With government bond yields holding at elevated levels worldwide, calls are growing for central banks to act as watchdogs over national fiscal health. Fiscal policy is the government's own prerogative, but the heavier a government's debt and interest burden grows, the harder it becomes for a central bank to raise rates. If that situation persists, monetary policy independence could erode and fiscal dominance could take hold, critics warn. Bank of Korea Governor Shin Hyun-song also signaled at a recent parliamentary audit that he would "continue to speak up about fiscal sustainability."
According to financial industry sources on the 21st, the Official Monetary and Financial Institutions Forum (OMFIF), a London-based financial policy think tank, argued in a commentary on its website that central banks should speak out actively on fiscal matters. The reasoning is that when national debt surges, governments press for rate cuts or bond purchases, which can undermine even the independence of monetary policy.
OMFIF cited the case of U.S. President Donald Trump, who pressured the Federal Reserve last year by saying a 3 percentage point cut in the benchmark rate would save $1 trillion a year. The forum stressed that central banks must uphold their price stability mandate while also clearly explaining to markets how fiscal policy affects financial markets.
KPMG, the global accounting and consulting firm, said in a report the same day that long-term rates would stay high because of expanding U.S. Treasury supply and rising interest costs. Market rates are unlikely to fall much even if the Fed cuts its benchmark rate, the firm said. Because fiscal risks can weaken the effectiveness of monetary policy, the report is read as arguing that central banks should speak out on fiscal crises.
In financial markets, the strict separation of monetary and fiscal policy has recently been treated as conventional wisdom. In Britain, the Treasury effectively held the power to set interest rates until 1997. As a result, monetary policy was frequently swayed by election timetables, and as policy predictability deteriorated, the country suffered chronic high inflation and volatility in the pound. South Korea, too, once had so little monetary policy independence that the Bank of Korea was called the "Namdaemun branch office of the Finance Ministry." But after the IMF currency crisis and the global financial crisis, the separation of the two policies became established as common sense.
Yet as fiscal health in major economies has deteriorated sharply in recent years, the room for monetary policy to maneuver has narrowed. Net interest costs for the U.S. federal government in fiscal 2026 are approaching $1 trillion, roughly triple the 2020 level and the highest on record, and are projected to exceed $2 trillion a year by 2036. The yield on the 30-year U.S. Treasury note rose to 5.31% this month, the highest since 2007. Even when price stability is urgent, the Fed cannot help but hesitate to raise rates because of the government's interest burden. And even if it cuts rates, market rates could stay high on concerns over the fiscal deficit.
Europe is no different. According to the International Monetary Fund, France's government debt-to-GDP ratio is projected to rise to 123.6% in 2031 from 115% in 2020. Amid such concerns, the yield on France's 10-year government bond jumped to 4.925% on the 19th, its highest level in about two decades. The European Central Bank could face a dilemma over whether to raise rates to curb inflation or hold them steady to stabilize the French bond market.
For that reason, the international financial community argues that central banks must also issue public warnings about fiscal risks in order to break the vicious cycle in which fiscal burdens dictate monetary policy decisions.
In South Korea as well, there are calls to expand the Bank of Korea's role in checking expansionary fiscal policy. At a parliamentary audit by the National Assembly's Finance, Economy and Planning Committee on the 12th, Rep. Park Soo-young of the People Power Party took issue with the government's budget proposal, which raises total spending next year by 12.8% from this year and channels 45 trillion won into a future response fund. He said that if spending is increased in anticipation of higher tax revenue from a semiconductor boom and revenue then falls short, the burden of issuing government bonds could grow. When Park asked Governor Shin, "Shouldn't you be putting on the brakes?" and "Why aren't you speaking up properly?" Shin replied, "We will continue to offer our views so that policy is managed in harmony."
Similar views are emerging in the financial sector. The concern is that the government's interest burden weakens the central bank's appetite for tightening, and that markets anticipate this, entrenching a structure in which inflation expectations and long-term rates move still higher. A senior financial industry official said, "If we fail to use the tax revenue gained from the semiconductor boom productively, to build future growth engines and secure fiscal soundness, we too could face a second French crisis."
