- Says independent Central Banks ’ll drive price stability, economic growth
The Chief Executive Officer of the International Monetary Fund, Kristalina Georgieva, has called for a strengthening of the independence of Central banks across the globe.
Georgieva in an article published on the blog of the IMF noted that Central bankers today face many challenges to their independence.
She warned that the risks of political interference in banks’ decision-making and personnel appointments are rising, adding that governments and central bankers must resist these pressures.
Georgieva, based on evidence from research, argued that Central banks with strong independence are more successful in keeping people’s inflation expectations in check, which helps keep inflation low. Independence is critical and has become more predominant among countries at every income level.
“Another IMF study tracking 17 Latin American central banks over the past 100 years examines factors including decision-making independence, clarity of mandate, and whether they could be forced to lend to the government. It also found that greater independence was associated with much better inflation outcomes,” she said.
“The bottom line is clear: central bank independence matters for price stability—and price stability matters for consistent long-term growth. But to wield enormous power in democratic societies, trust is key. Central banks must earn that trust every day—through strong governance, transparency, and accountability, and delivering 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.
“Even if employment is put on the same pedestal—as with the US Federal Reserve’s dual mandate—legislators have recognized that price stability aids macroeconomic stability, which ultimately supports employment.
“Strong governance and independence mean central bankers should have control of their budgets and personnel, and not be subject to easy dismissal based on their policy views or actions taken within the legal mandate. In exchange, they must be accountable, and they should be transparent,” she argued.
“She however said other branches of government have clear responsibilities in helping central bankers achieve their mandated objectives and navigate hazards ahead. This includes not only laws proclaiming independence but also following the letter and spirit of such laws. It also means taking into account how other policy actions impact the job of central bankers.
“Enacting prudent fiscal policies that keep debt sustainable helps to reduce the risk of “fiscal dominance”—pressure on the central bank to provide low-cost financing to the government, which ultimately stokes inflation. Fiscal prudence also provides more budget space to support the economy when needed, bolstering economic stability.”
Another government responsibility that is often shared with central banks is maintaining a strong and well-regulated financial system.
She said, “Financial stability benefits the whole economy and reduces the risk that the central bank becomes reluctant to raise interest rates for fear of causing a financial meltdown. Actions to strengthen financial institutions since the global financial crisis, including in emerging markets, allowed central banks to raise rates sharply without undermining the financial system. This major achievement must be preserved.”
