Atlas Macro

Central banks

Central Bank Independence

The principle that a central bank sets interest rates free from day-to-day political control, so it can take unpopular decisions, such as raising rates before an election, to keep inflation low.

Key points

  • Most advanced economies made their central banks independent from the 1990s.
  • Research links independence to lower and more stable inflation.
  • Markets watch for political pressure on central banks, which can push up inflation expectations and long-term yields.

Example

If a government is seen pressing its central bank to cut rates, investors may demand higher yields on long-term bonds as protection against future inflation.

In history

Political pressure on the Fed to keep rates low in the early 1970s is widely seen as one reason inflation became entrenched. The Bank of England was given control of interest rates in 1997. In 2025, public pressure from the US President on the Fed to cut rates, and an attempt to remove a Fed governor, made independence a market issue again.

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