IMF boss stresses independence is key to long-term economic stability

The challenges are particularly when it comes to prematurely cutting interest rates. Political interference, she noted, is growing and could affect banks’ decision-making and personnel appointments.

Georgieva emphasised the importance of central banks’ independence by reminding readers how their aggressive monetary easing had helped avoid a global financial meltdown and hastened recovery during the pandemic.

With the focus on restoring price stability, central banks have since tightened monetary policy albeit with different timelines. The responses have independently helped keep inflation expectations anchored regardless of increasing prices. Emerging markets were the leaders in tightening early and forcefully enhanced credibility, she added

This fresh success against inflation is the opposite of what was done in the 1970s when central banks were pressured to lower interest rates, which resulted in high inflation and was ruinous for those living on fixed incomes, who saw their incomes and savings crumble. During that time, central banks did not have clear mandates to prioritise price stability or clear laws protecting their autonomy.

Success in reducing inflation came in the mid-1980s after central banks received political support to aggressively fight inflation.

Secret to measuring impact

A IMF study observed several central banks from 2007 to 2021 and found that banks with stronger independence scores are better in keeping people's inflation in check and low.

Another study focused specifically on 17 Latin American central banks and covered such factors as decision-making independence, clarity of mandate, and whether they could be forced to lend to the government. The study again showed that greater independence delivered better inflation outcomes

“Central bank independence matters for price stability—and price stability matters for consistent long-term growth,” Georgieva wrote, adding that trust is key in a democratic world. Central banks must earn trust and with strong governance, transparency, and accountability, they can deliver on core responsibilities.

“Strong governance helps ensure that monetary policy is predictable and based on achieving mandated long-term goals, rather than short-term political gains. It starts with a clear legislative mandate that sets price stability as the main objective.” said Georgieva.

Legislators should recognise that price stability aids macroeconomic stability and eventually supports employment. This can start with central banks having control of their budgets and personnel and not being subject to easy dismissal based on their policy views or actions taken within the legal mandate. Certainly, they need to be transparent and accountable.

As central banks’ decisions unavoidably affect everyone, AI should be included in their policy conversation. Banks and governments should make economic literacy possible by providing clear explanations as to how their actions advance their legislatively mandated goals.

Respecting independence

Georgieva noted that branches of government should be responsible for helping central banks achieve their mandated objectives by, for example, proclaiming independence, following the letter and spirit of laws and being aware of how other policies could impact central bankers.

For instance, prudent fiscal policies that keep debt sustainable help reduce the chances of “fiscal dominance”. Fiscal dominance can be a tool to pressure central banks to give out low-cost financing to the government and stoke inflation. Furthermore, fiscal prudence creates budget space when needed.

Maintaining a strong and well-regulated financial system is also essential, as financial stability benefits the entire economy and rescues risk. The central bank is therefore often reluctant to raise interest rates for fear of stimulating a financial meltdown.

“When central banks and governments each play their roles, we see better control of inflation, better outcomes in growth and employment, and lower financial stability risks.” she said.

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