In Budapest on Jan 27, European Central Bank President Christine Lagarde expressed concerns about the undermining of central bank independence worldwide, warning that increased political influence on policy could hinder efforts to control inflation. Specifically, she highlighted U.S. President Donald Trump's pressure on the Federal Reserve to lower interest rates, cautioning that such interference could disrupt the ability of central banks to fulfill their mandates effectively.
Lagarde emphasized the importance of both de jure and de facto independence of central banks, noting that recent studies show a global trend towards questioning the autonomy of these institutions. She highlighted the potential risks of political interference, emphasizing how it can exacerbate macroeconomic volatility, increase exchange rate fluctuations, and elevate bond yields and risk premia.
Furthermore, Lagarde warned of a "vicious circle" where political pressure could weaken central bank independence, leading to a breakdown in the social consensus and further economic instability. Notably, she addressed Hungary's situation, where the appointment of a political ally as the central bank's next governor raised additional concerns about the ongoing challenges to central bank autonomy.