Fulfilling the mandates of central banks in a changing world
Speech by Mr Pablo Hernández de Cos, General Manager of the BIS, on the occasion of receiving an honorary doctorate from CEU San Pablo University Madrid, 28 January 2026.
Rector of CEU San Pablo University, Deputy Minister for Universities, Research and Science of the Community of Madrid, faculty, authorities, ladies and gentlemen.
Good morning and thank you very much for attending this event. I would like to begin by thanking CEU San Pablo University for awarding me this distinction. It is a great honour for me to receive it.
As can be deduced from the generous introduction given by Professor Ricardo Palomo Zurdo, I have spent my entire professional career in central banking, at the Bank of Spain, the European Central Bank and, since last July, the Bank for International Settlements (the bank for central banks). I therefore understand this distinction as recognition of the importance that the faculty attaches to the institutional framework in promoting economic development and, more specifically, to the quality of institutions and the degree of trust they generate in the various economic actors. The academic literature in recent decades has indeed highlighted the quality of institutions as a fundamental determinant of long-term economic growth.
Within the general concept of the quality of institutions, it has been shown that independent bodies free from government control or management are particularly important for achieving certain goals. In fact, in some areas of the economy, independent institutions have a long tradition in market economies and constitute a fundamental pillar of their institutional framework.
The independence of such institutions is motivated by considerations of general interest, based on the belief that it enables achieving a greater benefit for society than would be attained if their responsibilities were directly assumed by the political authority..
Independent bodies acquire this status by decision of the highest political authorities of the state (parliaments) and are given powers in specific areas of decision-making (eg the central bank in monetary policy) and a legal framework to decide and act autonomously in matters which fall within their mandates.
I would like to take this opportunity to recall the foundations of this institutional framework in the case of central banks, as well as the current challenges it faces and the principles that should guide an appropriate response to them.
Three institutional pillars have been fundamental in recent decades in enabling central banks to achieve solid credibility in the fight against inflation: a clear mandate of price stability, independence and accountability.
A clear price stability mandate specifies that monetary policy must protect the value of money. For a growing number of countries, this has translated into inflation targets. This mandate provides clear guidance to economic agents, which helps to anchor inflation expectations and mitigates the macroeconomic and financial impact of any disturbance.
For its part, independence allows central banks to take monetary policy decisions based on long-term considerations, without short-term political interference. This forces them to act in response to risks to price stability. It also protects central banks from pressure to use monetary policy to finance budget deficits. To be effective, independence must be institutional, functional, personal and financial, and backed by a sound legal framework.1
Finally, accountability to lawmakers and society is a fundamental counterpart to independence that underpins its legitimacy. A key instrument for accountability is clear communication of monetary policy decisions, their rationale and potential impact, which in turn promotes confidence in the central bank and enhances its effectiveness. As well, it is crucial to periodically evaluate the effectiveness and efficiency of its decisions.
A clear price stability mandate, independence and accountability are the anchor, hull and mast of the monetary policy vessel. However, a strong vessel needs more than just these basic parts: it also requires sails, a rudder, a compass and maps. These are the tools that central banks use to decide monetary policy. Today, various structural changes, in the form of deglobalisation, population ageing, climate change, technological disruptions and high and rising public debt, are posing new challenges for central banks. In particular, these changes increase uncertainty about the evolution of some of the basic variables for effective monetary policy formulation: the balance between supply and demand, which affects the outlook for inflation and growth, and the natural interest rate, ie the rate at which monetary policy is neither expansionary nor restrictive.
How can central banks fulfil their mandates in such an uncertain environment? Three guiding principles seem essential to me in the design and implementation of monetary policy in this context: robustness, flexibility and realism.
The experience of recent decades illustrates the importance of central banks having, first and foremost, robust policy frameworks that enable them to fulfil their mandate, regardless of whether inflationary or deflationary pressures prevail.
In the wake of the Great Financial Crisis, many central banks faced persistently low inflation, and the main challenge was to overcome the constraints arising from the existence of an effective lower bound on interest rates. Revisions to the monetary policy framework focused on increasing the scope for action to combat low inflation.
