IMF advocates for central bank autonomy in the face of rate-cut pressures during election years

Shafaq News/ International Monetary Fund (IMF) Managing Director Kristalina Georgieva cautioned on Thursday that central banks are encountering increasing political pressure to reduce interest rates amid a significant election year. However, she emphasized the importance of policymakers maintaining their independence despite these challenges.

Georgieva said that central bankers today face many challenges to their independence, therefore "calls are growing for interest-rate cuts, even if premature, and are likely to intensify as half the world's population votes this year. Risks of political interference in banks' decision making and personnel appointments are rising. Governments and central bankers must resist these pressures."

The IMF's Managing Director explained the importance of this matter by considering what independent central banks have achieved in recent years.

"Central bankers steered effectively through the pandemic, unleashing aggressive monetary easing that helped prevent a global financial meltdown and speed 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. Emerging markets were leaders in tightening early and forcefully, enhancing their credibility." She pointed out.

According to Georgieva, the 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 explained that the recent success in bringing down inflation contrasts sharply to the economic instability that prevailed during the high inflation period of the 1970s.

"Back then, central banks didn't have clear mandates to prioritize price stability, or clear laws protecting their autonomy. As a result, they were often pressured by politicians to lower interest rates when inflation was high."

"Everyone was hurt by this high inflation, boom and bust era—especially people living on fixed incomes who saw their real incomes and savings eroded. Success in reducing inflation only came in the mid-1980s when central banks were given political support to aggressively fight inflation." Georgieva added.

Furthermore, Georgieva pointed out that an IMF study of dozens of central banks from 2007 to 2021 showed that those with strong independence scores 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."

Another IMF study tracking 17 Latin American central banks over the past 100 years examines decision-making independence, clarity of mandate, and whether they could be forced to lend to the government. It also found that greater independence was associated with much better inflation outcomes.

Georgieva emphasized the importance of strong governance to uphold central bank independence, highlighting the role of other government branches in supporting central banks' objectives through fiscal prudence.

"Implementing responsible fiscal policies that maintain sustainable debt levels helps mitigate the risk of 'fiscal dominance,' where the central bank is pressured to offer cheap financing to the government, leading to inflationary pressures," stated Georgieva.

In addition, she mentioned that the IMF is ready to offer technical assistance to member countries aiming to enhance their monetary policy frameworks.

"We incorporate independence as a fundamental aspect in certain Fund-supported financial programs, collaborating with members to establish and achieve measures to uphold it," Georgieva added.