MARIO DRAGHI, PRESIDENT, EUROPEAN CENTRAL BANK: Thank you. Sorry to say, but for personal reasons, the vice president is absent from today’s press conference.
So, ladies and gentlemen, I’m very pleased to welcome you to our press conference. And I’ll now report on the outcome of today’s meeting of the Governing Council.
Based on our regular economic and monetary analysis, we decided to keep the key ECB interest rates unchanged. Income information and analysis have further underpinned our previous assessment. Underlying price pressures in the euro area are expected to remain subdued over the medium term.
In keeping with this picture, monetary and, in particular, credit dynamics remain subdued. Inflation expectations for the euro area continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to 2 percent over the medium term. At the same time, real GDP growth in the second quarter was positive, after six quarters of negative output growth, and confidence indicators out to August confirm the expected gradual improvement in economic activity from low levels.
Our monetary policy stance continues to be geared towards maintaining a degree of monetary accommodation warranted by the outlook for price stability and promoting stable money market conditions. It thereby provides support to a gradual recovery in economic activity.
Looking ahead, our monetary policy stance will remain accommodative for as long as necessary, in line with the forward guidance provided in July. The Governing Council confirms that it expects the key ECB interest rates to remain at present or lower level - or lower levels for an extended period of time. This expectation continues to be based on an unchanged overall subdued outlook for inflation extending into the medium term, given the broad-based weakness in the economy and subdued monetary dynamics.
In the period ahead, we will monitor all incoming information on economic and monetary developments and assess any impact on the medium-term outlook for price stability. With regard to money market conditions, these have also been influenced by a gradual reduction in excess liquidity. Repayments of funds taken up in the context of the three-year longer-term refinancing operations reflect improvements in financial market confidence, some reduction in financial market fragmentation, and the ongoing deleveraging by euro area banks. We will remain particularly attentive to the implications that these developments may have for the stance of monetary policy.
Let me now explain our assessment in greater detail, starting with the economic analysis. Following six quarters of negative outlook growth, euro area real GDP rose quarter-on-quarter by 0.3 percent in the second quarter of 2013. This increase is partly explained by transitory effects related to weather conditions in the first half of this year. Since then, survey-based confidence indicators up to August have improved further from low levels, overall confirming our previous expectations of a gradual recovery in economic activity.
Looking ahead to the remainder of the year and to 2014, in line with our baseline scenario, output is expected to recover at a slow pace. In particular, owing to a gradual improvement in domestic demand, supported by the accommodative monetary policy stance. Euro area economic activity should, in addition, benefit from a gradual strengthening of external demand for exports. Furthermore, the overall improvements in financial markets seen since last summer appear to be gradually working their way through the real economy, as should the progress made in fiscal consolidation. In addition, real incomes have benefited recently from generally lower inflation.
This being said, unemployment in the euro area remains high, and the necessary balance sheet adjustments in the public and private sectors will continue to weigh on economic activity.
This assessment is also reflected in the September 2013 ECB staff macroeconomic projections for the euro area, which foresee annual real GDP declining by 0.4 percent in 2013 and increasing by 1.0 percent in 2014. Compared with the June 2013 Eurosystem staff macroeconomic projections, the projection for 2013 has been revised upwards by 0.2 percentage points, largely reflecting incoming data. For 2014, there has been a downward revision of 0.1 percentage points.
The risks surrounding the economic outlook for the euro area continue to be on the downside. Recent developments in global money and financial market conditions and related uncertainties may have the potential to negatively affect economic conditions. Other downside risks include higher commodity prices in the context of renewed geopolitical tensions, weaker than expected global demand, and slow or insufficient implementation of structural reforms in euro area countries.
According to Eurostat’s flash estimate, as expected, euro area annual HICP inflation was 1.3 percent in August 2013, down from 1.6 percent in June and July. On the basis of current assumptions for energy and exchange rate developments, annual inflation rates are expected to remain low in the coming months, owing in particular to energy price developments.
Taking the appropriate medium-term perspective, underlying price pressures are expected to remain subdued, reflecting the broad-based weakness in aggregate demand and the modest pace of the recovery. Medium- to long-term inflation expectations continue to be firmly anchored in line with price stability.
