The president of the European Central Bank (ECB), Christine Lagardedemands to maintain the independence of central banks in a more demanding environment and believes that, «in a world where conditions become more difficultthe challenge is no longer simply to maintain legal independence, but, above all, to maintain the necessary credibility to exercise it.» This was expressed during his speech at the meeting of governors of French-speaking central banks, held in Cambodia, where he made reference to the US Federal Reserve (Fed) and the defense of its president, Jerome Powell, of the independence of the institution. «The ability to contain political pressures was due to the public support accumulated over the years thanks to the independent decision-making of the Fed. Voices from across the political spectrum had also highlighted this independence,» he said, highlighting that «the matter is not settled». In an environment that considers «more demanding»the president of the ECB has pointed out three practical conditions which seem essential to safeguard the independence of the central bank. As detailed, first of all, he sees it as essential clarity of mandate. «Price stability must remain the primary objective and must be defended even if this entails a real and immediate cost. The Eurosystem supports the general economic policies of the EU – growth, employment and climate – but only to the extent that they do not undermine this primary objective. This hierarchy protects the central bank from external pressures and allows it to commit to secondary objectives, but never at the expense of the first. When a central bank reverses this hierarchy, its independence is compromised,» he indicated. The second condition is direct communication with citizens. «The anchoring of inflation expectations depends on households being convinced that the central bank will keep its promises. This conviction is built less with words than with accumulated experience: the feeling that, once made, commitments are systematically fulfilled. This conviction acquires democratic legitimacy through transparent decision-making methods and accountability to elected institutions. It is in this area where credibility is gained, and also where it can be lost most quickly, when decisions and words no longer coincide,» has stated. Finally, the third condition consists of preserve the room for maneuver in monetary policy. «Such headroom depends, first and foremost, on fiscal responsibility: legal frameworks cannot safeguard the independence of the central bank when fiscal trajectories become unsustainable. It also depends on the resilience of the financial system. When fragility in parts of the system – whether banks, non-bank intermediaries or financial markets – makes every change in interest rates potentially destabilizing, the central bank finds its room for maneuver reduced and financial stability considerations risk overshadowing the stability of prices in practice,» he said. Therefore, he has assured that maintaining monetary independence requires, in addition to fiscal responsibility, financial regulation that sustains the resilience acquired since 2008 and that extends to the new components of the financial system that have been developed since then.
