Central Bank Independence - in need of further thinking - Speech by Andrew Bailey

The Governor of the Bank of England has delivered a robust defence of central bank independence, arguing that the principle — that the people who set interest rates should be insulated from the people who set taxes and spending — is essential to economic stability and that any erosion of that principle would damage the prosperity of the country.

In a speech at the University of Cambridge, Andrew Bailey acknowledged that central bank independence was under pressure in several countries, including some of the world's largest economies, where political leaders had sought to influence monetary policy decisions. He said the experience of the past half-century demonstrated that independent central banks delivered lower inflation, more stable growth and better economic outcomes than central banks that were subject to political control.

Bailey's speech was notable for its directness. He did not name specific countries or leaders, but his references to "attempts to influence monetary policy for short-term political advantage" and "the temptation to subordinate sound economics to electoral calculation" were clearly aimed at the United States, where President Trump has repeatedly criticised the Federal Reserve and attempted to influence its decisions.

The Governor argued that the case for independence rested not on the superior wisdom of central bankers but on the recognition that politicians faced incentives that made it difficult for them to take the decisions that were in the long-term interest of the economy. "The temptation to cut rates before an election, to keep them low when they should be rising, to blame the central bank when things go wrong and to take credit when they go right — these temptations are universal," he said. "Independence exists to resist them."