2024-03-26 18:00:32
“The risks of political interference in the decision-making of central banks and the appointments of their officials are increasing,” according to the Managing Director of the International Monetary Fund (IMF), Kristalina Georgieva.
“Central banks today see their independence called into question from all sides. Demands for rate cuts are becoming more and more insistent, even if it is too early to take action, and they should intensify since half of the world’s population goes to the polls this year. , she notes in a recently published note.
An essential ingredient to win the battle against inflation
Convinced that the wave of elections looming this year risks putting decision-makers under pressure, the DG of the IMF calls on “public authorities and central banks to resist these pressures”, believing that independence is an essential ingredient to win the battle against inflation and stabilize long-term growth.
“Central banks have accomplished in recent years thanks to their independence. They skillfully negotiated the pandemic by carrying out aggressive monetary easing that helped avoid a collapse of the global financial system and accelerate the recovery,” she notes.
Furthermore, she continues, “when the priority refocused on restoring price stability, they tightened their monetary policy wisely, even if they did not all do so in the same time frame. Their response has helped keep inflation expectations well anchored in most countries, despite price increases not seen in several decades.”
For the DG, there is no doubt that the central banks of emerging countries have shown the way by tightening their monetary policy quickly and vigorously, which has established their credibility.
It must be said that “these measures have brought inflation back to much more reasonable levels and reduced the risks of a hard landing” and that even though the fight is not yet won, “their effectiveness so far is largely part of the independence and credibility that many central banks have acquired in recent decades.
It is obvious that the way in which they were able to curb inflation contrasts sharply with the economic instability which characterized the period of high inflation in the 1970s, she points out in her note.
For those who have forgotten, “at the time, their mandate did not explicitly provide that they had to give priority to price stability, nor did there exist clear laws protecting their autonomy, if although they were often pushed by political leaders to lower interest rates in times of high inflation,” recalls Kristalina Georgieva noting that it was not until the mid-1980s when central banks were given the political support necessary to take aggressive measures, which they succeeded in reducing inflation.
As if to underline the benefits of the independence of central banks, the DG indicates that an IMF study covering several dozen central banks over the period between 2007 and 2021 showed that those with a high level of independence performed better managed to control their population’s inflation expectations, which helps keep inflation low.
Another IMF study cataloging the performance of 17 Latin American central banks over the past 100 years examines factors including independence in decision-making, clarity of mandate and the possibility that they will be forced to grant loans to the State. Again, it turns out that a greater degree of independence is associated with much better inflation outcomes.
Alain Bouithy
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