speech central bank independence in retrospect guy debelle [ * ] deputy governor address at bank of england independence : 20 years on conference london – 28 september 2017 it is a pleasure to be here today to celebrate 20 years of central bank independence for the bank of england. i have been tasked with discussing central bank independence in retrospect. in part, this is because a little more than two decades ago, stan fischer and i wrote about central bank independence in prospect and posed the question : how independent should a central bank be? when we asked that question in 1994, central bank independence was all the rage. i wrote my phd dissertation at mit on it, under stan's expert tutelage. a bit further up mass ave, adam posen was writing his phd dissertation at harvard on the very same issue. in new zealand, the government had established a new framework for independence for the reserve bank of new zealand ( rbnz ) in 1989, which granted the rbnz significant independence, including making the governor directly accountable for any failure to achieve the price stability objective. the framework for the european central bank ( ecb ) had just been established, which legislated a very high degree of central bank independence. looking back, that may have been the high - water mark for central bank independence. though, of course, the bank of england's independence was still to come, so perhaps that was the apogee! fast forward to today and central bank independence is no longer in the ascendancy. its legitimacy and effectiveness are under scrutiny. is this ‘ the end of the era of central bank independence ’? the answer to that question is no, in my opinion. the reason why has a lot to do with the answer that stan and i proposed in answering the question of how independent should a central bank be. we made the important distinction between goal and instrument independence, arguing that central banks should be goal dependent but have instrument independence. that is, the goal ( s ) that the central bank is pursuing should be determined by the political process. but, once given the goal, the central bank should be able to pursue the goal as it sees fit, with appropriate accountability. that distinction we drew between the two aspects of independence stands up to scrutiny twenty years on. if anything, i would argue that the experience of the past two decades serves to reinforce our conclusion, with the bank of england's own experience being a prime example. in my remarks today, i will first rev

##vr restrictions reduce the chance of borrowers going into negative equity following a large correction in the house prices, and therefore also reduce the loss given default for banks if borrowers fail to maintain their mortgage payments. as such, we find that it is the effect of lvr policy on the stock of mortgages that matters more than its effect on the flow of new mortgages. in new zealand, the stock of high - lvr lending has declined markedly since we first imposed lvr restrictions and is currently near historic lows ( figure 2 ). it has declined from nearly 17 % of all lending in 2014 to around 7 % at the end of 2021. the system - wide loss given default has therefore declined leading to a more stable, resilient financial system. this has been the main benefit from having macroprudential policy options. figure 2 : the stock of high lvr mortgages in new zealand the need for a complete set of tools while it has been beneficial for us to add macroprudential tools to our policy suite, it has also become apparent that we need a full set of tools to better manage risks. debt to income has been increasing in new zealand over the past 35 years, with only a modest dip following the gfc ( figure 3 ). therefore, households are still vulnerable to falls in income affecting their ability to service their debt. as mentioned earlier, lvr restrictions help us manage the loss given default in a period of widespread default on mortgage lending. including a debt to income measure in our toolkit would help with reducing the probability of default. therefore, these two policy tools deal with different sources of risk : lvrs with the risk to banks from a fall in house prices, and dtis with the risk to households from a fall in income. we see reducing the probability of default and loss given default as two complementary policies in creating a more resilient financial system. as with lvr restrictions, we see dti measures as policies aimed at reducing through - the - cycle risks. and indeed dtis might well be better at managing such risks, as income tends to vary much less through the financial cycle than the value of houses. figure 3 : household debt - to - income ratios among other policy measures, 11 we have also looked at implementing floors or buffers on banks ’ test interest rates, to ensure that borrower households are better equipped to deal with fluctuations in interest rates and, hence, less likely to default on their mortgages. with