European Central Bank president and former International Monetary Fund Managing Director Christine Lagarde warned today that monetary institutions worldwide must remain independent.
Central banks in the industrialized world have lessons to learn from those in emerging countries, she told a conference in Cambodia, AFP reports.
Concerns have been raised about risks to central bank independence as US President Donald Trump has put the Federal Reserve under public pressure to cut rates, lashing out at its former chairman Jerome Powell and placing him under a criminal investigation that has since been dismissed.
This month, ECB board member Isabel Schnabel warned that central banks in Europe faced a “quiet erosion” of their independence as rising government debt meant lenders of last resort could be under pressure to keep rates low.
“The question is no longer just how to guarantee independence” of central banks, Lagarde said in a speech at a conference in Phnom Penh.
“It is how to defend it when it is tested,” she told a gathering of francophone central bankers from across the globe including the Middle East and West Africa.
“Many of the central banks represented here today have traditionally operated under structurally more challenging conditions,” Lagarde remarked.
“We have a lot to learn from your experience, more than the other way around,” she continued. “You have long been doing the work that now is the work of all.”
In addition, the experience of the oil shock and stagflation of the 1970s had demonstrated that independence was “crucial” The data showed that nations with less independent central banks have higher price growth, Lagarde noted.
“This evidence highlighted the importance of insulating monetary policy choices from the electoral cycle,” she said.
‘A central bank must be close enough to the state – yet autonomous enough to withstand the constraints of the moment – to best serve the public interest,’ she added.
Economic shocks are increasing in frequency and trust in public institutions such as central banks is decreasing, which might undermine their power, Lagarde warned.
“Credibility is most needed in times when monetary policy decisions are politically difficult and economically costly,” she said.
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