Over the past decade, the world’s central banks have become increasingly independent, which has a positive effect on their nations’ economies. It is well known that the less subordinate a central bank is to the government, the more moderate the rates of inflation are. Usually, a tight monetary policy is implemented in those states where central banks do not have to fix budget and social policy problems, rehabilitate financial institutions and support inefficient enterprises.
In 2020, the Bank of England classified more than 150 central banks as independent. The autonomy of the European Central Bank is guaranteed by the Treaty on European Union, and the Federal Reserve system in the U.S. is also independent.
In countries with developing markets, pressure from political leaders on central banks is common. The independence of the central bank makes it difficult for politicians to stimulate the economy, since some banks oppose fiscal expansion. Central banks have become less rigid and more willing to take into account, at the request of the public, factors such as employment and the level of economic activity, in addition to inflation. Nevertheless, increasing such demands on regulators may lead to political pressure to distort monetary policy. And here, it is important to set a limit and not cross it, so as not to lose the hard-earned gains.
Most central banks have significantly increased their independence and succeeded in fighting inflation in recent decades. Of course, exceptions such as the central banks of Turkey or Argentina are indicative.
Ukraine has come a long way in this matter. Everyone remembers the times when the heads of our National Bank were directly appointed by politicians — according to the quota of whichever political party had influence in the Verkhovna Rada, Ukraine’s parliament.
There was a period when the National Bank of Ukraine, or NBU, had to buy domestic government loan bonds to finance the state budget — unfortunately, this was considered the duty of the regulator. Each time, different generations of employees of the National Bank had to choose independence and prove to our politicians that an independent NBU is much more useful for Ukraine and our economy than one dependent on government officials, politicians or oligarchs.
A shift toward independence began when amendments to Ukrainian law gave the NBU the priority to maintain price stability, which made it impossible to issue bonds that could be bought out by the regulator. During my tenure, the National Bank did everything to fulfill these new rules, even when the government tried to indirectly push us to purchase debt securities.
The only exception came after Feb. 24, 2022, when the National Bank had to, without exaggeration, save the security and independence of all of Ukraine. Last year, we had to purchase domestic government loan bonds to support the budget at the most difficult point in the modern history of our country. However, even this had its limits, amounting to 400 billion hryvnia.
I want to believe that the NBU will fulfill its obligations and will not buy domestic government loan bonds this year. Government officials should understand that with current inflation, they will have to raise rates for domestic government loan bonds to the market level. This will not only make it possible to cover the budget deficit in a timely manner and solve urgent financing problems, but will also be useful for the development of the secondary market of government bonds. A market, not administrative, approach will support both state finances and the independence of the NBU, which the professional community fought for a long time.
Governments around the world — and Ukraine is no exception — are increasingly inclined to borrow and spend, which could undermine confidence in monetary policy and increase inflation around the world, especially if the public believes that the government will go down the path of devaluing its debts.
However, I am convinced that it is too early to give up. Central banks are still independent, although this independence is not absolute and can be undermined at any time by political pressure. This means only one thing — we need to work to solidify the independence of monetary policy and not succumb to the provocations of the elites. We must constantly explain the benefits this approach can provide to businesses and the economy.
We must not play along and say “yes” but always tell the truth and prove that the independence of the central bank is the basis of price stability.
