MARIO DRAGHI, PRESIDENT, EUROPEAN CENTRAL BANK: Ladies and gentlemen, I am very pleased to welcome you to our press conference. I will now report on the outcome of today’s meeting of the Governing Council, during which we took a number of decisions on key ECB interest rates, forward guidance, and liquidity provision.
First, based on our regular economic and monetary analyses, we decided to lower the interest rate on the main refinancing operations of the Eurosystem by 25 basis points to 0.25 percent and the rate on the marginal lending facility by 25 basis points to 0.75 percent. The rate on the deposit facility will remain unchanged at 0.00 percent.
These decisions are in line with our forward guidance of July 2013, given the latest indications of further diminishing underlying price pressures in the euro area over the medium term, starting from currently low annual inflation rates of below 1 percent.
In keeping with this picture, monetary and, in particular, credit dynamics remain subdued. At the same time, inflation expectations for the euro area over the medium to long term continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2 percent. Such a constellation suggests that we may experience a prolonged period of low inflation, to be followed by a gradual upward movement towards inflation rates below, but close to, 2 percent later on. Accordingly, our monetary policy stance will remain accommodative for as long as necessary. It will thereby also continue to assist the gradual economic recovery, as reflected in confidence indicators up to October.
Second, following today’s rate cut, the Governing Council reviewed the forward guidance provided in July and confirmed that it continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time. This expectation continues to be based on an overall subdued outlook for inflation extending into the medium term, given the broad-based weakness of the economy and subdued monetary dynamics.
Third, we continue to monitor closely money market conditions and their potential impact on our monetary policy stance. We are ready to consider all available instruments, and, in this context, we decided today to continue conducting the main refinancing operations as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the 6th maintenance period of 2015, more precisely on July 7, 2015.
This procedure will also remain in use for the Eurosystem’s special-term refinancing operations with a maturity of one maintenance period, which will continue to be conducted for as long as needed, and at least until the end of the second quarter of 2015. The fixed rate in these special-term refinancing operations will be the same as the MRO rate prevailing at the time.
Furthermore, we decided to conduct the three-month longer-term refinancing operations, the LTROs, to be allotted until the end of the second quarter of 2015 as fixed-rate tender procedures with full allotment. The rates in these three-month operations will be fixed at the average rate of the MROs over the life of the respective LTRO.
Let me now explain our assessment in greater detail, starting with the economic analysis. Real GDP in the euro area rose by 0.3 percent, quarter on quarter, in the second quarter of 2013, following six quarters of falling output. Developments in survey-based confidence indicators up to October are consistent with continued, albeit modest, growth in the second half of the year.
Looking ahead, output is expected to continue 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 demand for exports. Furthermore, the overall improvement in financial markets seen since last year appear to be gradually working their way through to the real economy, as should the progress made in fiscal consolidation.
In addition, real incomes have benefited recently from generally lower energy price 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.
The risks surrounding the economic outlook for the euro area continue to be on the downside. 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, weaker than expected domestic demand and export growth, and -- and slow or insufficient implementation of structural reforms in euro area countries.
According to Eurostat’s flash estimate, euro area annual HICP inflation decreased in October 2013 to 0.7 percent, from 1.1 percent in September. This decline was stronger than expected and reflected, in particular, lower food price inflation, a larger fall in energy prices, and some weakening in services price inflation.
On the basis of current futures prices for energy, annual inflation rates are expected to remain at low levels for the coming months. Underlying price pressures in the euro area are expected to remain subdued over the medium term. At the same time, inflation expectations for the euro area over the medium to long term continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2 percent. Such a constellation suggests that we may experience a prolonged period of low inflation to be followed by a gradual upward movement towards inflation rates below but close to 2 percent.
Taking into account today’s decisions, the risks to -- taking into account today’s decisions, the risks to the outlook for price developments are broadly balanced over the medium term. Upside risks relate in particular to higher commodity prices, as well as stronger than expected increases in administered prices and indirect taxes, and downside risks stem from weaker than expected economic activity.
