Central bank independence in a changing world

Introductory remarks by Alexandre Tombini, Chief Representative, Representative Office for the Americas, Bank for International Settlements, at the OECD webinar "Guardians of stability: strengthening central bank independence in a changing world", Latin America policy dialogues webinar series, 12 November 2025.

Introduction

Thank you to the Organisation for Economic Co-operation and Development (OECD) for bringing us together to discuss central bank independence in a world that continues to evolve. This is a subject at the heart of how we navigate the complexities of ensuring stability and fostering trust in our institutions.¹

As the title of this panel suggests, our focus today is on central bank independence and the changing global environment. To frame my contribution, I will first reflect on central bank independence. I will then turn to the transformations that are redefining the challenges that central banks face. Finally, I will bring these two perspectives together to explore what this changing world means for central banks as they endeavour to fulfil their mandates within a framework rooted in their independence.

Central bank independence

The importance of central bank independence has been underscored by the experiences of Latin American economies. The painful episodes of debt crises and high levels of inflation in the 1980s and 1990s forced governments to confront the urgent need for a comprehensive wave of measures to construct the foundations of a strong macroeconomic framework. At the core of these efforts was recognition that achieving low and stable inflation was critical – not only because price stability is a valuable objective in its own right but also as a foundation for sustained economic growth and improved societal wellbeing.

Granting independence to central banks became a central pillar of these efforts, but it was not the only reform (Tombini et al (2023)). Rather than an isolated initiative, central bank independence was part of a concerted effort to build a sound macroeconomic framework. Countries in the region also adopted flexible exchange rate regimes, which enabled the independent conduct of monetary policy while serving as vital shock absorbers against external volatility. At the same time, economies were opened to international trade and capital flows, and stronger prudential regulation and supervision were introduced to fortify financial systems. Fiscal consolidation was equally critical, as governments worked to avoid fiscal dominance and ensure that monetary policy could focus squarely on achieving sustainable reductions in inflation.

At the time, there was a pressing need for an institution that could command public trust in its ability to maintain low and stable inflation. Policymakers responded by turning to the concept of an independent central bank – an institution designed to inspire trust (Carstens (2025)). With a clear and well-defined mandate, an independent central bank would act in a predictable and consistent manner to achieve its predefined goal of price stability. Confidence and policy effectiveness are further strengthened by accountability, which fosters transparency. Together, these three institutional pillars – a clear price stability mandate, independence and accountability – form the foundation that enables central banks to maintain price stability (Hernández de Cos (2025)).

While central bank independence is designed to shield monetary policy from undue influence, it does not imply isolation. On the contrary, effective collaboration with other government entities is often necessary to ensure that complementary policies work together to reinforce macroeconomic stability.

Inflation targeting has proven to be an effective framework for operationalising the core principles of central bank independence and fulfilling the very raison d'être of such independence: maintaining price stability. It provides a practical way to implement the key pillars that underpin autonomy.  

Inflation targeting places accountability and transparency at the centre of policymaking. A numerical inflation target enhances them by translating the central bank's mandate into a measurable and concrete objective. Central banks operating under this framework must clearly communicate their objectives, the rationale behind their actions and the factors they consider to be influencing inflation. In doing so, they not only fulfil their responsibility to explain their decisions but also reinforce the trust and credibility that are vital to maintaining their independence. This framework also emphasises the importance of policy tools, with the reference interest rate serving as the primary instrument to achieve the inflation target. Under inflation targeting, monetary policy decisions are guided solely by the pursuit of price stability, while the autonomy of the central bank seeks that it is not influenced by the broader considerations of other entities. The inflation targeting framework has proven effective through various challenges, notably the Covid-19 pandemic, which brought decades-high inflation (Macklem (2025)).

A changing world

The world has significantly changed since central banks were legally granted autonomy. Central banks have had to adapt, demonstrating their ability to respond with flexibility and innovation.

An important turning point in this changing world was the Great Financial Crisis (GFC) of 2008–09. The crisis exposed significant vulnerabilities in the global financial system and underscored the vital role of financial stability. It became evident that central banks needed to adopt a more proactive and vigilant approach to financial stability in order to navigate a world that had become far more complex and interconnected than previously understood (Tombini et al (2023)).

The Covid-19 pandemic marked another phase of challenges for central banks, initially underscoring their role as "market makers of last resort" in stabilising financial markets (Tombini et al (2023)). Subsequently, central banks acted decisively to face the supply-demand imbalances driving inflationary pressures. The onset of the war in Ukraine further complicated matters, as its concurrent development with the pandemic highlighted the significant impact of supply-side shocks on inflation. While advanced economies were reminded of the severity of such challenges, emerging market economies, more accustomed to navigating them, may have drawn on their experience to raise rates earlier.