This assessment is also reflected in September 2013 ECB staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 1.5 percent in 2013 and 1.3 percent in 2014. In comparison with June 2013 Eurosystem staff macroeconomic projections, the projection for inflation for 2013 has been revised upwards by 0.1 percentage point, while the projection for 2014 remains unchanged.
The risks to the outlook for price developments are expected to be broadly balanced over the medium term, with upside risks relating in particular to higher commodity prices, as well as stronger than expected increases in administered prices and indirect taxes, and downside risks stemming from weaker than expected economic activity.
Turning to the monetary analysis, data for July confirm that underlying broad money, M3, and, in particular, credit growth remained subdued. Annual growth in M3 decreased further in July to 2.2 percent from 2.4 percent in June. Annual growth in M1 remained strong but decreased to 7.1 percent in July from 7.5 percent in June.
M3 growth continued to be mainly supported by net capital inflows in the euro area, while the annual rate of change of loans to the private sector weakened further. The annual growth rates of loans to households remained at 0.3 percent in July, broadly unchanged since the turn of the year. The annual rate of change of loans to non-financial corporations was minus 2.8 percent in July compared with minus 2.3 percent in June. Weak loan dynamics continue to reflect primarily the current stage of the business cycle, heightened credit risk, and the ongoing adjustment of financial and non-financial sector balance sheets.
Since the summer of 2012, substantial progress has been made in improving the funding conditions of banks and, in particular, in strengthening the domestic deposit base in a number of stressed countries. In order to ensure an adequate transmission of monetary policy to the financing conditions in euro area countries, it is essential that fragmentation of euro area credit markets declines further and that the resilience of banks is strengthened where needed. Further decisive steps to establish a banking union will help to accomplish this objective.
To sum up, economic analysis indicates that price developments should remain in line with price stability over the medium term. A cross-check with the signals from the monetary analysis confirms this picture.
In order to further reduce imbalances and to foster competitiveness, growth and job creation, euro area countries need to continue with their reform agenda. As regards fiscal policies, governments should not unravel their efforts to reduce deficits and put debt ratios on a downward path.
The composition of fiscal consolidation should be geared towards growth-friendly measures which have a medium-term perspective and combine improving the quality and efficiency of public services with minimizing distortionary effects of taxation.
In terms of economic policies, product market reforms to increase competitiveness will facilitate the creation of new businesses, support the tradable goods sectors, and foster job creation, while high unemployment rates require decisive structural reforms to reduce rigidities in labor markets and to increase labor demand.
I am now at your disposal for questions.
STAFF: Jeff Black, Bloomberg, please.
QUESTION: Good afternoon. Sorry, I have to peer around to be able to see you. You mentioned that if excess liquidity declines much further, you’d be particularly attentive to developments in that regard. So could you help us by perhaps indicating at what point numerically excess liquidity becomes a concern to you and what then you would do about that?
And my second question is about the renewed tensions in the Middle East. If it transpired there was an oil price spike, which has happened in the past, of course, does that endanger your forward guidance outlook? Or would an oil price spike be something that you would be inclined to look through? Thank you.
DRAGHI: Thank you. You’re absolutely right to have focused on that - on that sentence, particularly the attentive. Right now, we view the current excess liquidity as adequate, but we stand ready to act.
Now, we’ve got to be aware that excess liquidity depends on two factors. The less fragmentation, the less is the excess liquidity. The second factor is our reaction to the excess liquidity and to the demand, namely through LTROs. So now we are down from 800 billion to 250 billion, in terms of excess liquidity, and that’s all in all good news, because it means that fragmentation has been receding.
Now, when we come to the relation between the excess liquidity and the on-year (ph) rates, which is what you are really asking, we have to consider this relation is unstable, in the sense that there isn’t any precise figure. I remember some time ago I’ve said - I’ve mentioned the figure of 200 as the figure - as the threshold, but, in fact, it’s - it’s really context-depending. It depends on the context. It depends on the degree of fragmentation that we have. The ECB balloting speaks of a figure between 200 and 100. But in general, the threshold depends on the state of fragmentation.
