Draghi Says Risks to Euro-Area Economic Outlook on Downside
European Central Bank President Mario Draghi comments on monetary policy and the euro-area’s sovereign-debt crisis.
He made the remarks at a press conference in Frankfurt today after the ECB cut interest rates to a record-low 0.75 percent from 1 percent.
On monetary policy:
“Inflationary pressure over the policy relevant horizon have been damped further. The underlying pace of monetary expansion remains subdued.
Some ‘‘downside risks to the euro-area economic outlook have materialized. The downside risks also relate to possibly renewed pressures on energy prices. The main downside risks relate to weaker-than-expected economic activity.
‘‘The lowering of the short-term and the lowering of the rate on deposit facility have several effects. The immediate effect on pricing on 1 trillion euros.’’ Another effect ‘‘has to do more with expectations more generally with bringing the deposit rate to zero.
‘‘When we were discussing it a month ago, we couldn’t say we had the same picture for the whole euro area as we have it today. Now we can generally say this measure is addressed to the whole of the euro area.
‘‘The reason why this price signal has a more powerful effect than before is that it has been accompanied by a reduction in the rate on the deposit facility. There wasn’t any communication beyond the normal exchange of views.
‘‘What we said is that downside risks are materializing for the economic outlook and this would damp price behavior for the medium term.
‘‘The third effect’’ of the rate cut ‘‘has to do more with expectations more generally by having moved to zero the rate on the deposit facility. Expectations of further easing of monetary policy in case price stability considerations were to warrant it. This by itself has a positive effect, a stimulus effect.
‘‘The idea that the ECB could channel funds through the bank lending channel to a specific category of firms or households, is as wrong as the idea that the ECB should make sure the banks don’t buy government bonds otherwise its government financing. We have to remember that their decisions are basically business decisions.
‘‘We broadened the eligibility rules of collateral so as to attract the broadest number of banks. We broadened the collateral eligibility so that banks can actually use the assets they create in lending to the real economy in lending by the ECB. The risk for the ECB balance sheet is very, very low.
‘‘Our mandate is the pursuit of price stability in the medium term. We will use any tool within that mandate. We stand ready and we are very, very aware that this is an essential requirement that comes together with more powers, even more so us being an non-elected institution.
‘‘We are awaiting from the euro group, the commission, the parliament, for the citizens of the union how we can comply with being even more democratically accountable than in the past.’’
Today’s decision to cut the interest rate ‘‘was unanimous on all grounds and this by itself carries a special strength to this decision. There are no really divergent views on the governing council, on the principles the governing council is absolutely compact.’’ Regarding the supervisory mandate, ‘‘We are working together to find the right parameter for this.
‘‘One of the reasons we took the decision we took today is we don’t see risks for inflationary expectations, on either side, certainly not on the upside in the short or medium term. That has a lot to do with the weakening of the economy. The rest of the economy doesn’t seem to be inclined to generate upward pressures on inflation. It does show that a process that was considered fair and pivotal for the functioning of financial markets wasn’t fair.’’
‘‘Inflation expectations continue to be anchored.
‘‘On the basis of current futures prices for oil, inflation rates should decline further in the course of 2012 and be again below 2 percent in 2013. In an environment of modest growth in the euro area, underlying price pressures should remain moderate.
‘‘Risks to price developments should be broadly balanced.
‘‘Price developments should remain in line with price stability over the medium term.
‘‘People are reading too much into this. Whenever the bank pursues the objective of price stability in the medium term, that has a positive efect on the economy.’’
‘‘Let’s define, what is deflation. Deflation is a protracted and generalized fall in the price level. So protracted and strong and so general that it would disanchor inflation expectations. It has to be generalized across countries, and products and sectors, we see no sign of this in any country.
‘‘We have to distinguish between movements in the price level and movements in some prices. What happens if everyone needs it? It’s a big question.’’
‘‘Economic growth in the euro area continues to remain weak with heightened uncertainty weighing on both confidence and sentiment. We maintain our full capacity to ensure medium-term price stability.
‘‘Indications for the second quarter of 2012 point to a renewed weakening of economic growth and heightened uncertainty. We expect the euro-area economy to recover gradually although with momentum damped by a number of factors, in particular tensions in a number of euro-area sovereign-debt markets. Risks surrounding the economic outlook for the euro area continue to be on the downside.’’
The potential exists for a ‘‘spillover to the euro-area real economy.’’
Regarding 2009, ‘‘We are not there at all. Growth is hovering around zero. We still expect a gradual, slow recovery around the end of the year. The baseline scenario of the ECB hasn’t changed, although the downside risks are now materializing.
‘‘We shouldn’t forget that nominal are very, very low and real rates are negative. And certainly the expectations of a recovery is based on an improvement of general sentiment and an abating of the sovereign-debt crisis.’’
On European leaders’ summit:
‘‘We welcome the European Council conclusions of June 29. We agree that economic and monetary union needs to be put on a more sustainable basis for the future. We welcome the decision to develop a specific time-bound road map for the achievements of a genuine economic and monetary union.
‘‘The ECB is ready to serve as an agent of the EFSF and ESM in conducting market operations.
‘‘The European Council, with the decision on banking supervision, has made a very very important step toward the creation of a financial market union. The leaders have committed substantial political capital into this decision. This is the competence of the commission.