However, the rapid and substantial rise in inflation following the pandemic reminded us that the inflationary environment can change radically. Central banks responded with the most synchronised global tightening cycle in history, which prevented inflation expectations from de-anchoring and brought inflation back to target in most economies.
These episodes underscore the need for monetary policy frameworks to be designed to cope with any situation.
An environment characterised by high uncertainty also requires flexibility to adapt to the source, magnitude and persistence of any shocks that may occur. The appropriate monetary policy response depends on the specific economic circumstances.
On the one hand, central banks must be particularly attentive to large shocks that may generate a risk of inflation expectations de-anchoring. In such situations, monetary policy may need to act decisively to ensure price stability. On the other hand, as I pointed out, various structural changes are increasing uncertainty about the evolution of inflation, the level of the natural interest rate and the transmission of monetary policy. In such circumstances, a gradual adjustment of monetary policy may be appropriate to minimise the risk of it being overly accommodative or restrictive.
A key element of a flexible framework is also to have a broad set of tools, covering not only interest rates but also future monetary policy guidance and asset purchases when necessary. This flexibility should also apply to the design of these tools. For example, it is essential that guidance on the future direction of monetary policy be conditional on economic developments – avoiding unconditional commitments – and that the design of asset purchases facilitates a rapid reduction once the reasons for their implementation have disappeared, to minimise concerns about financial stability and unwanted side effects.
This brings me to the third and final principle: realism. Given that central banks face a potentially more volatile economic outlook, they should focus on what they can foresee and deliver and communicate appropriately about the level of uncertainty.
On the one hand, monetary policy should focus on the objectives for which it is well equipped to achieve, such as price stability and financial stability. Pursuing other objectives for which central banks do not have the appropriate tools would increase reputational risks and undermine their credibility and independence.
On the other hand, communicating the uncertainty central banks face when making their decisions would help citizens and market participants to better understand the risks and contingencies underlying those decisions and would help to clarify the central bank's reaction function. One way to communicate this uncertainty is through the macroeconomic projections that guide central bank decisions. When uncertainty is high, it is common for the forecast errors in these projections to be high. It is therefore advisable for central banks to be transparent about the assumptions on which they are based and their limitations, as well as to present alternative scenarios and sensitivity analyses.
In short, to navigate the turbulent and unpredictable waters of a more volatile economy, monetary policy frameworks must be equipped to respond to a wide range of scenarios. This means that they must be robust enough to weather storms, flexible enough to adjust course when necessary, and realistic in what they can anticipate and achieve in order to navigate towards their objectives. For central banks to uphold these three principles, they must base their decisions on analytical rigour, which requires access to high-quality data and highly skilled human capital.
At the same time, we must also be aware of the limitations of what monetary policy can achieve on its own. To achieve macroeconomic stability, monetary policy must be supported by all other economic policies.
Fiscal policy must ensure that public finances are sustainable, not only in the current economic climate, but also if adverse economic conditions were to materialise in the future. Sustainable public finances are vital for central banks to fulfil their mandates.
In turn, structural policies that promote long-term growth would improve the budgetary situation and help alleviate the pressure on monetary policy to focus excessively on short-term economic growth rather than fighting inflation. Higher long-term growth can only be achieved by increasing the productive potential of the economy. This requires the design and implementation of structural reforms that promote innovation and dynamism.
Finally, we must not forget that financial stability is a necessary condition for price stability. Ensuring this requires a sound financial sector, supported by adequate and internationally coordinated regulation and supervision.
The combination of these economic policies must be the basis for ensuring macroeconomic stability and, in this way, promoting greater economic growth in the long term and, ultimately, improving the well-being of our citizens. Macroeconomic stability is always essential, but it is particularly important in a context of high uncertainty such as the current one.
1 Institutional independence ensures that central banks operate without government interference, while functional independence allows them to determine which policy instruments to use. Personal independence protects decision-makers from external influence, and financial independence allows central banks to manage their own finances.
