A new global monetary order is being built before your eyes

The Covid-19 pandemic and the extraordinary stimulus unleashed has re-written the role of central banks. Now that economic recovery is picking up, there's a global tussle over the spoils and just how much power monetary authorities have to surrender.

Battle lines draw little distinction among regions and whether an economy is emerging or developed, rich or poor. In New Zealand, a pioneer of inflation targeting, the finance minister decreed that the Reserve Bank needs to worry about housing costs. Brazil's interest-rate chiefs finally got full legal autonomy — but at a price. And in Indonesia, politicians are encroaching on the independence of Southeast Asia's most influential central bank.

They've put up a draft parliamentary bill that seeks Bank Indonesia's support for government budgets in times of financial emergency. That goes beyond the bank's agreement to purchase of 574.4 trillion rupiah ($40 billion) in bonds from the state last year, a step then characterized as a one-time product of the Covid-19 pandemic. The idea that this was a response to an extreme health emergency meant Indonesia paid little price for debt monetization, something that would have once been considered heresy. By trying to link similar undertakings to financial messes rather than deadly disease, lawmakers are effectively seeking to make what was once extraordinary a normal economic tool.

While the nature of this incursion is unique to Jakarta, the remaking of monetary economics is becoming a global phenomena. The dramatic interest-rate cuts that marked the depth of the coronavirus slump are over in most countries. World commerce is poised for a big rebound this year and investors are fretting about a resurgence of inflation. That makes further adventures into unconventional policy a tall order, given the acceleration projected in global growth this year. If anything, we will see some withdrawal of stimulus. But this is far easier said than done. Central banks have shown they can act swiftly, relative to legislatures where fiscal horse-trading is the name of the game.

The very success of practitioners makes them vulnerable. What price are policy makers going to pay for the way monetary measures have enmeshed themselves in almost every aspect of economic life? And will some of the fire fighting steps undertaken during the pandemic's darkest hours become more permanent? The political class has seen what central banks can do. It can hardly be blamed for trying to squeeze more from interest-rate chieftains. 

Tussles and compromises from Wellington and Brasilia are a sign of what might come. The Reserve Bank of New Zealand, the first authority to adopt an inflation target in the 1980s, has been instructed by the government to consider house prices in decisions. The bank initially resisted the idea, but Finance Minister Grant Robertson prevailed. The real-estate plank is nakedly political: Few things matter more to voters than the affordability of shelter, and dwelling prices in New Zealand have skyrocketed. 

In Brazil, a byproduct of the coronavirus has been a formalization of the central bank's independence. Inside the bank, officials long pined for autonomy to be ratified, although de-facto separation from political whims has been practiced for a while. This new, legally enshrined freedom didn't come without a price, however. Legislators added a full-employment goal to the institution's mandate, something that the bank's leaders were initially wary of, but will have to live with. 

There's no need for die-hard inflation fighters to get too upset. The Federal Reserve has long had a goal of maximum employment, along with price stability. Support for jobs is also one of the goals being sought in Jakarta. Defenders of Bank Indonesia should pick their shots. They should have no fear of labor-market sensibilities; the big battles against inflation have been won. Lingering unemployment will be one legacy of Covid-19, no matter how great gross domestic product gains look in 2021. That is an economic and political reality. 

To some extent these changes are a reaction against an overly-pure focus on busting prices. In the case of Indonesia and Brazil, they reflect a remodeling of institutions along lines preferred by the International Monetary Fund. Governance was fundamentally remade in Indonesia, for example, after the 1998 financial collapse. That re-ordering of public life extended to setting the price of money. 

The scuffle over the spoils of low inflation and ultra-accommodation is unfolding. It's hard to extract yourself from very loose, especially when it has intruded into the fiscal arena. Circumstances warranted creativity. That doesn't make it easy to revert to some version of normal, whatever that now means. 

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement