With greater independence and policy clout, central banks have been forced to shed their earlier mystique and confront the ‘democratic deficit’ which independence implies. The Australian Financial Review has said that an independent central bank ‘occupies an unusual place in a democracy’, largely because independence devolves substantial policy authority to unelected officials. In Europe there has been a debate about the ‘democratic deficit’ created by the highly independent European Central Bank. It is time for a similar debate in Australia.

As we have seen, central bank independence in Australia in the 1990s was worked out incrementally by a process of elite interaction and accommodation, and the idea was never fully debated in public. In fact, to most people it was not clear who was running monetary policy. By 1996, the incoming Howard government announced the independence of the Reserve Bank as a fait accompli. Yet, as the Australian Financial Review suggests: ‘While central bank independence has become an accepted part of the landscape in modern democracies, the idea deserves a lot more scrutiny because it really still is a work in progress.’

UNPACKING CBI

An independent central bank can be seen as an example of ‘new governance’, which emphasises government policy devolution and power-sharing with other institutions.