The financial system has become increasingly intricate, with new layers of complexity emerging. The prolonged period of low global interest rates after the GFC, the expanding role of non-bank financial institutions and the rapid rise of digital financial technologies have introduced vulnerabilities, new channels for shock transmission and a greater need for regulation and cyber security measures.

All these developments have made the task of central banking more complex and uncertain. Many of the risks we face today are harder to predict, quantify and address. They often involve
"unknown unknowns" (Tombini (2025)). For example, geopolitical shocks can lead to sudden capital outflows, sharp exchange rate fluctuations and liquidity stress in financial systems.

While these evolving challenges demand attention, two long-standing issues – old acquaintances with renewed urgency – deserve particular focus. The first is the need for higher productivity growth in order to achieve stronger long-term economic growth, which is critical for improving living standards. The second is the challenge posed by higher levels of public debt (Hernández de Cos (2025)).

Central bank independence in a changing world

What do these changes mean for central banks, their independence and their ability to fulfil their mandates? They suggest that we will probably be living in a more shock-prone world (Maechler (2024)). In this environment, the conduct of monetary policy becomes more complex in at least three dimensions.

First, the described changes could imply structurally subdued demand that has to be distinguished from a cyclical slowdown.

Second, central banks will need to manage the trade-offs posed by supply-side shocks, which create upward pressures on prices while simultaneously constraining economic activity. While monetary policy cannot directly counteract the root causes of these shocks, it has a critical role to play in ensuring that inflation expectations remain firmly anchored. Achieving this will require central banks to communicate their policy decisions with clarity and transparency, whether they choose to "look through" temporary shocks or act decisively to prevent inflationary pressures from becoming entrenched.

Third, the relationship between monetary policy and financial stability will likely face greater tensions in this more volatile world. The interplay between these two objectives can become particularly challenging during periods of economic stress.

Central banks have the responsibility to fulfil their mandates, even in the face of uncertainty and complexity. Transparency and accountability require that any actions taken are clearly explained to the public. At the same time, this steadfast commitment to price stability, along with transparent communication and accountability, allows central banks to justify and safeguard their independence. Ultimately, it is in their hands to uphold these principles.

Beyond the immediate difficulties posed by a more shock-prone and uncertain world, the deeper, longer-term issues of low productivity growth and higher public debt may present the most significant challenges to central bank independence.

Persistently low productivity growth constrains long-term economic expansion, which, in turn, heightens the risk of inflationary pressures. It may also give rise to calls for central banks to take a more active role in stimulating the economy.

At the same time, high levels of public debt further complicate the policy landscape. In a scenario of low growth and mounting debt, concerns about fiscal sustainability can intensify, and central banks may face increasing pressure to keep interest rates low to ease debt servicing costs. All these pressures run counter to the autonomy of Central Banks and their focus on their primary mandates and will prove unsuccessful and counterproductive in the medium and long run.

Having discussed the challenges that central banks are facing, we return to where we started: central bank independence cannot be viewed in isolation. It must be understood within the broader context of the macroeconomic framework. If low growth and fiscal pressures threaten central bank independence – a cornerstone of low and stable inflation – then efforts by the competent authorities must be redirected towards fostering higher productivity growth and strengthening sustainable public finances.

Closing remarks

To conclude, let me reiterate that the independence of central banks emerged not in isolation but as part of efforts to build stronger macroeconomic foundations that could foster an environment of low and stable inflation. As we face a future characterised by heightened uncertainty and more frequent shocks, central banks must remain unwavering in their commitment to fulfil their mandates. At the same time, they must continue to reinforce their accountability and transparency frameworks, ensuring that their actions are clearly communicated and understood by the public. In a world increasingly prone to shocks, the ability to explain decisions and the rationale behind them will be critical. Through effective communication, central banks can reinforce their legitimacy, build trust and underscore the value of their independence.

References

Carstens, A (2025): "Origins and foundations of central bank independence", presentation prepared for an event hosted by the Bank of Spain, "Central bank independence in the face of present and future challenges", Madrid, 17 January.

Hernández de Cos, P (2025): "Delivering on central bank mandates in a changing world", speech at the Bank of Mexico 100th Anniversary Conference, Mexico City, 26 August.

Macklem, T (2025): "Flexible inflation targeting in a shock-prone world", speech at the Bank of Mexico 100th Anniversary Conference, Mexico City, 26 August.

Maechler, A M (2024): "Monetary policy in an era of supply headwinds – do the old principles still stand?", speech at the London School of Economics, London, 2 October.

Tombini, A (2025): "Fulfilling central bank mandates in times of high uncertainty", speech at the Regional Central Bank Governance Forum, 4 April.

Tombini, A, A Aguilar, J Frost, C Upper and F Zampolli (2023): "Lessons from 20 years of central banking in the Americas", BIS Papers, no 143, November, pp 3–20.

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¹ The views expressed are those of the author and not necessarily those of the BIS or its member central banks. I thank Alejandrina Salcedo for her input.