As government bond yields climb worldwide, calls are growing for central banks to act as guardians of fiscal soundness. Fiscal policy is the government's exclusive domain, but the larger a government's debt and interest burden grows, the harder it becomes for a central bank to raise rates — eventually weakening monetary policy independence and entrenching what economists call fiscal dominance. Bank of Korea Governor Shin Hyun-song said at a recent parliamentary audit that he would "continue to speak up about fiscal sustainability."
The Official Monetary and Financial Institutions Forum (OMFIF), a British think tank on financial policy, argued in a contribution posted on its website that central banks should speak out actively on fiscal matters, according to financial industry sources on the 20th. When national debt surges, the forum said, governments press for rate cuts or bond purchases, which can ultimately undermine monetary policy independence.
OMFIF cited the case of U.S. President Donald Trump, who last year pressed the Federal Reserve to cut its benchmark rate by 3 percentage points, saying it would save $1 trillion a year. Central banks must uphold their price stability mandate while also clearly explaining to markets how fiscal policy affects financial conditions, the forum said.
KPMG, the global accounting and consulting firm, said in a report the same day that long-term yields would remain elevated because of expanded U.S. Treasury supply and the resulting rise in interest costs. Market rates will not fall even if the Fed lowers its benchmark rate, the firm said — in effect suggesting that fiscal risks could erode the impact of monetary policy and that central banks should speak out on fiscal crises.
In financial markets, the strict separation of monetary and fiscal policy has become conventional wisdom. In Britain, the Treasury effectively held the power to set interest rates until 1997, and monetary policy was often swayed by elections. That left policy less predictable and contributed to chronic inflation and swings in the pound. South Korea also went through a period of weak monetary policy independence, when the central bank was once dismissed as little more than a branch office of the Finance Ministry. But after the International Monetary Fund crisis and the global financial crisis, the separation of monetary and fiscal policy came to be accepted as standard.
Recently, however, the room for monetary policy has narrowed as fiscal soundness in major economies has deteriorated at an uncontrollable pace. Net interest costs for the U.S. federal government in fiscal 2026 approached $1 trillion — about three times the 2020 level and the highest on record — and are projected to top $2 trillion a year by 2036. The yield on 30-year U.S. Treasuries rose to 5.31% this month, the highest since 2007. That makes it harder for the Fed to raise rates even when price stability is urgent, because of the government's interest burden. Even if it cuts rates, market yields could stay high because of deficit risks.
Europe faces the same situation. France's government debt is projected to rise to 123.6% of gross domestic product by 2031 from 115% in 2020, according to the IMF. The yield on 10-year French government bonds jumped to 4.925% on the 19th, the highest in about two decades. In such conditions, the European Central Bank could face a dilemma over whether to raise rates for price stability or hold them to stabilize French government bonds.
The concern in international finance is that central banks must warn publicly about fiscal risks to break the vicious cycle in which fiscal burdens shape monetary policy decisions.
In South Korea, too, there are calls to strengthen the central bank's role in checking expansionary fiscal policy. At a parliamentary audit by the National Assembly's Finance and Economic Planning Committee on the 12th, Rep. Park Soo-young of the People Power Party criticized the government's budget proposal, which raises total spending 12.8% from this year and puts 45 trillion won (about $32 billion) into a future response fund. His point was that expanding spending on expectations of higher tax revenue from a semiconductor boom could increase the burden of bond issuance if revenue falls short. Park asked Shin, "Shouldn't you put on the brakes?" and said, "Why aren't you speaking up properly?" Shin replied that the central bank would "continue to offer our views so that policy is managed in harmony."
Voices within the domestic financial sector also say the central bank should speak out on government fiscal policy. The government's interest burden can weaken the central bank's resolve to tighten, and markets anticipating that can entrench a structure in which inflation expectations and long-term yields rise further. A senior financial industry official said that unless tax revenue gained during the semiconductor boom is used productively to build future growth engines and secure fiscal soundness, South Korea could face a second French-style crisis.