Factbox-What is Central Bank Independence?

The central banker’s job is to maintain the value of the currency by keeping inflation under control. To this end, many of them are sheltered from political pressure from the government.

This independence, once a sacred cow in the Western world, has been increasingly questioned in recent years as central banks propped up governments when they were hit by the global financial crisis and then the coronavirus pandemic.

Here are some questions and answers on a topic that is moving fast from academia to politics and could dramatically affect inflation in the decades to come.


The front-runner to become Britain’s next prime minister, Liz Truss, has vowed to review the Bank of England’s mandate – possibly including its ability to set interest rates without government interference.

This comes after Britain’s central bank on Thursday raised interest rates by the highest level since 1995, while also forecasting a long recession and double-digit inflation – a double blow to household finances.

BoE Governor Andrew Bailey is not alone. Central bankers around the world have come under fire from politicians for failing to predict and prevent the current high inflation volatility.


A central bank is independent if it can make policies, such as setting interest rates or printing money, without interference from elected officials or the private sector.

The idea is that governments will lean on the central bank to trigger a boom when they need re-election and to hold off on rate hikes that would be too painful for their voters.

As a result, the economy will overheat and inflation will rise too high to the inevitable collapse.

Instead, central bankers should turn their attention to inflation, sometimes marrying off other goals such as full employment, and letting politicians deal with issues of redistribution and equity.


The data show that more independent central banks, such as Germany, Austria and Switzerland, achieved lower inflation rates between 1970 and 1999 than central banks that were more closely linked to their governments, such as Norway, New Zealand and Spain.

But this relationship weakened in the new millennium, when new forces came into play, such as greater globalization and the introduction of the euro.

However, the alternative is difficult to digest.

In Argentina, where the central bank is under presidential control, inflation is near triple digits, the peso has lost half its value in less than a year and a half and citizens face restrictions if they want foreign currency. goods abroad.


Most central banks in developed countries and many in developing countries are formally independent, although to varying degrees.

In practice, the boundaries between central banks and governments can be blurred and in some cases nothing more than polite fiction.

Turkey’s central bank is officially independent, but that hasn’t stopped the country’s president, Tayyip Erdogan, from firing one governor after another if he doesn’t comply.

Even in the United States and Europe, central bank governors have been systematically accused of banking countries with massive purchases of sovereign debt, which has become commonplace since the global financial crisis.

While these “quantitative easing” programs are always justified by the need to boost inflation when it’s too low, it means central bankers are working shoulder to shoulder, not shoulder to shoulder, with their governments.

Nowhere is this clearer than in Japan, where the central bank owns half of the national debt.


No, until recently the central bank was an arm of the government.

The idea of ​​a fully independent central bank was discussed in 1962 by economist Milton Friedman, who rejected it on the grounds that it would not survive the first “real conflict” with the government.

The Federal Reserve has enjoyed operational independence since 1951, but presidential interference lasted until at least the 1970s.

Fed chairman Arthur Burns was under pressure to keep policy soft to help US President Richard Nixon win re-election.

The period of high inflation over the next decade, sparked by the oil shock Fed Burns attempted, spurred the idea of ​​central bank independence.

This idea flourished in the 1980s and boomed in the 1990s, when many central banks, including the Bank of England, were reformed and more established in what was once the Eastern Bloc.

Astrid Marshman

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