Central Bank Independence

Governments may be tempted to keep interest rates low before elections or to finance spending by creating money, which can lead to high inflation. Giving central banks independence aims to protect monetary policy from these short-term pressures.

Independence typically involves a clear legal mandate, such as price stability; long, fixed terms for central bank leaders, who cannot easily be dismissed; control over policy tools; and restrictions on lending directly to the government.

For example, the Bank of England was given operational independence to set interest rates in 1997, with the government setting the inflation target and the bank deciding how to achieve it.

Research suggests that countries with more independent central banks have tended to have lower and more stable inflation. Independence comes with accountability, such as publishing decisions, explaining them and appearing before legislatures. Debates continue about how much independence is appropriate, especially as central banks have taken on broader roles since 2008.