Quick Bites | Central Bank Independence

Central bank independence is not a factor of modern economic management that we should take for granted. Indeed, there is a long and checkered history of government interference with the setting of monetary policy that older market heads will readily recall.

The recent tensions between the Albanese government and the RBA highlight this issue. Despite claims of cooperation, the RBA has raised concerns about persistent inflation and the potential to increase interest rates further. RBA Governor Michelle Bullock has noted that increased public spending by federal and state governments has delayed the return of inflation to the target range, contradicting the government’s optimistic projections.

This isn’t just an Australian issue. In 1997, the UK Labour Party granted the Bank of England independence over interest rates, a move widely credited with stabilising the economy. However, in the US, Donald Trump has suggested that the president should have more control over Federal Reserve policy, a view his running mate JD Vance supports. This contrasts sharply with the stance of Kamala Harris, who argues for the Fed’s independence.

History demonstrates the dangers of politicising monetary policy, with examples such as Nixon’s interference in the 1970s leading to economic instability. Independent central banks are essential to maintaining economic stability and avoiding inflationary spirals, as seen in Latin America and other regions.

Sources: RBA