Draghi Says ECB May Start Outright Open-Market Operations

European Central Bank President Mario Draghi comments on monetary policy and the region’s debt crisis.

He made the remarks at a press conference in Frankfurt today after the ECB kept interest rates unchanged.

On the future of the euro:

“The euro is irreversible.”

“It’s pointless to bet against the euro. It’s pointless to go short on the euro. It’s pointless because the euro will stay.”

On the ECB’s focus on the short end of the yield curve:

“Why do we focus on the short end of the yield curve? The main reason is that this falls squarely in the list of classical monetary policy instruments.”

On the Bundesbank stance on ECB bond purchases:

“It is clear and it is known that Mr. Weidmann and the Bundesbank have their reservations about programs that buy bonds.”

On sterilization of ECB bond purchases:

“You shouldn’t assume that we will not sterilize or sterilize.”

On the possibility of an interest-rate cut:

“We have discussed possible reductions in interest rates, but the Governing Council in its entirety decided this was not the time, and that’s it.”

On ECB response to the crisis:

“We want to repair monetary-policy transmission channels.”

“The ECB remains the guardian of price stability.”

“Going beyond our mandate? No.”

“It is within our mandate to do whatever is in our power to preserve the euro as a stable currency.”

“The voting was unanimous with one reservation.”

“It was not a decision, but a determined guidance for the committees to design the appropriate modalities for such policy measures.”

“There wasn’t any specific instance that led us to have the discussion we had today, just a sense of worsening of the crisis.”

The “sudden increase in the shorter part of the curve in some euro-area countries” was a sign of market fragmentation in the last month.

“What we have expressed now is a guidance, a strong guidance, that will be completed in their details in the coming weeks.”

“The endorsement to do whatever it takes to preserve the euro as a stable currency has been unanimous.”

“The ECB cannot replace governments.”

“To go to the EFSF is a necessary condition, but it’s not a sufficient condition.”

“Many of the details will be worked out by the relevant committees within the ECB” in the weeks ahead.

“The adherence of governments to their commitments and the fulfilment by the EFSF/ESM of their role are necessary conditions. The Governing Council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective. In this context, the concerns of private investors about seniority will be addressed. Furthermore, the Governing Council may consider undertaking further non-standard monetary policy measures according to what is required to repair monetary policy transmission. Over the coming weeks, we will design the appropriate modalities for such policy measures.”

On the euro area’s temporary bailout fund, the European Financial Stability Facility:

“Governments must stand ready to activate the EFSF in bond markets.”

“There is not yet one country that has asked the EFSF to intervene.”

On the euro-area economy:

“On a quarterly basis, euro-area real GDP growth was flat in the first quarter of 2012, following a decline of 0.3 percent in the previous quarter. Economic indicators point to weak economic activity in the second quarter of 2012 and at the beginning of the third quarter, in an environment of heightened uncertainty. Looking beyond the short term, we expect the euro area economy to recover only very gradually, with growth momentum being further dampened by a number of factors. In particular, tensions in some euro area sovereign debt markets and their impact on financing conditions, the process of balance sheet adjustment in the financial and non-financial sectors and high unemployment are expected to weigh on the underlying growth momentum, which is also affected by the ongoing global slowdown.

“The risks surrounding the economic outlook for the euro area continue to be on the downside. They relate, in particular, to the tensions in several euro area financial markets and their potential spillover to the euro area real economy. Downside risks also relate to possible renewed increases in energy prices over the medium term.

“Euro-area annual HICP inflation was 2.4 percent in July 2012, according to Eurostat’s flash estimate, unchanged from the previous month. On the basis of current futures prices for oil, inflation rates should decline further in the course of 2012 and be below 2 percent again in 2013. Over the policy-relevant horizon, in an environment of modest growth in the euro area and well anchored long-term inflation expectations, underlying price pressures should remain moderate.

“Risks to the outlook for price developments continue to be broadly balanced over the medium term. Upside risks pertain to further increases in indirect taxes, owing to the need for fiscal consolidation, and higher than expected energy prices over the medium term. The main downside risks relate to the impact of weaker than expected growth in the euro area, in particular resulting from a further intensification of financial market tensions. Such intensification has the potential to affect the balance of risks on the downside.”

On what governments must do:

“While significant progress has been achieved with fiscal consolidation over recent years, further decisive and urgent steps need to be taken to improve competitiveness. From 2009 to 2011, euro-area countries, on average, reduced the deficit-to- GDP ratio by 2.3 percentage points, and the primary deficit improved by about 2 1/2 percentage points. Fiscal adjustment in the euro area is continuing in 2012, and it is indeed crucial that efforts are maintained to restore sound fiscal positions. At the same time, structural reforms are as essential as fiscal consolidation efforts and the measures to repair the financial sector. Some progress has also been made in this area. For example, unit labour costs and current account developments have started to undergo a correction process in most of the countries strongly affected by the crisis. However, further reform measures need to be implemented swiftly and decisively. Product market reforms to foster competitiveness and the creation of efficient and flexible labour markets are preconditions for the unwinding of existing imbalances and the achievement of robust, sustainable growth. It is now crucial that member states implement their country-specific recommendations with determination.”

To contact the reporters on this story: Jeff Black in Frankfurt at jblack25@bloomberg.net; Jana Randow in Frankfurt at jrandow@bloomberg.net Gabi Thesing in London at gthesing@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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