Factbox – What is central bank independence?

The job of central banks is to maintain the value of a currency by keeping inflation in check. To this end, many of them are protected from political pressure from governments.

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

Here are some questions and answers about a topic that is quickly moving from academia to the political realm and could dramatically affect inflation for decades to come.


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

This came after the Bank of England on Thursday raised interest rates by the highest rate since 1995 while predicting 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 are under fire from politicians for failing to predict and prevent the current spate of high inflation.


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 fuel a boom when they need re-election and to withhold rate hikes that would be too painful for their constituents.

As a result, the economy would overheat and inflation would rise too high for an inevitable collapse.

Instead, central bankers should turn their attention to inflation, sometimes married to another goal, such as full employment, and let politicians deal with issues of redistribution and fairness.


The data show that central banks that were more independent, such as those in Germany, Austria and Switzerland, achieved lower inflation rates between 1970 and 1999 than central banks that were more closely tied to their governments, such as those in 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 firmly under the control of the president, inflation is approaching 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. Buy or sell goods abroad.


Most central banks in the developed world and many in emerging economies are formally independent, albeit to varying degrees.

In practice, the line between central banks and governments can be blurred and in some cases is little more than a polite fiction.

Turkey’s central bank is formally independent, but that has not stopped the country’s president, Tayyip Erdogan, from firing one governor after another if he did not comply with his wishes.

Even in the US and Europe, central bankers are systematically accused of banking states with the massive purchases of sovereign debt that have become commonplace since the global financial crisis.

Although these “quantitative easing” programs are always justified by the need to raise inflation when it is too low, it means that central banks work shoulder-to-shoulder, rather than arm’s length, with their governments.

Nowhere was this more evident than in Japan, where the central bank owns half of the national debt.


No, until recently central banks were an arm of government.

The idea of ​​a completely independent central bank was mooted in 1962 by the 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 at least into the 1970s.

Then-Fed Chairman Arthur Burns came under pressure to keep policy accommodative to help US President Richard Nixon win re-election.

The subsequent decade-long period of high inflation, triggered by an oil shock that Burns’ Fed sought to mitigate, strengthened the idea of ​​central bank independence.

This idea took off in the 1980s and boomed in the 1990s when many central banks, including the Bank of England, were reformed and more were established in what used to be the Eastern Bloc.

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