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ECB's Draghi Urges Central Banks To Continue Preparing For New Challenges

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Monetary and regulatory policy actions and steps in supervision undertaken over the last decade have made the world more resilient, however, central banks must continue preparing for new challenges, European Central Bank President Mario Draghi said Wednesday.

"When the world changes as it did ten years ago, policies, especially monetary policy, need to be adjusted," Draghi said in a speech delivered to a gathering of Nobel laureates and economists in Lindau, Germany.

"Such an adjustment, never easy, requires unprejudiced, honest assessment of the new realities with clear eyes, unencumbered by the defence of previously held paradigms that have lost any explanatory power."

Policymakers must be aware of the gaps that are present in the existing know-how, Draghi said, adding that it is often sudden shocks that bring to light the flaws of policy frameworks.

Thus, they challenge the explanatory power of existing theories in ways that have been previously overlooked, he added.

That said, thorough analysis by researchers remain essential in policy-making, the central banker stressed.

"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.

ECB policymakers are grappling with the dilemma posed by Eurozone's strong growth momentum and feeble inflation.

Though economic expansion had strengthened and risks to the growth outlook were broadly balanced, it is yet to translate into stronger inflation dynamics, ECB rate-setters assessed in July, according to the minutes of the session.

Emphasis is also strong on careful communication after Draghi's comments at a banking forum in Portugal late June fed market expectations of an imminent tapering, and sent yields and the euro soaring.

Given such a response, policymakers have been very careful with their words so as to avoid the kind of market turbulence dubbed "taper-tantrum".

Draghi is set to speak at the US Federal Reserve's Jackson Hole symposium in Wyoming on Friday. Markets will be watching his speech closely for clues on what lies ahead for the euro area monetary policy.

The ECB Chief and his colleagues are expected to drop any hint of a gradual withdrawal of stimulus, or tapering, in September and an actual decision in October.

Economists expect that a possible tapering would only start in January after the end of the on-going round of EUR 60 billion asset purchases a month.

Citing empirical research, Draghi said both forward guidance and quantitative easing have been successful, both in the euro area and the United States.

by RTT Staff Writer

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