Mugur Isărescu: In support of central bank independence
Address by Mr Mugur Isărescu, Governor of the National Bank of Romania, at the Conference on
"The role of a central bank in modernising society - challenges in emerging economies",
organised by the National Bank of Moldova, Bucharest, 7 April 2021.
* * *
Dear Governor Armașu,
Distinguished guests,
adies and gentlemen,
Good morning,
Let me start by congratulating the National Bank of Moldova on the initiative of holding this
conference. I believe that discussions on the proposed topic are welcome at the current juncture,
when light needs to be shed both on the measures to rescue the economies hit by the COVID-19
pandemic and on central banks' mission. The question about what a central bank can and
cannot do is always on the agenda.
Governments and central banks throughout the world have promptly stepped in to address the
fallout from the pandemic by means of social, economic, fiscal and monetary policies. Such
comprehensive and unprecedented support has proven that, in situations like this, the concerted
action of the authorities - particularly monetary and fiscal ones - is critical to safeguarding the
smooth functioning of markets, of economic and social mechanisms.
The topic of this roundtable, The role of a central bank in modernising society - challenges in
emerging economies, is however more comprehensive than the response to the challenges of
the unprecedented medical crisis we are currently facing. By choosing this topic, the National
Bank of Moldova and the central bankers at its helm prove, yet again, if it were still needed, that
they are constantly preoccupied with playing an active role in the development and modernisation
of the Moldovan society on the road to the European Union.
Let me take the opportunity of opening this event to highlight - in my capacity as a long-standing
partner of the National Bank of Moldova - the remarkable progress your institution has made on
its path to a European-style central bank. When acknowledging the road followed by your
institution, I cannot help recalling the bumpy ride of the National Bank of Romania in the same
direction, the challenges we faced along the way and how we overcame the hurdles. That is why
I believe we, at the NBR, are qualified to perform an accurate, realistic evaluation of the progress
achieved by our colleagues in Chișinău, all the more so that our central banks boast a tight
bilateral institutional cooperation spanning three decades, alongside the strategic partnerships
between our institutions with EU, IMF and World Bank support. Dear colleagues and dear friends
in Chișinău, you can be sure of the NBR's full support in the National Bank of Moldova's
endeavour to align to European standards and practices.
Ladies and gentlemen,
Distinguished audience,
The primary objective of a European central bank is to pursue price stability in the domestic
economy. The outcome of the 2008 crisis strengthened the idea that ensuring financial stability is
not at odds with achieving the primary objective, but is even beneficial in this respect. Fulfilling
this objective essentially hinges on central bank independence - political, legal, functional. This is
a wide-ranging topic. Please allow me, however, to elaborate only on a few ideas about monetary
policy independence; it implies decisions particularly with regard to the key policy rate, the
exchange rate policy, international reserve management, setting prudential requirements on
minimum required reserves in the banking system. Also worth mentioning is the central bank's
role as agent when it comes to borrowing via issues of government securities conducted by
fiscal authorities on the primary market. At the same time, a central bank manages liquidity in the
economy by granting credit against eligible collateral, consisting especially in government
securities, and may resort to extraordinary interventions for the purpose of ensuring an adequate
level of liquidity, for example via quantitative easing programmes, purchasing financial assets -
government securities traded on the secondary market - and holding such instruments in its own
portfolio.
The simple listing of these areas in the monetary policy scope suggests that we are dealing with
decisions on highly-technical, sophisticated mechanisms and instruments, based on complex
information, working correctly only in an environment of high professionalism. Central bank
independence, on the basis of a clear mandate, is therefore of the essence. One field where this
is all the more obvious, because it has to do with competition on the global market, is the
management of forex reserves. In principle, they ensure - especially in the case of emerging
economies - the resources to overcome external imbalances and to safeguard a relative stability
of the domestic currency's exchange rate around economic fundamentals. The reallocation of
reserves for discretionary use and their monetisation strongly erode these essential equilibria,
significantly impairing market functionality and the credibility of the central bank and of any
government, ultimately to the detriment of society itself. Maintaining and managing an adequate
level of international reserves, through the competence and professionalism of the central bank,
shelter the country from terrible crises; take this right away and the country is left to the mercy of
the winds.