The other thing - the other caution that I would - I would make is that one should not extrapolate too much from the past repayments pattern of LTRO. As you’ve seen the figures, it’s been quite significant for some time, and now it’s basically constant. So it really depends on who’s repaying the LTRO, what is the state of their funding conditions, what is the state of their - of their profitability, what is the - what’s in general their situation? So I wouldn’t extrapolate repayment pattern too much, as say that say demand stay (ph) this 250 figure will go down to 200 or whatever.
And, second, I would say that there isn’t any stable relation between the figure and the threshold and the rates. In any event, we would - as I said, we would stand ready to take appropriate action as - as needed. And obviously, we will - I’ve already said this several times - we have the fixed-rate full allotment policy in place until at least July 2014 and for as long as needed.
On - on the second question, well, we have to see, really. But in general, we look at - you know, our reference is the HICP inflation. So we have to see whether this would alter our medium-term forecasts for inflation. As I mentioned before, our risks to inflation are broadly balanced, and one of the reasons is exactly shocks in commodity prices for risk (ph). So we will have to assess. But the rate to which we look is the headline inflation.
QUESTION: First question is whether you have discussed a rate cut today. And second question is on market interest rates. You raised concern about the level of the market interest rates in July, and I just wonder whether you feel comfortable with the level right now.
DRAGHI: Thank you. On interest rate cut, there was a discussion like we do all the time - we discuss the state of our monetary policy stance at each point in time. We also discuss interest rates and other monetary policy instruments. Some governors, of course, observe that improvements in the economy will not justify this discussion, but several other governors observed that, on one hand, the recovery is still too green. If you look at that slack (ph) is still wide, weak credit, weak money aggregates, inflation is subdued in the medium term, unemployment is still high.
So it was too green to exclude this discussion. And if money market developments - and here I’m answering to the second question, really - if money market developments were to be judged unwarranted in their impact on our assessment of medium-term inflation, then such an instrument should be considered. Thank you.
STAFF: Brian Blackstone?
QUESTION: Brian Blackstone with the Wall Street Journal. Just on that second answer you have, last month you said that the rate hike expectations embedded in the money markets were unwarranted. Is that still your assessment? And if it is, then why didn’t you cut rates today?
And my second question more broadly is, is there a risk that the ECB is trying to fine-tune the markets too much? Is there anything wrong, given the context of the euro zone and the global economy, for investors to say a couple years down the line there might be a single rate hike from crisis low, near-zero levels? Thank you.
DRAGHI: Thank you. Interest rates move for a variety of reasons. And some of them have to do with the news related to the improvements in the economy. In this case, the forward guidance we have expressed is just geared to make sure to reach two objectives. The first is to reduce the volatility in the - within the corridor, which we have succeeded.
The second objective is to make sure that the news - this news relative to the improvements in the economy do not cause overreaction in the market interest rates. And on that ground, we have been moderately successful, and I would refer for an analysis and a comparison the different forward guidance concepts to a very recent and very interesting paper by the Bank of International Settlements.
Then there is another set of news that comes that has nothing to do with the euro fundamentals. And it can - may come from all over, in which case the forward guidance is meant to make sure that you want to look through this news to make sure that their impact on the medium-term assessment of inflation is contained. So that’s the - I would say that’s the answer.
STAFF: Hela Hukh (ph), please (inaudible)
QUESTION: Well, Europe is picking up, but the Netherlands is still in recession, and the Dutch people think that’s because of austerity measures. What do you think is the main reason that the Dutch economy is lagging behind?
And my second question would be that there are new austerity measures coming up, 6 billion. One-third will be tax increases. Do you think that the Netherlands is on the right track to recovery?
And I know I’m stretching it a bit, but I have a third question. Dutch government has decided not to privatize ABN Amro for another year. Two of our four big banks are nationalized. I was wondering, in general, what your vision is on state ownership of a bank? What does that do to the competitiveness of the sector?
STAFF: (OFF-MIKE) two questions, so would you please pick the two most important ones?
QUESTION: The first - the first two.
STAFF: Thank you.
