Supervisor Elham AbolFateh
Editor in Chief Mohamed Wadie

IMF Director: Strengthening Central Banks Independence Necessary to Protect Global Economy

Sun 24 Mar 2024 | 09:50 PM
Taarek Refaat

IMF Director Kristalina Georgieva said that central banks around the world today face many challenges that affect their independence, and there are increasing calls to reduce interest rates, even if prematurely.

The IMF Director Pointed out that the risks of political interference in decision-making in banks and the appointments of their officials are increasing, and governments and central banks must resist these pressures.

Georgieva indicated in a recent blog post that she published on the Fund’s website recently, about strengthening the independence of central banks to protect the global economy, that the banks were able to overcome the pandemic effectively, and they unleashed strong monetary easing, which helped avoid a global financial collapse and accelerated the recovery.

She added that with the focus shifting towards restoring price stability, central banks took the right step towards tightening monetary policies - albeit with different time horizons, noting that their response helped maintain the stability of inflationary expectations in most countries even as prices rose and reached high levels that they did not reach for several decades. Emerging markets were at the forefront of tightening early and strongly, enhancing their credibility.

She added that the result of these measures taken by central banks was to reduce inflation to manageable levels and reduce the risks of a violent decline. The battle has not yet ended, and much of its success so far is due to the independence and credibility that many central banks have built over the past decades.

She said that the recent success in reducing inflation globally contrasts sharply with the economic instability that prevailed during the period of high inflation in the 1970s. Central banks at that time did not have clear powers to ensure that price stability was given priority, or clear laws that protected their independence. As a result, they often face pressure from politicians to cut interest rates when inflation is high.

She continued: Everyone was affected by this era of high inflation, recovery, and recession - especially those who were living on a fixed income and saw their real incomes and savings eroded. Success in reducing inflation was achieved only in the mid-1980s, when central banks were given political support to combat inflation vigorously.

A study conducted by the International Monetary Fund examining dozens of central banks during the period from 2007 to 2021 shows that banks that obtained high degrees of independence were more successful than others in keeping people’s expectations regarding inflation under control, which helped keep inflation at low levels. Independence is extremely important and is becoming more widespread among countries at all income levels.

The International Monetary Fund conducted another study that included 17 central banks in Latin America over the past 100 years, examining factors including: independence in decision-making, clarity of powers, and the possibility of being forced to lend to the government. It also concluded that increasing independence is associated with significantly improved inflation results.

The Director General of the IMF stressed that the independence of central banks is important for achieving price stability - and price stability is important for consistency in long-term growth.

She added that strong governance helps clarify the course of monetary policy and establish it on the basis of achieving the long-term goals assigned to it, rather than focusing on short-term political gains. It begins with a clear legislative mandate that stipulates that the main goal is price stability.