Central Bank Independence: Erosion of Central Bank Independence

By: Peter Ort The Quinnipiac University Economics Research Team 

 Photo credit: Uladzislau Petrushkevich on Unsplash

This is the third article in our four-part series on Central Bank Independence (CBI) and focuses on the erosion of CBI and the growing pressure from federal governments.

When assessing monetary policy, it is always essential to ask: who should establish the goals—the central bank or the government? In England, for example, a 2% inflation target is set by the federal government, while in the United States, the 2% target is determined by the central bank itself. This distinction matters because it sets a precedent for who holds greater influence over monetary policy. The government of England, for instance, can change its inflation target if doing so benefits the current administration in the short run. Interestingly, New Zealand (the country that first introduced inflation targeting) has gone even further, adding an unemployment target in 2018 and a housing price target in 2021. Yet, it ended the COVID-19 period with roughly the same inflation as countries like England and the U.S.

Even without formal mandates from the federal government, pressure from the current administration can easily spiral into economic instability. We see this in Turkey under President Tayyip Erdoğan, who repeatedly dismissed central bank governors in 2019, 2020, and 2021 for refusing to lower interest rates at his direction. As a result, Turkey’s inflation rate surged from around 14% in previous years to 63% between 2022 and 2023. Similarly, in the U.S., Federal Reserve Chair Jay Powell has faced ongoing pressure from President Trump to cut interest rates, even as inflation remains above target.

At the end of the day, CBI can be something of a paradox in the modern world. Even when a central bank is granted formal independence, the institution itself must be strong enough to maintain credibility and public trust in its inflation expectations. Countries with weaker institutions, such as Zimbabwe, often experience more volatile inflation despite nominal independence. Overall, lower inflation tends to correlate with greater central bank independence, but in today’s world, even countries with strong institutions risk undermining that independence for short-term political gain.

The following articles on inflation targeting and reconsidering central bank independence provide more context on this part of the series on CBI.

Source:

Kuttner, Kenneth. “The Erosion of Central Bank Independence.” Econofact, 21 Sept. 2025, econofact.org/the-erosion-of-central-bank-independence.