DRAGHI: No, the - I’ll say this. The Netherlands is undergoing a protracted domestic demand-driven recession. And you know that the household sector is heavily indebted. There are financial sector challenges, declining real estate prices, and all this weighs on domestic demand.
So in this environment, the leveraging by the households and by the banks is natural. However, the recent data show a decelerating pace of the contraction with some signs of recovery in business investments and some stabilization of exports.
So there are also positive signals coming from the latest survey. The industrial confidence has improved in recent months. The manufacturing PMI has climbed into positive growth territory. So I would expect a gradual pickup of the economy. However, the medium-term outlook remains subdued, as with - with other - with other - as with other members of the euro area.
Now, what are the most important reforms the Dutch government ought to do? It’s not up to me, really. It’s up to the Dutch government to decide on the importance and urgency of reforms. The - in the context of the European semester, the council has adopted country-specific recommendations which we fully support. And these recommendations concern a correction of the excessive deficit by 2014 and the implementation of further reforms in the housing market, in the pension system, the health and long-term care sector, and the labor market.
STAFF: (inaudible) please.
QUESTION: I have a couple of questions. My first question is on the Single Supervisory Mechanism for banks. I would like - I would like you, Mr. President, to tell us about the recent developments of the ongoing discussion within - with the European Parliament on the SSM.
And, second, about measures regarding banks, again, there were some measures that were announced in July, for instance, to ease ABS haircut and raise it on rate and covered bonds (ph), but there were some legal hurdles to be crossed on this regard, and other measures regarding mezzanine credit for small and medium enterprises. Can you give us a flavor of what the state-of-the-art is, as regards these issues? Thank you.
DRAGHI: Thank you. On - on the SSM, our discussions with the European Parliament progressed considerably, and we should have some - some news in the coming days, some positive news in the coming days. Next to this, the preparation of the - for the - for the creation of the SSM continues, is continuing. And it works well. The - as I remarked on other - on other occasions, the - there is a sense by all the national supervisors, there is a strong, I would say, collaborative, cooperative stance. So the working atmosphere is actually very, very good.
There will be a full communication - a first full communication on the - on the assets - what’s called the asset quality review, which, in fact, is a risk assessment, is a balance sheet assessment, by mid-October. I think that is the - that is one of the communications that I think is most important, because especially by the - by the banking system, which is going to be the recipient of the SSM action, it is highly welcome to know how things will be done in the coming months.
On the other front, the ECB continues to work with EIB and with the commission in an advisory role. And we will report on this, and we will see what is the space, what is the room for the ECB to act on this front, once the work is - is completed.
DRAGHI: Certainly before year end. Certainly before year end. But we have to keep in mind, one - one thing is the design of what can come out of this effort. Another one is - the overcoming of the regulatory hurdles, which make - which make the use of ABS quite difficult at the present time.
QUESTION: (inaudible) Mr. Draghi, but have the exact criteria for balance sheet assessment already been defined by the Governing Council? And if so, what is the outcome?
DRAGHI: No, as I said, we’re going to have a full communication at mid-October. So for the time being, I can only tell you the people are working. There are many people who are working on this. All the 17 national supervisors and their teams and the ECB are working on this. There isn’t any - anything that I can report - precise that I can report at this stage on this.
STAFF: (inaudible) La Stampa?
QUESTION: Mr. Draghi, a follow-up to the question on union - on banking union. Yesterday, Mr. Asmussen said very explicitly that if a bank should be resolved, this should be decided by the ECB and implicitly not by the European Commission. I wonder if you agree with this position, which is a very clear position?
And my second question is on Greece. There has been a discussion, especially in Germany, about an eventually - an eventual third package of - for after the elections. I wonder if the ECB is - has the same opinion, that Greece will need help again.
DRAGHI: On the first point, I think there has been a misunderstanding. I don’t think Mr. Asmussen’s ever said that. And there has been confusion. The - the view that we have and - is the following. The supervisor makes the assessment. And that’s, by the way, how things usually go in most member countries nowadays. The supervisor makes the investment, in total independence, and then hands this assessment to the resolution authority, which nowadays in many member countries is the government.
