Draghi urges open-minded central banking

Officials must be ‘unencumbered by the defense of previously held paradigms that have lost any explanatory power’

FRANKFURT • Mario Draghi said central banks must be open-minded on policy innovations as they prepare for future economic developments — even if that concept is not clear to everyone.

In a speech that avoided any specific signals on the European Central Bank’s (ECB) current deliberations, the institution’s president said officials must be “unencumbered by the defense of previously held paradigms that have lost any explanatory power”.

He spoke to an audience of 17 Nobel laureates and 350 young economists in Germany, a nation which has been one of the stiffest critics of ECB policies such as quantitative easing.

“When the world changes as it did ten years ago, policies, especially monetary policy, need to be adjusted,” he said in a prepared text. He then added in an unscripted remark that “that’s obvious for most people, but not for everybody”.

The speech in the southern town of Lindau came as ECB policymakers gear up to discuss the future of their stimulus programme at their Sept 7 meeting. The central bank is entering a crucial phase of its battle to restore euro-area price stability as inflation fails to keep pace with the economic upturn.

A purchasing managers survey published yesterday showed euro-area manufacturers continuing to feed economic growth and create jobs. Yet, consumer-price growth was just 1.3% in July — enough to argue that deflation risks have disappeared but too little to meet the ECB’s goal of just under 2%.

Draghi said global policy actions have “made the world more resilient”, but officials “should continue preparing for new challenges”.

A particular concern among officials, expressed at their last policy meeting in July, is the risk that a stronger euro will undermine the recovery. The single currency has risen more than 5% on a trade-weighted basis this year and 12% against the dollar. It gained as much as 0.3% after Draghi’s speech, which didn’t mention the exchange rate, and was 0.2% higher at 12:41pm Frankfurt time yesterday.

Investors will likely now watch for clues tomorrow, when the ECB chief is due to speak at the US Federal Reserve’s (Fed) symposium in Jackson Hole, Wyoming.

Draghi stressed in Lindau that monetary policy relies heavily on academic input, saying that “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”.

He also said studies show innovations such as forward guidance and the ECB’s €2.3 trillion (RM11.55 trillion) bond-buying programme, as well as the equivalent programme undertaken by the Fed, have been successful in supporting the economy and inflation. — Bloomberg