Central Bank Independence is an anchor for stability, not a shield - Makhlouf

Gabriel Makhlouf, Governor of the Central Bank of Ireland, today delivered a keynote address at the Blavatnik School of Government, outlining the critical role of central bank independence in delivering price stability and supporting economic prosperity for society.

Speaking on “Institutions, Anchors, and Their Discontents: The Role of Central Banks”, Governor Makhlouf highlighted how central bank independence, underpinned by clear mandates and robust accountability frameworks, enables monetary policy to be set according to economic cycles rather than political cycles.

“Independence is sometimes portrayed as a shield. I see it more like an anchor providing stability, while also allowing for some movement and flexibility when required,” said Governor Makhlouf. “Independence gives central banks the confidence to take difficult decisions in the long-term interests of the people that we serve.”

The Governor emphasised that credibility is a central bank’s most valuable asset, and that this credibility depends on far more than institutional distance alone. “Credibility also depends on a number of elements including competence, engagement, coherence, and public trust that decisions will be reached consistently and without bias.” he noted.

Reflecting on historical lessons, Governor Makhlouf pointed to the macroeconomic instability of the 1960s and 1970s, when monetary policy was often subject to short-term political pressures, resulting in persistently high inflation and poor anchoring of inflation expectations. He contrasted this with the more recent post-pandemic period, where central banks with established credibility were able to act decisively to bring inflation down to target while avoiding recession.

“The credibility that had been built up over time underpinned the effectiveness of that response, reducing its ultimate costs,” he said.

Governor Makhlouf stressed that independence cannot be taken for granted and must be continuously earned and maintained. “There is no ‘natural law of central bank independence’. Rather it must be explained, understood and earned continuously if it is to be sustained,” he said.

On accountability and trust, Governor Makhlouf noted: “Independence does not mean isolation. In an interconnected world, credible and effective central bank policies require dialogue with society more broadly and with other institutions responsible for economic governance.”

Concluding, Governor Makhlouf said: “Independence is a means to a public end; it requires continuous maintenance – analysis, engagement and review. Our legitimacy rests on delivering outcomes for the people we serve and being accountable for the decisions we make.”

ENDS