And then the government decides what they want to do. The supervisor cannot decide what they want to do, whether to resolve the bank or sell the bank or whatever. It’s not its responsibility.
And Mr. Asmussen said this. And so he’s been - he’s been, I think, misinterpreted. So there is no - the - there is no confusion here. The line is pretty clear. The - and the - and, by the way, we’ve seen also that there was, again, a misunderstanding, saying the Bundesbank would take - Bundesbank agrees 100 percent with this view.
So - and that’s by - by the way, this is how supervisors work in all countries. Supervisors can’t have (ph) responsibilities that pertain or may pertain to the taxpayer. So he - the supervisor makes the assessment, hands the assessment, saying, look, this bank is not viable under this - under present circumstances. You have to do something. But it’s up to you to decide what to do. So that’s the - that’s pretty clear.
Sorry. On the second point, on Greece, now, I can say that the current adjustment program for Greece expires at the end of 2014. And this leaves some time for the euro group to decide on possible extension of the current program and to assess prospects for Greece to regain access to capital markets. So it’s also quite straightforward the fact that if - if an extension of the program is needed, it will require further conditionality.
STAFF: Suzanne Lynch, the Irish Times?
QUESTION: Hi, I just have a specific question regarding Ireland. It intends to be the first country to exit the bailout at the end of this year. Do you think it will need a precautionary credit line?
DRAGHI: Well, in Ireland, I would say program implementation is on track. Recent fiscal data have been overall positive. Market sentiment continues to improve. Challenges remain, especially in the financial sector.
About the possible successor program, a decision will be taken in due time. Now, a key consideration is that conditions remain for a successful conclusion of the current program. And I should say that Ireland is leading the way in this respect.
So it will be key to ensure that the appropriate framework is in place to safeguard the achievements made and to avoid potential risks to full market access once the program is completed.
QUESTION: It’s just that - just to follow up - a quick follow-up - just as you said there in the previous question, Greece (inaudible) whole other year, until the end of 2014, but - for its program to finish, but in Ireland we’re talking about a couple of months. So when do you think? Do you think it’s imperative that a decision is made on - on a strategy for exiting the bailout quite soon, in the next two months?
DRAGHI: Well, yes, that’s up to the euro group to decide. Thank you.
STAFF: Jack Ewing, International Herald Tribune?
QUESTION: Jack Ewing, International Herald Tribune and New York Times. Not to hamper too much about Greece, but the - there’s also been a lot of talk about whether there should be some kind of debt relief. And I wonder if I could just push you a little bit more on that and whether there’s anything you can say about whether that’s something the ECB would consider, in light of the fact that you’re major holders of Greek bonds? Thank you.
DRAGHI: Well, the answer is no. I mean, the - it’s pretty - what we’ve done - you remember - I don’t know whether you remember - we’ve gone through this when - when we had the discussions about Greece almost, what, a year, year-and-a-half ago. And it’s pretty clear that we cannot do monetary financing. Article one, two, three of the treaty forbids the ECB from doing monetary financing.
QUESTION: (OFF-MIKE) thank you - there - there are some critical voices who say that the ECB is responsible for the crisis of some saving banks because of the low interest rates and - which, by the way, contribute also to the expropriation of savings. Could you please answer to this? Because it is very much debated here, especially here in Germany.
And then the - well, I had several questions. I’m sorry. Is the - is the ECB reflecting over the fact that with high debt and - and weak - and countries coming out weak from recession, a midterm inflation target is not enough to get out of the crisis. And there are some economists who suggest that you link it to, like the Fed, to - also to unemployment.
DRAGHI: The answer to the second question is pretty straightforward. Our mandate talks about price stability. And that’s our objective, price stability in the medium term.
On the first point, as you know, as I’ve said many times, we, the ECB, sets rates for the whole of the euro area. Second, we see no inflation in Germany. Third, interest rates - now, are interest rates low because of ECB’s rates are low? But the answer is just look at what happened to the interest rates of the 10-year bund in the last month or so. It went up by about 50 basis points to slightly less than 200, than 2 percent. And our rates were simply the same or even - actually, they were cut a month-and-a-half ago about.
