Central bank credibility vital, says ECB's Issing

Speaking to the annual meeting of the Allied Social Science Associations, European Central Bank's chief economist Otmar Issing said interest-rate policy can only control inflation in the "medium to longer term," and that consistent policy was needed to establish credibility.
Speaking to the annual meeting of the Allied Social Science Associations, European Central Bank's chief economist Otmar Issing said interest-rate policy can only control inflation in the "medium to longer term," and that consistent policy was needed to establish credibility.

Issing told the meeting it was important for a central bank to offer enough information about its policymaking process to provide an element of predictability about its likely actions.

"If a central bank is reliable in this sense, it is much easier for it to gain credibility and win the trust of the public and the markets alike," said Issing, who was chairing a panel discussion about central bank communication.

"In this regard, all efforts must focus on anchoring inflation expectations at a level that is in line with a mandate and, where appropriate, with price stability or an inflation target," he said, adding that "as far as steering medium to longer term expectations is considered, credibility is essential."

Issing said a central bank also must explain the limits of its mandate, noting "monetary policy can control inflation only in the medium to longer term," and it is important that the public knows it cannot control short-term inflation risks.

"I rely on the process of reasonable people to deal with this problem," Issing said. "So I am not worried about that."

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