[THE VIEW]Why Is Central Bank Independence Important?

The "Dangerous Temptation" of Political Interference in Interest Rates
Lessons from the 1997 IMF Crisis and the Limits of Central Bank Independence

Just as South Korea has the Bank of Korea and the United States has the Federal Reserve (Fed), almost every country has a central bank. A central bank is a public institution that manages a country's currency and monetary policy, and its authority to set the benchmark interest rate is particularly powerful.

By controlling the money supply and the flow of credit, a central bank can influence the entire macroeconomy, including economic growth, inflation, employment, and financial stability. Because of this strong authority, many politicians want to control or interfere with the central bank. This tendency becomes even stronger during election seasons or when a president's approval ratings are low.

The reason politicians want to intervene in monetary policy is clear. Low interest rates are an effective tool for rapidly stimulating the economy. By keeping rates low, they can generate positive responses from voters through economic booms, increased employment, and low-interest loans.

Currently, U.S. President Donald Trump is no exception. During his term, he criticized the Fed chair he appointed and demanded interest rate cuts. On April 17, when Jerome Powell, the Fed chair, warned that tariffs were likely to cause inflation, Trump criticized Powell in an online post as "too slow and wrong," arguing that the sooner Powell is dismissed, the better.

However, any attempt to control an independent central bank is likely to provoke backlash in the financial markets. A bigger problem is that significant macroeconomic costs, such as higher inflation, may arise in the long term.

Regardless of macroeconomic schools of thought, all economists agree that lower interest rates and increased money supply have negative long-term effects on the economy. Politicians are likely aware of this as well. Nevertheless, they want to exert influence over monetary policy because of the immediate short-term effects they can achieve.

The fact that short-term, politically motivated monetary policy can harm the national economy in the long run is also evident in South Korea. While there were several reasons for the 1997 IMF crisis in South Korea, the lack of independence of the Bank of Korea was one of the major factors.

President Donald Trump (left in the photo) and Jerome Powell, Chairman of the United States Federal Reserve (Fed), (right in the photo).

Lessons from the 1997 IMF Crisis, and the Limits of Independence

In fact, prior to the IMF crisis, the Bank of Korea was under the jurisdiction of the Ministry of Strategy and Finance. As a result, the Bank of Korea could not independently decide on key macroeconomic policies such as interest rate and money supply adjustments, and functioned merely as an agency implementing government policies. Among the many changes demanded by the IMF in exchange for financial assistance was the independence of the Bank of Korea. This allowed the Bank of Korea to respond more stably to currency crises or macroeconomic shocks.

It is extremely important for the overall macroeconomy that a central bank is guaranteed independent discretion from the interests of politicians and the executive branch when setting interest rates. However, no matter how much independence is guaranteed, there are inherent limitations, as central banks are fundamentally part of the government bureaucracy and therefore inevitably have a political character.

For example, the appointment of central bank heads around the world is inherently political. According to a 2025 study, about 70% of central bank heads are appointed with the involvement of the head of government or senior executive officials. Whether in South Korea or the United States, the head of the central bank is ultimately designated by the president.

In South Korea, the president has sole authority to appoint the governor of the Bank of Korea. In contrast, in the United States, the president nominates the Fed chair, but the appointment must be confirmed by the Senate. In fact, there have been cases where unqualified candidates were rejected by the Senate. For this reason, it is believed that the Fed in the United States is better positioned to secure a higher degree of independence compared to South Korea.

The problem is that politicians sometimes try to undermine the independence of the central bank while simultaneously shifting responsibility for inflation onto the central bank, which is a contradictory behavior.

In recent years, the U.S. government has exerted influence over the central bank by pressuring for interest rate cuts, publicly criticizing policies, or demanding meetings with the Fed chair. At the same time, U.S. politicians have blamed the Fed for failing to predict the 2007-09 financial crisis or for overusing quantitative easing policies.

However, history shows that actions that undermine central bank independence, such as Trump's recent public criticism of the Fed chair and suggestions of dismissal, will lead to high inflation.

Seo Boyoung, Professor at Indiana State University, USA