The managing director of International Monetary Fund, Kristalina Georgievawarned Thursday that central banks face growing political pressure to cut interest rates during an important election year, but monetary leaders must maintain their independence.
Georgieva stated in a blog published on the IMF website thats central banks with greater independence are more successful in controlling inflation and keep inflationary expectations under control.
“Requests for cuts to the interest ratesare premature, and are likely to intensify when half the world’s population votes this year,” he said. Georgieva.
“Risks of political interference increase in banks’ decision-making and personnel appointments. Governments and central bankers must resist these pressures,” he added.
According to Georgievathe success of central banks in avoiding a global financial collapse during the COVID-19 pandemic was quickly followed by a monetary tightening to reduce inflation. Both efforts were due to their independence and the credibility that comes with it.
On the contrary, Georgieva stated that during the period of high inflation in the 1970s, central banks had no clear mandates to prioritize price stability, nor clear laws protecting their autonomy, so they often came under pressure from politicians to cut interest rates.
He cited IMF research showing that between 2007 and 2021, Central banks with a strong independence score were more successful in keeping inflation expectations under control.
Interest rates: the decision of the Federal Reserve
The chairman of the Federal Reserve, Jerome Powell said on Wednesday that the U.S. central bank was still on track for three rate cuts this year, but its timetable depended on Fed officials becoming more confident that inflation was declining toward a 2% target, even though The economy exceeds expectations.
The Fed has faced growing demands from US congressmen so that cut rates to help reduce mortgage costs for homebuyers and boost financing for small businesses and clean energy projects.
Georgieva said that strong governance is important to ensure the independence of central banks and that other branches of government have responsibilities in helping central banks achieve their objectives, including through fiscal prudence.
“Enact prudent fiscal policies Maintaining debt sustainability helps reduce the risk of “fiscal dominance”, that is, pressure on the central bank to provide low-cost financing to the state, which ultimately fuels inflation,” Georgieva said.
He added that the IMF is willing to provide technical assistance to member countries who wish to strengthen their monetary policy frameworks.
“We make independence an explicit pillar in some funding programs supported by the Fund, agreeing with members on measures to measure and achieve it,” Georgieva added.
Source: Ambito