So this relation between our rates and rates of the bunds is - has to - has to be looked quite close, and it’s not a total in one (ph) relation. As a matter of fact, there is another factor that plays into keeping interest rates artificially low in Germany and the Netherlands and in some other countries, as well, and that’s the fact that we have had fragmentation and these countries have become the safe haven for the euro area, so you have flow. You had - for about three years now, we had flows pouring into these countries and keeping interest rates artificially low.
And so everything we’ve done for reducing fragmentation actually contributes to higher and more realistic rates in these countries. And this should be acknowledged.
QUESTION: Mr. Draghi, I’ve got two questions. One is related to - you announced last time on this press conference that you would put forward a proposal on minutes. And I would like to hear what something - that this was discussed and what the state of this discussion is.
The second is - question is on general politics. Are you watching the outcome of the general elections coming this month? And do you think that this can have an impact on the economy?
DRAGHI: On the second question, I have to give you a very general answer. Often elections have an impact on the economy, but I can’t comment on specifics - on the specifics of this election.
On the first, actually I - if I’m correct, I didn’t use the word “minutes.” I think I used the word an “account” of our discussions. Work is going on, is - is going on. And as I said, it’s quite important - it could be. If it - if it’s well done, it could actually give more light and transparency on the nature of our discussions, but it’s quite important to acknowledge that our set-up, our institutional set-up is not the same as the U.S. or the U.K. or Japan. We are a 17-countries monetary union.
And so the governors are there in their personal responsibility, and they should remain independent in their decision-making. And so anything that would threaten their independence would not be acceptable, so transparency, while keeping their independence.
DRAGHI: We said - yes, the - I think I did say that the executive board will present the proposal in the fall.
STAFF: (inaudible) El Pais?
QUESTION: Hi, this is - this is (inaudible) from El Pais. The Spanish program for the banking system is going to expire in the - in next January. Do you support an extension for the program or another form of backstop or - or insurance for the banking Spanish - for the Spanish banking system?
DRAGHI: Well, I - I mean, the program - the financial assistance program is fully on track. Banks have been recapitalized. Their restructuring plans have been implemented. The nonperforming assets have been transferred to SARB (ph). And SARB (ph) has already started selling some of the assets.
The deleveraging process is going as expected. Some banks have made a steady progress in reducing their dependence on wholesale funding and the Eurosystem. As you know, Spanish banks have repaid a substantive amount. So the reform of the savings bank has been comprehensive. So there are very few issues that remain, but they are likely to be resolved without any major impact on the liquidity or solvency of the Spanish banks.
STAFF: Geoff Cutmore, CNBC?
QUESTION: Thank you very much. Geoff Cutmore, CNBC. While I don’t want to overdramatize what’s going on at St. Petersburg, the market has become quite sensitive to news flow over Syria. So that is one of the potential geopolitical downside risks that you’ve acknowledged, I think.
In the medium term, there is also a growing concern about the emerging market slowdown and the deficit currencies. So my two-pronged question really is, what specific responses have been discussed within the Governing Council to ease any market distress on either of these issues? And my second question is, have you spoken or communicated with the Federal Reserve or other central banks about the prospect of coordinated action, should it be necessary? Thank you.
DRAGHI: Thank you. We certainly - we certainly are alert to the geopolitical risks that may come out of the Syrian situation and to the economic risks that may derive from the emerging market situation, which are two different things, really.
From this point, I should say something I should have said before. When we look at the nature of the composition of the - this sort of beginning of a recovery, as you - as you observe, I’m very, very cautious about the recovery. I can’t share enthusiasm. It’s just the beginning. Let’s see. These shoots are still very, very green.
I should have said one thing, that for the first time in about two years, it’s domestic demand that is at the root of this recovery. It’s still coupled with exports, but it’s domestic demand. That’s very important, because it’s - it kind of gives a sense that if it - if it continues, if it continues, it gives a sense that the dependence of the recovery on the rest of the world is somewhat balanced by domestic - by domestic demand. Also - but I only say - so this is one thing.
