Central banks must be independent to resist political pressures from govts— Ex-IMF MD

By Damilare Adeleye

Former International Monetary Fund Managing Director and President of the European Central Bank, Christine Lagarde, has harped on the need for central banks across the world to maintain their independence in order to withstand political pressure from governments.

Lagarde made the remarks on Thursday while speaking at a conference of francophone central bankers in Phnom Penh, Cambodia, where participants included representatives from the Middle East and West Africa.

According to her, the challenge facing monetary authorities globally is no longer merely how to guarantee institutional independence, but how to preserve it when governments come under economic and political pressure.

“The question is no longer simply how to guarantee independence. It is how to protect it when it is put to the test,” Lagarde said.

Her comments come amid growing global concerns over the pressure governments may place on central banks to maintain lower interest rates despite inflationary risks and mounting public debt burdens.

Earlier this month, European Central Bank board member Isabel Schnabel warned that central banks were experiencing a quiet erosion of their independence as rising government debt levels increase expectations for accommodative monetary policies.

Lagarde noted that central banks in emerging and developing economies have long operated under more difficult economic conditions and may now offer valuable lessons to advanced economies grappling with persistent inflation, economic shocks, and declining public trust.

“Many of the central banks represented here today have long operated under structurally more challenging conditions.”

“We have more to learn from your experience than the other way around. You have long practised the work that has now become the task of all,” she said.

Drawing parallels with the oil shock and stagflation crisis of the 1970s, Lagarde argued that history has shown why independent monetary authorities remain essential for economic stability.

She cited evidence indicating that countries with weaker central bank independence often experience higher inflation and greater price instability.

“This evidence underscored the need to shield monetary policy decisions from the electoral cycle,” she stated.

“To best serve the public interest, a central bank must be close enough to the state but independent enough to resist the pressures of the moment,” she said.
Lagarde further warned that increasingly frequent economic disruptions and declining confidence in public institutions could weaken the authority of central banks if credibility is not preserved.

“It is precisely when monetary policy decisions are politically fraught and economically costly that credibility is most needed,” she added.