IMF chief urges strengthening central bank independence

International Monetary Fund (IMF) managing director Kristalina Georgieva on Thursday called for strengthening central bank independence to protect the world economy amid growing risks of political interference in banks’ decision making and personnel appointments.

Central bankers face many challenges to their independence, Georgieva said in a blog post, while pointing out that calls for interest-rate cuts, even if premature, are likely to intensify as half the world’s population votes this year.

Governments and central bankers must resist these pressures, she said.

Highlighting the achievements of central bankers in recent years, Georgieva said central bankers steered effectively through the covid pandemic, unleashing aggressive monetary easing that helped prevent a global financial meltdown and speed up recovery.

“As the focus shifted to restoring price stability, central bankers appropriately tightened monetary policy—albeit on different timelines. Their response helped to keep inflation expectations anchored in most countries even as price increases reached multi-decade highs,” the IMF MD said.

These central bank actions have brought inflation down to much more manageable levels and reduced the risks of a hard landing. While the battle isn’t yet over, their success thus far has largely been because of the independence and credibility that many central banks have built up in recent decades, she said.

US Fed on interest rates

The IMF chief’s message came closely after US Federal Reserve chair Jerome Powell said on Wednesday that he wants to see more evidence that inflation is coming down, while signaling that the Fed is on track to cut key interest rates thrice this year.

The Fed, while maintaining the target range for the federal funds rate at 5.25-5.5%, said it does not expect it will be appropriate to cut the range until it has gained greater confidence that inflation is moving sustainably toward the 2% mark.

The Fed said it will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities.

Bank of Japan raises rates after 17 years

The Bank of Japan this week raised interest rates for the first time since 2007 from -0.1% to a range of 0-0.1% as wages jumped following an increase in consumer prices.

The banking regulator had slashed rates below 0% in 2016 as the economy stagnated, in a move aimed at forcing people to spend as banks charged for deposits.

The bank also stopped its yield curve control policy, in force since 2016, that aimed to purchase government bonds in a bid to control interest rates.

RBI’s MPC to meet on 3-5 April

Reserve Bank of India governor Shaktikanta Das on Wednesday, 20 March, called on finance minister Nirmala Sitharaman ahead of the meeting of the RBI’s rate-setting monetary policy committee (MPC) meeting next month.

Das’ meeting with Sitharaman comes at a time the industry is pushing for a rate cut amid intense volatility in the equities market. RBI has held the repo rate at 6.5% since February 2023. The MPC is scheduled to meet on 3-5 April, its first meeting in the new fiscal year.

Strong central bank independence

Meanwhile, citing an IMF study that analyzed the actions of dozens of central banks between 2007 and 2021, Georgieva said those with strong independence score were 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, she said.

“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,” she said.

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, IMF head said.

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 said.

The chief of the multilateral institution also said other branches of government have clear responsibilities in helping central bankers achieve their mandated objectives and navigate hazards ahead.

Enacting prudent fiscal policies that keep debt sustainable helps to reduce risk of “fiscal dominance”—pressure on the central bank to provide low-cost financing to the government, which ultimately stokes inflation, said, adding that fiscal prudence provides more budget space to support the economy when needed, bolstering economic stability.

The IMF managing director also pointed out that maintaining a strong and well-regulated financial system 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,” she added.