IMF calls for independent central banks amid pressure to cut interest rates – 03/21/2024 – Market

International Monetary Fund (IMF) Managing Director Kristalina Georgieva warned on Thursday that central banks face increasing political pressure to cut interest rates during a key election year, but that authorities need to maintain their independence. .

Georgieva said in a text published on the IMF website that central banks with stronger independence ratings are more successful in controlling inflation and keeping inflation expectations in check.

“Calls for interest rate cuts, however premature, are growing and are likely to intensify when half the world’s population votes this year,” Georgieva said.

“The risks of political interference in banks’ decision-making and staff appointments are increasing. Governments and central banks must resist these pressures,” he added.

She said central banks’ success in avoiding a global financial meltdown during the Covid-19 pandemic was quickly followed by monetary tightening to reduce inflation. Both efforts were a function of his independence and the credibility that comes along with that.

On the other hand, Georgieva said 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, and as a result, they were often pressured by politicians to reduce interest rates.

She cited IMF research that shows that between 2007 and 2021, central banks with strong levels of independence were more successful in keeping inflation expectations in check.

Federal Reserve Chairman Jerome Powell said Wednesday that the U.S. central bank was still on track for three interest rate cuts this year, but the timing depended on whether Fed officials become more confident that inflation was declining toward the 2% target even as the economy exceeded expectations.

The Fed has faced increasing calls from U.S. lawmakers to cut rates to help reduce mortgage costs for homebuyers and increase financing for small businesses and clean energy projects.

Georgieva said strong governance is important to ensure central bank independence, and that other branches of government have responsibilities in helping central banks achieve their goals, including through fiscal prudence.

“Enacting prudent fiscal policies that keep debt sustainable helps reduce the risk of ‘fiscal dominance’ — pressure on the central bank to provide low-cost financing to the government, which ends up fueling inflation,” Georgieva said.

She added that the IMF stands ready to provide technical assistance to member countries that were seeking to strengthen their monetary policy frameworks.

“We make independence an explicit pillar in some funding programs supported by the Fund, agreeing with members on actions to measure and achieve it,” Georgieva added.