Second thing, we certainly stand ready to act. I did say this when I was asked about - about what we do about - if interest rates - or money market developments were unwarranted in view of our assessment of medium-term price stability. And we - we certainly - and as I said before, we stand ready to act whether these developments derive from one source or another. I commented on that before.
We haven’t yet discussed any coordinated action. And we - you know, we have periodic exchanges anyway. One of them will be, by the way, the next - the next - this weekend in Basel. There will be an opportunity for - for - for a meeting with central banks of major countries.
STAFF: Michael Steen, FT.
QUESTION: Michael Steen, FT. Mr. Draghi, was there any discussion today on the Governing Council about a more explicit version of the forward guidance you’ve got? I might invite you to use - you seem to be dipping your toes into giving us a fuller account by talking (inaudible) about various governments saying this and that, and so if you - if you could answer the question that way, that would be brilliant.
And the second question is, as a (inaudible) correspondent, I enjoyed your answer about Holland just now. I was wondering, could you give us a similar sort of tour de raison (ph) about the situation in Italy? Or is that country fundamentally you won’t talk about? And I say that, because our Italian colleagues (inaudible) thank you.
DRAGHI: (OFF-MIKE) I’d rather - on the second question, I’d rather not comment. It’s kind of - you understand why, I think. So I think you have to rely on someone else to have this tour de raison (ph) for Italy.
But on the first question, we have - we have reflected, of course, on the nature of our forward guidance. And we’ve asked ourselves, what are the objectives of the forward guidance? The forward guidance contains an assessment by the central bank about its view of the future and contains information about the central bank’s policy response for the future. I think that’s the essence of forward guidance. It’s not a change in our reaction function, but it’s rather an explanation of our reaction function. We wanted to be clear. We don’t want to change it.
Now, forward guidance are two types. One is qualitative, and the other one - the other ones are quantitative with precise state (ph) conditions. And ours is of the first type.
So only know (ph), we - the Governing Council, it’s fairly compact, unanimous actually on this point. On - on the wish to maintain this type of forward guidance, we are also - I mean, if we look - I mentioned before to this paper by the BIS, where they actually compare their results and the sort of successes, some different types of forward guidance, and as I said before, the ECB doesn’t score too badly. It scores very well on having controlled volatility and reduced the uncertainty in - within the corridor, and its score is OK in controlling the levels of rates. But as I said, there are many news - continuously news - continuous flow of news on the rates.
So given our specific institutional set-up, the quality of the forward guidance that we’ve used is the most appropriate. And you can - you can - you can easily - you can easily see why a different forward guidance will create problems for our - in our - within our institutional set-up, if we were to be willing to adopt a precise formulation, a quantitative formulation, which we are not.
QUESTION: (OFF-MIKE) change in the reaction function? Does that mean that, essentially, you would do nothing different if there was no forward guidance?
DRAGHI: No, because we - we basically said that, looking at the medium term, the medium-term outlook for inflation, so way beyond the short term, we have - we wanted to make clear that we have a downward bias in interest rates for an extended period of time. And I think that is - that is the essence, and we never said that before. So the very fact of saying it is by itself a very powerful clarification of our reaction function.
QUESTION: Yes, thank you. The first one is also on forward guidance, but on a different issue. In July, you said at the end of the press conference that you would all agree that low level of interest rates entail serious risks to financial stability. But there is no reference to financial stability in your forward guidance, while, for example, the Bank of England explicitly manages such risks as one of the three knockouts for forward guidance. So the question is, why is there no mentioning of financial stability risks in your forward guidance and, to be more precise, what would happen - or what would be the reaction of the ECB if such risks emerged while the medium-term inflation outlook was very subdued still?
And the second question is just on the resolution issue, just to clarify. You said that the - you will make an assessment and hand it to the governments. Let’s say, if this is the resolution authority and it’s up to them to decide, does that mean we can get into a situation where the ECB says, OK, this bank is OK for resolution, but the authority says, no, we differ from this kind of view? And what would happen in that case? Thank you.
