The changing nature of central bank independence

Panel remarks by Mr Jaime Caruana, General Manager of the Bank for International Settlements, given at the Bank of Mexico international conference "Central bank independence - Progress and challenges", Mexico City, 14-15 October 2013.

Central bank independence has traditionally aimed at insulating monetary policy from undue political pressure. Extraordinary monetary easing has given rise to new forces that might work against the timely normalisation of policy. One force emanates from financial markets and highly indebted private sectors and might be called the threat of "financial dominance". This is akin to the more traditional concept of fiscal dominance, which itself threatens unless governments get their finances under control. The second force arises from unrealistic expectations that central banks' prolonged monetary accommodation can deliver the only antidote to the pathologies we currently face. One may term this "expectations dominance". Central banks should decide the timing and pace of the inevitable normalisation without being unduly constrained by these pressures. What is ultimately at stake is their credibility in fulfilling their mandates.