at the Congress and shrug off the political pressure on-the-follow.  The same cannot be said for a central bank that is not fully independent.

PBOC Governor Zhou Xiaochuan (3rd row, center) is a minister-level official.  Moreover, the PBOC is under the organization chart of the State Council, headed by Premier Li Keqiang.

This makes China’s economic reaction function somewhat difficult for market participants to anticipate, because reactions on changing economic conditions may come in the form of fiscal or monetary policy, or a combination of both (the “dual bazooka” approach).

Monetary policy independence - PBOC
PBOC Governor is a ministerial post

Next article11 17 2015 | by Victor Xing | Capital Markets

Why did swap spreads turn negative (late 2015)?