Liikanen adds voice to defenders of central bank independence

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Central bank independence is under threat and should be defended, according to Erkki Liikanen, the governor of the Bank of Finland.

Speaking at a conference organised by the National Bank of Slovakia, Liikanen said independence was "essential" in keeping inflation expectations well anchored. "One of the lasting lessons learned in the last decades is the value of the independence of monetary policy," he said.

The governor highlighted two main threats that central bank independence was currently facing. The first, fiscal dominance, was the older of the two, he said, as it had been recognised for many years that monetary policy-making "may become impossible" without accompanying fiscal adjustment.

The second, financial dominance, was a newer concept. This is the risk that the condition of the banking sector may become a constraint on monetary policy, as price and financial stability concerns compete. Liikanen suggested that an appropriate response would be to respond early to stability threats, to avoid having to impose pro-cyclical macro-prudential policies during recession.

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