Lessons from inflation: central banks must remain independent

The independence of central banks is now considered one of the key pillars of economic policy. We take it for granted. Experience from the 1970s showed that when governments interfere in monetary policy, it ends in high inflation and a loss of confidence in the currency. The independence of central banks is therefore not a technical detail, but a fundamental condition for a stable economic environment. However, events overseas show that even historical experience may not prevent attempts to erode this pillar. After all, there are occasional attempts in our country to influence the decisions of the central bank.

 Its purpose is to ensure that monetary policy is not directly subordinate to the government and that decisions on interest rates or the amount of money in circulation are primarily guided by the goal of price stability, rather than short-term political interests. This model began to gain ground in the 1980s, when experience from previous decades showed that political interference in monetary policy led to high inflation and overall instability in most countries.

The 1960s and 1970s were a period when governments in many countries used central banks to finance deficits or boost employment. The result was “high inflation” – rapid price growth that undermined public and business confidence. It became apparent that the political cycle worked differently from the economic cycle: governments had an incentive to stimulate the economy in the short term before elections, while society bore the costs in the form of inflation and loss of stability in the long term.

A landmark example was the Bundesbank, which had built a reputation as an uncompromising “inflation watchdog” since the 1950s. Its approach became a model on which the ECB later built. Gradually, the principle of an independent monetary authority gained acceptance in virtually all advanced countries and became the standard of modern economic policy.

If the door were to be opened today to renewed political influence on central banks, there would be a risk of a return to past mistakes – from maintaining artificially low interest rates and financing government deficits by printing money to short-term overheating of the economy. The price would be high: loss of confidence in monetary policy, rising inflation, and a weakening of long-term growth potential. The independence of central banks is therefore not a technical detail, but a fundamental condition for a stable environment in which households, businesses, and the economy as a whole can thrive.