For all these reasons, in the context of extensive debates internationally on the importance of
central bank independence - debates that I am aware of and I am not contesting -, I plead for the
independence of central banks, but also for an institutional balance between central banks and
fiscal authorities, as parts of the executive power. Macroeconomic stability - a key prerequisite
for sustainable economic and social development - is ensured when there is a balance between
the monetary policy and the fiscal policy. Altering the well-established institutional rapports, in
times of crisis, may pose a serious risk for the future. The successful implementation of
postpandemic measures, when the priority will be a return to economic and social normality as fast
as possible, hinges on the extent to which macroeconomic stability is preserved.
When I speak of independence I do not see the central bank secluded in an ivory tower, but
working actively, and combatively, under the law, with the fiscal authority, with the government.
Based on my experience, I do not think there is a better alternative to a balanced, coherent fiscal
and monetary policy mix. And central bank independence implies accountability vis-à-vis the law,
the mandate, the society. Or, in the words of 19th-century Romanian writer and politician
Costache Negruzzi, the central bank needs to 'stand accountant' for what it does.
By encroaching upon central bank independence, in favour of political decisions seeking
shortterm electoral gains, the real costs will be borne from an economic and social perspective, in the
long run, by the entire country.
A recent study published by the European Central Bank, titled The Case for Central Bank
Independence, shows that - while the de jure independence has largely remained intact - the de
facto independence has deteriorated in almost half of the sample of central banks under review.
This is a fact and, for me, it is a matter of concern. I shall not comment on it. Looking at central
banking history that spans more than three centuries, I hope this is part of the long cycle of ups
and downs in terms of central bank independence.
Ladies and gentlemen,
In Romania, the initial economic impact of the pandemic was strong, compounding the existing
imbalances and the depreciation pressures on the domestic currency and entailing higher
liquidity needs. Consequently, the immediate objective of our central bank was to maintain
banking system stability and liquidity, for the proper functioning of public finances and the real
economy; at the same time, the dosage of measures sought to avoid an excessive and
unnecessary depreciation of the leu. Over a broader horizon, our aim was to preserve
confidence that economic and financial equilibria are kept under control.
In this vein and in full compliance with its mandate and statutory independence, the NBR
promptly adopted a package of proportionate and effective measures to support the Romanian
economy. Given the exceptional nature of the pandemic, the NBR cooperated more closely with
the Government of Romania, particularly with the Ministry of Finance, to avoid any conflict
between monetary, macroprudential and fiscal measures.
that background, the NBR Board decided to successively cut the monetary policy rate, to narrow
the symmetrical corridor defined by interest rates on standing facilities around the policy rate, to
provide liquidity to credit institutions via repo transactions (repurchase transactions in
government securities) for ensuring the smooth functioning of money market and of other
financial market segments, to lower the minimum reserve requirement ratio on foreign
currencydenominated liabilities of credit institutions, as well as to purchase leu-denominated government
securities on the secondary market with a view to consolidating structural liquidity in the banking
system that should contribute to the smooth financing of real economy and the public sector.
As regards the purchase of leu-denominated government securities on the secondary market, a
measure widely resorted to by central banks in the current context, I would like to stress that the
NBR decided to launch secondary market purchases only after its position on the market shifted
from net debtor to net creditor in relation to commercial banks. From this perspective, in full
compliance with the NBR Statute, the measure was carried out with a view to ensuring an
adequate level of financial system liquidity and I do not think it qualifies as a quantitative easing
measure per se.
Finally, the NBR took operational measures to ensure the continuity and smooth functioning of
payment and settlement systems underlying payments in domestic currency, as well as to
ensure the necessary cash flows for banks to conduct all operations.
Distinguished audience,
To sum up, what can a central bank do to modernise the society in an emerging economy such
as that of Moldova? Lots of good things, within the confines of the law and of its mandate.
Nothing good beyond its mandate. Effective inter-institutional cooperation, within an optimum
functional architecture, is a formula for successfully overcoming moments of crisis, including the
situation generated by the COVID-19 pandemic.
I therefore reiterate, with all conviction, the importance of preserving the independence of central
banks and taking on their primary objective in full responsibility. This objective is the key element
of macro-financial stability, to which also adds the symbolic role of originator of the horizon of
hope, so necessary nowadays in all of our countries.
I am convinced that the works of this conference will be a good opportunity to reflect on the
topical matter regarding the role of central banks and the importance of their independence.
On behalf of the Romanian central bank and the NBR Board, I extend the best wishes to you and
your colleagues in the distinguished institutions that you represent.
Thank you for your attention!