DRAGHI: Thank you. The second question is - the - I mean, the practice - I would say almost all, if not all the supervisors in the euro area is the following. It’s the supervisors who look at the viability of a bank in a certain situation. If they were to decide that the bank is not viable, then they would simply communicate this to the authority which has the responsibility to - well, first of all, there is what’s called supervisory action, namely, the bank would be asked to raise capital, to sell assets, to (inaudible) and so on, to do all these things.
But suppose you have exhausted all these things or you simply judge that the bank is unviable no matter what supervisory action could be undertaken. In that case, you hand it to the resolution authority, which often is the government, but often is separate. In our proposed legislation will be a separate entity, where it’s the (ph) commission or (inaudible) isn’t clear yet, and they will decide what to do, because it’s up to them, because they are using - they may be using public money or they may be considering that the further bailing (ph) could be feasible.
So - but the assessment - and not how to - I would say the assessment is made by the supervisor. The actions required to respond to this assessment would be decided by the independent authority. I mean, that’s pretty clear, and that’s been the view of the ECB and - so that’s one - one question I think I’ve answered.
Oh, the second question is about - about financial stability. We - the issue is, first of all, financial stability risks are often addressed by macroprudential tools, so that’s what we have in mind. And it’s actually part of the SSM creation.
We don’t view now movements in interest rates as a - sort of as a realistic way to respond to risks in financial stability that we don’t see. In other words, we don’t see risks to financial stability that may derive from the level - from the too-low level of interest rates at the present time.
Now, certainly, if there were a situation like we had in the past, we will have to think about that and react. But in the past, we didn’t have this medium-term outlook of inflation so subdued as we are watching now.
STAFF: The gentleman at the back?
QUESTION: (OFF-MIKE) with respect to the policy forward guidance and the challenge that central banks face in keeping the credibility with the marketplace, I wonder if you could speak to whether the Governing Council has given consideration to -
DRAGHI: Can you repeat this?
QUESTION: Pardon me?
DRAGHI: I’m sorry. Can you repeat the question?
QUESTION: Yes. I wonder if you could speak to the consideration, if at all, the Governing Council has given to ways in which you cement the forward guidance, particularly perhaps releasing inflation forecasts into 2015 or other methods that might give the market more comfort with respect to the forward guidance, given the market differential that we’re seeing, not only for yourselves, but for other central banks?
DRAGHI: I think that’s a legitimate question. And the forecasts for 2015 inflation will be published at year end, so on the occasion of the next - next projections.
STAFF: The last question to you.
QUESTION: (inaudible) from (inaudible) Japanese news agency. My question is on OMT. Just one year ago, you announced the detail of these measures (inaudible) and the - what’s interesting for me is that why this measure is so effective without being activated? Other central banks, for example, Bank of Japan or Fed, have introduced similar programs, but they need to activate it to be effective. So my question is, why only in euro zone such program is effective, even without being activated? Thank you.
DRAGHI: Well, it’s very hard to answer this question without flattering one’s self.
But I - I suspect that - that it’s - the design of this has made this measure both powerful and credible. It’s powerful because it addressed a realistic objective, which is the redenomination risk spreads, the spreads that derive from redenomination risks.
It’s - it’s credible because it is accompanied by conditionality. In our present context - and in many others, I suspect - it - the commitment to buy an infinite amount of bond in order to keep interest rates at a certain level is often not credible, besides being in our present context illegal.
So I think these two combinations of a realistic target, accompanied by an, in principal, unlimited amount of means, in fact, limited by the market size, and by conditionality, has made this measure - has made this measure very effective without need to be - to be activated.
But conditionality is an important ingredient, because it says that once this measure is being activated, the country that is receiving - and so on the receiving end - is actually undertaking a series of actions, budgetary consolidation or structural reforms, or both, that have as a consequence - as a consequence, they have the result of increasing the value of the bonds issued by the country. And the value of the bonds are exactly what the ECB is buying into it.
So the conditionality, if properly activated, produces an increase in the value - if you want to use this word - of the collateral that the country posts in exchange of the ECB action. I think that’s a way to think about this. But, anyway, thanks for asking.
STAFF: And thank you very much.
DRAGHI: Thank you.
To contact the reporter on this story: Jana Randow in Frankfurt at firstname.lastname@example.org
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