Is Central Bank Independence Under Threat?

Syed Bukhari is an International Management student, interested in global affairs and political economy. He is a member of Chatham House. [www.linkedin.com/in/syed-qamar-bukhari]

Introduction

For much of the last four decades, central bank (CB) independence was vital to economic policy globally. Governments gave control over monetary policy to technocratic institutions with clear instructions, limited tools, and protection from day-to-day politics (e.g. through staggered terms). The aim was simple: low and stable inflation. This now looks less secure. Inflation has returned, public debt has risen, and political pressure on CBs has increased massively. The question is no longer theoretical.

This article argues that independence is under pressure, but not out of date. Its survival depends less on the design and more on credibility, political norms, and institutional performance, and uses Europe and North America to show this divide clearly.

What central bank independence actually means

Central bank independence means that day-to-day monetary policy decisions sit with the central bank, not elected politicians; governments set the goals, while CBs choose the tools. This is often called operational independence. Since gaining operational independence in 1997, the Bank of England (BoE) decides interest rates to meet the inflation target, but the government sets it. As a result, policy focuses on long-term stability rather than short-term politics, allowing for monetary policy that is credible, even when decisions are unpopular in the short run.

However, this separation is not complete. Governments still appoint CB leaders and can change mandates through law. Financial crises also blur the line. When CBs buy government bonds through Quantitative Easing (QE) or support failing banks, or institutions that are “too big to fail”, actions have fiscal effects. As a result, external pressures limit how freely CBs operate and how widely it is accepted.

Why are they under strain

Since the global financial crisis, CBs have operated far beyond their original role. Interest rates fell close to zero. Balance sheets expanded through QE. CBs became significant holders of government debt, roughly 25% in the UK in 2025.

Consequently, the effects of monetary policy are more visible. When interest rates rise, debt servicing costs increase quickly. When there is high debt, political pressure may increase, because of stronger incentives to favour looser monetary policy, even when inflation risks persist. Therefore, independence becomes harder to maintain when rate decisions have immediate budgetary effects.

The return of inflation after the pandemic intensified these pressures; CBs missed targets for extended periods after 2021. Inflation dipped slightly below target for a brief period, before rising sharply. As a result, critics questioned whether independent CBs still delivered better outcomes than elected governments. For example, James Forder argues that the 1980s–90s case for central bank independence was based on weak evidence and overconfident claims, and that recent inflation has shown weaknesses in earlier reasoning.[1]

There is an important counterpoint, in that much of the inflation surge is due to supply-side shocks, like energy prices, pandemic disruptions, and war-related effects. Monetary policy primarily affects demand, not supply. CBs therefore faced inflation they could not fully control, yet they bore much of the blame.

Political pressure and populism

Political attacks on CBs have become more open. In the United States, President Donald Trump repeatedly criticised the Federal Reserve and called for lower interest rates. These attacks have resulted in efforts to influence appointments (like replacing the current Fed chair Jerome Powell).

This is the most direct challenge to CB independence in a major advanced economy in decades. Legal protections still exist, but informal norms have weakened. Even without changing the law, independence can lessen if CBs face pressure through public attacks, political signalling, or appointments based on loyalty rather than expertise.

The UK shows a less extreme version of the same trend. Certain media outlets, like The Spectator [2], and politicians, (like Nigel Farage [3], leader of Reform UK), have increasingly questioned why the Bank of England is independent. Although day-to-day interference is small, tension has increased. This matters because credibility relies on expectations about future behaviour, not just current rules.

On the other hand, the euro area presents a contrast.

Europe compared with North America

The European Central Bank (ECB) has strong legal protection. Its independence is embedded in treaties, which require unanimous agreement among member states to change. As a result, direct political pressure is far harder to apply to the ECB.

However, legal strength does not guarantee independence in reality. Central Europe provides a useful comparison. Poland, Hungary, and the Czech Republic all have inflation-targeting CBs with similar legal frameworks. Yet outcomes changed sharply post-pandemic.

In Hungary and Poland, governments informally pressured the CBs to delay tightening (restricting money supply, resulting in higher interest rates). Rates stayed lower for longer despite rising inflation. In contrast, the Czech National Bank acted earlier and more aggressively. As a result, inflation peaked lower and returned to target faster.

This shows that independence depends on behaviour as well as rules. When governments respect central banks’ independence, policy works better. When they do not, legal protections alone are not enough.

Independence, credibility, and communication

Central banks cannot rely on independence alone; they must justify it. This means competence, transparency, and accountability matter more than ever.

After recent policy failures, many CBs have improved communication. For example, the BoE now publishes individual voting rationales, leading to more transparency and improved legitimacy. This matters because independence is ultimately a political bargain. Society tolerates unelected power only if outcomes seem better than alternatives. When inflation rises sharply, that bargain weakens.

Even so, independent central banks still appear better at keeping inflation expectations stable. During the recent surge, expectations in most advanced economies stayed relatively contained, according to the Federal Reserve Bank of Kansas City. Credibility has been damaged, but it has not disappeared.

Do we need a new model?

Some argue that the old separation between fiscal and monetary policy no longer fits a volatile and uncertain world of frequent supply shocks, climate risks, and rapid technological change. As a result, calls for tighter coordination have grown.

However, coordination does not mean control. Clear mandates can allow cooperation without political interference. Monetary policy cannot fix supply constraints. Fiscal policy often can. This means that, instead of pressure, coordination should happen through formal methods with institutions. Artificial Intelligence demonstrates this point. If AI boosts productivity, it is a positive supply shock. CBs typically welcome such shocks. If AI disrupts labour markets, for example, regulation and fiscal policy matter more. Expanding central bank mandates creates confusion and political conflict. Global fragmentation adds further pressure; trade barriers and geopolitical blocs raise costs and reduce efficiency, pushing interest rates higher over time. Central banks must adjust, but this does not justify giving up independence.

Conclusion

The age of central bank independence is not ending. However, it is changing. Legal frameworks remain largely intact, especially in Europe. Yet political norms have weakened, particularly in North America. High debt, visible fiscal consequences, and recent policy failures have made independence harder to defend.

This means that independence can no longer rely on tradition alone; central banks must demonstrate competence, explain decisions clearly, and respect democratic accountability. On the other hand, governments must recognise the long-term costs of politicised money.

The lesson from Europe and North America is clear. Where independence remains, outcomes improve. Where it erodes, stability suffers. The real threat is not reform, but complacency. Independence will not be able to survive on its own without effort, without restraint, without accountability.

Works Cited

[1] Forder, J. (2022). The fallacies of central bank independence. Economic Affairs, 42(3), pp.549–558. doi:https://doi.org/10.1111/ecaf.12554.

‌[2] Mani Basharzad (2025). An independent Bank of England isn’t working. [online] The Spectator. Available at: https://spectator.com/article/an-independent-bank-of-england-isnt-working/

[3] Rees, T. (2025). Farage’s Rise Calls Bank of England Independence Into Question. [online] Bloomberg.com. Available at: https://www.bloomberg.com/news/articles/2025-06-22/farage-s-rise-calls-bank-of-england-independence-into-question‌