Central banks must be open-minded to meet challenges, says ECB’s Draghi

Bloomberg

Mario Draghi said that while central-bank actions over the last decade have strengthened the global economy, it is important to be open-minded in readying for future developments.
In a speech that gave no specific signals on the European Central Bank’s current policy deliberations, the institution’s president stressed that officials must be “unencumbered by the defense of previously held paradigms that have lost any explanatory power.”
Speaking to an audience of 17 Nobel laureates and 350 young economists in the southern German town of Lindau, he said that research remains essential in designing monetary strategy.
“A policy response that has its foundation in rigorous research is less prone to being impaired by political compromise and easier to explain to the general public,” Draghi said. “Policy actions undertaken in the last ten years in monetary policy and in regulation and supervision have made the world more resilient. But we should continue preparing for new challenges.”
Draghi’s speech marks the end of a relatively quiet summer break as policy makers gear up to discuss the future of their stimulus program in the fall. The central bank is entering a crucial phase of its battle to restore euro-area price stability as the economy improves but inflation remains stuck below target.

Autumn Decisions
One of the challenges is judging how much monetary support is still needed for the region’s recovery to become durable, and how markets and the economy will fare when it is gradually withdrawn. Consumer-price growth was just 1.3 percent in July—enough to argue that deflation risks have disappeared, but too little to meet the ECB’s goal of just under 2 percent.
Investors will likely now watch for clues, when Draghi is due to speak at the Federal Reserve’s symposium in Jackson Hole, Wyoming. He’ll join his US counterpart Janet Yellen, among others, in discussing how to foster dynamic growth.
Draghi said in Lindau that research has shown that innovations such as forward guidance and the ECB’s$2.7 trillion bond-buying program, as well as the equivalent program undertaken by the US Federal Reserve, have been successful in supporting the economy and inflation.