Importance of Central Bank Independence from Political Interferences

What is it about?

The effects of lower interest rates on the central bank’s inflation targeting policies – as well as consumer expectations constitutes a subject of contentious debates. Whilst lower interest rates are needed to stimulate economic activity – even where it appears that reasons for doing so are not immediately apparent, there are also concerns that such actions may impact consumer expectations by delaying spending in the hopes of lower rates or even worse, trigger fears and concerns amongst investors.

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Why is it important?

Central bank independence is important as a means of facilitating accountability - however it has also been demonstrated that lack of close coordination and linkages between financial regulatory authorities (particularly where independent separate agencies are in charge of regulation and supervision), and close working relationship between the central bank and government representative/s, could create problems for central bank functioning - particularly where this involves time sensitive matters such as bank runs and systemically significant financial institutions.

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