‘‘The proposal will be as strong as the commitment the leaders have placed in making this decision. Whatever the proposal is going to be, the ECB should be placed in a way to carry out the future tasks in an effective, rigorous and independent way without risks to its reputation.
‘‘Any new tasks in the supervisory area should be rigorously separated from monetary policy. We will certainly find ways to ensure that this is so. The ECB should remain independent in carrying out this task. We will work with the national supervisors; this is very important, this is essential.
‘‘I have been a supervisor for six years. I know only too well that the knowledge the competence the skills and the tradition are at a national level. New tasks will imply a higher level of democratic eligibility. We are basically all unanimous about the principles. We stand ready to higher standards of democratic legitimacy.
‘‘How big is enough? We know what we have, and so we have to make it do. Right now I think the ESM and the EFSF with the new modalities are enough, adequate to cope with the risk, the contingencies we can envisage now.
‘‘We are certainly supporting the euro-area economy with the achievement of price stability over the medium term.
‘‘We want to behave with the limits of the mandate. I don’t think there’s anything to be gained by asking an institution to destroy its credibility by acting outside its mandate.’’
On credit flows:
‘‘A few months have passed and we see that credit flows remain weak. The second reason is that this lack of transmission and further enhancement of credit flows is not the same in all countries. There are countries like France where credit flows are moderately sustainable, and there are others where credit growth is decreasing, so the transmission mechanism is also linked to national factors.
‘‘Credit is now led dominantly by demand. In a highly fragmented economy, price changes have a more limited effect than selected quantity changes.’’
On banks and collateral:
‘‘The situation on collateral changes country by country. We have several countries that have nowadays plenty of funding, so they need less collateral. There are some local situations where they are short of collateral and they need funding. You can see where the funding strains in Europe, and then in one country, and you can imagine they need collateral.
‘‘In a highly fragmented situation, they only have to go to the ECB. The ECB will keep all liquidity lines alive to solvent banks and the ECB will provide them with all they need if they are solvent.
‘‘We don’t precommit. We think the collateral framework needs to be revisited. It’s not something we can come out with soon because it is highly complicateed. We should present again a well-thought-out, organized collateral framework. It’s clear that when demand is weak, the transmission of price signals to the aggregated economy is muted. It should make entrepreneurs think their tradeoffs are better.
‘‘Very much of this depends on demand for credit. It’s a Ralph Atkins Mini Me!’’
‘‘Libor is an inquiry that’s unfolding as we are speaking today it does show that a process considered fair and pivotal for the functioning of financial markets was not fair. A lot of action ought to be undertaken to improve the governance of this process.
‘‘It’s quite clear the governance at these two levels was weak, if not faulty. I don’t know what the ECB would have done. but I hope it would have done better.’’
On non-standard measures:
‘‘We didn’t discuss any other non-standard measures Because we had to have non-standard measures which are effective. I’ll also tell you why: we have to have non-standard measures which are effective. They have to be effective in an area that is fragmented.
‘‘I would say this point in time we are not really elaborate thinking on various non-standard situations in which we may find ourselves. There is not such a feeling we are running low on policy options. We still have all our artillery to contain inflation risks.
‘‘When I say pursue the objective of price stability, I mean in both directions. I don’t think I want to elaborate on further non-standard measures.’’
‘‘We have not seen signs of outflows from the euro area. This is quite important. One of the reasons that euro summit has been a success is that leaders showed this is a monetary union that’s meant to last. ’’
On m3 money supply and banks:
‘‘The increase in the annual growth rate of m3 to 2.9 percent in May mainly reflected a reversal of the outflows in April of overnight deposits.’’ There are ‘‘negative monthly loan flows to non-financial corporations. To a large extent this reflects the current cyclical situation and ongoing risk aversion.
‘‘It essential for banks to continue to strengthen their resilience where needed.’’
‘‘Ireland is a member country that through extraordianry efforts has run a program which is on track so much that Ireland returned to the market today, much earlier than anyone expected even two or three months ago. This must be a success which should be properly celebrated. It is so important that an event like this that are making the financial environment today a little less tense than it was a month ago.’’
On ECB staff, resources:
‘‘We are all especially impressed by the extraordinary commitment that our staff show every day. It’s not a surprise that they see themselves as overworked. In the undertaking of tasks that have become more numerous, difficult and psychologically hard.
‘‘Executive board have discussed increasing the resources of ECB in a very moderate way. We don’t have a date here because the final proposal is a commission proposal.
‘‘I am sure it will be done as speedily as possible. I would not dramatize too much the need for doing things fast. It is important that things are done well. It’s not going to be a drama if it is two or three months late. Everything is subject to conditionality. Conditionality is what gives credibility to these measures.’’
‘‘It is difficult to foresee what banks will do. I don’t expect banks’ behavior to change dramatically in any way. Banks could have an incentive to return what they have in the deposit facility earlier if they were sure that they don’t need that liqudiity any time soon. How this is going to affect their business decisions, it’s very hard to predict. We haven’t discussed this and we don’t precommit to any further measure, as usual. We don’t think we are in that situation.
‘‘This point in time we are not really elaborate, thinking on various non-standard situations in which we might find ourselves.’’
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