Today's central bankers face many challenges that threaten their independence. Calls for interest rate cuts, even if premature, are growing and are likely to grow stronger this year with half the world's population voting. The risk of political interference in bank decision-making and personnel affairs is increasing. Governments and central bankers must resist these pressures.
But why does this matter? Consider what independent central banks have achieved in recent years. Central bankers effectively weathered the pandemic, deployed aggressive monetary easing, and helped prevent a global financial collapse and accelerate the recovery.
As the focus shifted to restoring price stability, central bankers tightened monetary policy appropriately, albeit at different times. Their response helped maintain inflation expectations in most countries, even as price increases reached multi-decade highs. Emerging markets led the way in early and strong tightening, increasing confidence.
These central bank actions have reduced inflation to much more manageable levels and reduced the risk of a hard landing. Although the battle is far from over, the success of central banks to date is largely due to the independence and credibility that many central banks have developed in recent decades.
Recent successes in controlling inflation contrast sharply with the economic instability that prevailed during the high inflation period of the 1970s. At the time, central banks did not have a clear mandate to prioritize price stability or clear laws to protect their autonomy. As a result, when inflation was high, there was often pressure from politicians to lower interest rates.
Everyone has been hurt by this period of high inflation, booms and busts. This was especially true for people who lived on fixed incomes and saw their real income and savings eroded. It was not until the mid-1980s, when central banks gained political support to aggressively fight inflation, that they succeeded in controlling inflation.
Measuring impact
A wide range of research, including ours, demonstrates that central bank independence is critical.
An IMF study looked at dozens of central banks from 2007 to 2021 and found that central banks with high independence scores were more successful in controlling people's inflation expectations, which led to lower inflation. It has been shown that this contributes to maintaining a low level. Independence is very important, and independence is becoming more important in countries at all income levels.
A separate IMF study that tracked 17 Latin American central banks over the past 100 years found that factors such as independence of decision-making, clarity of authority, and whether they could be forced to lend to governments It is being investigated. We also find that greater independence leads to better inflation outcomes.
The conclusion is clear. Central bank independence is important for price stability, and price stability is important for consistent long-term growth.
But trust is key to wielding enormous power in a democratic society. Central banks must earn that trust every day by fulfilling their core responsibilities through strong governance, transparency and accountability.
Strong governance helps ensure that monetary policy is predictable and based on achieving mandated long-term goals rather than short-term political interests. It starts with a clear legislative mandate that has price stability as its main objective.
Even though jobs are placed on the same pedestal as with the dual mandate of the US Federal Reserve, lawmakers recognized that price stability helps macroeconomic stability, which ultimately supports jobs. are doing.
Strong governance and independence means central bankers must have control over budgets and personnel, and cannot be easily removed based on policy views or actions taken within legal obligations. To do.
Instead, they must be accountable and transparent.
They must regularly explain how their actions seek to advance legislatively mandated goals, both through detailed reports and testimony before legislators. Because central banks' decisions have a significant impact on everyone, central banks and governments must continue their efforts to increase economic literacy so that citizens can participate in policy dialogue.
And trust ultimately depends on success in achieving price stability and ensuring financial system stability.
respect for autonomy
Other branches of government have a clear responsibility to help central bankers achieve their mandated goals and avoid future risks. This includes not only following the law declaring independence, but also following the letter and spirit of such laws.
It also means considering how other policy measures will affect the work of central bankers.
Implementing prudent fiscal policy to keep debt sustainable reduces the risk of 'fiscal control', which puts pressure on central banks to provide low-cost loans to governments, ultimately causing inflation. useful for. Fiscal health also increases economic stability by increasing budgetary space to support the economy when needed.
Another responsibility of governments, often shared with central banks, is to maintain a strong and well-regulated financial system.
Financial stability benefits the economy as a whole and reduces the risk that central banks will be reluctant to raise interest rates for fear of triggering a financial meltdown. Since the global financial crisis, measures to strengthen financial institutions, including in emerging markets, have allowed central banks to significantly raise interest rates without damaging the financial system. This great achievement must be preserved.
With central banks and governments playing their roles, we saw better control of inflation, better growth and employment outcomes, and lower financial stability risks.
The IMF is here to help policymakers face these challenges. We strongly support central bank independence and provide tailored technical assistance to member countries as they work to improve their governance and legal frameworks. We make independence an explicit pillar of some of our Fund-supported lending programs and agree with our members on actions to measure and achieve independence.
To strengthen this commitment, we have introduced a new way to measure independence based on which aspects of independence are most important to us, according to our recent survey of central banks.
We have also developed a transparency code to help central banks assess and improve their practices to strengthen accountability.
By working together, central bankers, government leaders, Congress, and the public can maintain central banks to win the fight against inflation today and promote economic stability and growth for years to come. It can be strengthened.
This benefits everyone, including retirees and retirees living on fixed incomes. A small entrepreneur trying to launch a business. And if inflation gets out of control, any society could face instability.
With such significant risks, we need to maintain and strengthen central bank independence.
