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Making Central Banks Financially Resilient

A Centre for Economic Policy Research paper has focused on the need for central banks to be financially resilient ¹. Central bank financial strength is fundamental to their independence and functional autonomy. However, many major central banks have recorded substantial operating losses and suspended remittances to respective ministries of finance and treasuries.

While weak financial strength may not immediately impair policy, it can do so over time. If, for example, the European Central Bank (ECB) adopted a ‘zero-loss’ strategy to mitigate accruing losses ex-post, it would need to implement a significantly lower interest rate path compared to the assumptions underlying the ECB’s own projections.

Weak financial strength also makes central banks more vulnerable to political interference, particularly when fiscal support is uncertain. Central bank financing is an integral part of public financing, and its losses are ultimately fiscal losses.