Turning to the monetary analysis, data for September confirm the subdued underlying growth of broad money, M3, and, in particular, credit. Annual growth in M3 moderated to 2.1 percent in September, from 2.3 percent in August. Annual growth in M1 remained strong at 6.6 percent, reflecting a preference for liquidity, although it was below the peak of 8.7 percent observed in April. Net capital inflows into the euro area continued to be the main factor supporting annual M3 growth, while the annual rate of change of loans to the private sector remained weak.
The annual growth rate of loans to households stood at 0.3 percent in September, broadly unchanged since the turn of the year. The annual rate of change of loans to non-financial corporations was minus 2.7 percent in September, compared with minus 2.9 percent in August. Overall, weak loan dynamics for non-financial corporations continue to reflect primarily their lagged relationship with the business cycle, credit risk, and the ongoing adjustment of financial and non-financial sector balance sheets. At the same time, the October 2013 bank lending survey tentatively signals a stabilization in credit conditions for firms and households, in the context of still weak loan demand.
Since the summer of 2012, substantial progress has been made in improving the funding situation of banks. In order to ensure an adequate transmission of monetary policy to the financing conditions in euro area countries, it is essential that the fragmentation of euro area credit markets declines further and that the resilience of banks is strengthened where needed. The ECB’s comprehensive assessment before it adopts its supervisory role under the single supervisory mechanism will further support this confidence-building process. It will enhance the quality of information available on the condition of banks and result in the identification and implementation of necessary corrective action. Further decisive steps to establish a banking union will help to restore confidence in the financial system.
To sum up, taking into account today’s decisions, the economic analysis indicates that we may experience a prolonged period of low inflation, to be followed by a gradual upward movement towards inflation rates below, but close to, 2 percent later on. A cross-check with the signals from the monetary analysis confirms this picture.
As regards fiscal policies, the euro area budget deficit is projected to decline further from 3.1 percent of GDP in 2013 to 2.5 percent in 2014, according to the European Commission’s autumn 2013 economic forecast. At the same time, the euro area government debt ratio is expected to rise from 95.5 percent of GDP in 2013 to 95.9 percent in 2014.
In order to put high public debt ratios on a downward path, governments should not unravel their efforts to reduce deficits and sustain fiscal adjustment over the medium term. 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. Governments must also decisively strengthen efforts to implement the needed structural reforms in product and labor markets.
Progress has been made in reducing current account deficits and unit labor cost differentials, but substantial efforts still need to be undertaken with a view to further improving competitiveness, supporting rebalancing within the euro area and creating more flexible and dynamic economies that in turn generate sustainable economic growth and employment.
We are now at your disposal for questions.
STAFF: Stefan Riecher, Bloomberg News?
QUESTION: Good afternoon -- do you hear me? Yeah. Good afternoon, Mr. President. First question, a prolonged period of time of low inflation. Is there any chance you could elaborate a bit more in detail on what prolonged means? And does it mean there’s going to be low inflation from more than a year or not?
DRAGHI: I’m sorry. I was looking for you. Where are you? OK, that’s -- all right, yes, please.
QUESTION: I apologize. I should have stood up.
DRAGHI: No, that’s OK.
QUESTION: You want me to start again?
DRAGHI: Yes, please.
QUESTION: Or -- OK, sorry. First question on the prolonged period of time in which we’re going to see low inflation. Is there any chance you could elaborate on bit on for how long we’re going to see low inflation? And do you feel that inflation may drop even lower than it is already, meaning there’s a high chance of deflation to come up?
And second question. What options do you have in place to fight inflation if it drops even lower than it is already, considering that the main refinancing rate is at 0.25 now and you’ve only one traditional rate to cut left. Thank you.
DRAGHI: Thank you. On the first question, I think you will have a fuller presentation with -- in December with our macroeconomic projections. We expect from our updates, given the latest figures on inflation, that it will extend for some period of time, as we said, extended and prolonged. And we will be clearer on the length of time of this period in December. But certainly it’s not going to be a short -- short time.
On the second question, we don’t -- I’ve answered this question, actually, on other occasions. If we mean by deflation a self-fulfilling -- a self-fulfilling fall in prices across a very large category of goods and across a very significant number of countries, we don’t see that. We have certainly one country where the fall in prices is more marked than in others, but we have to be careful there at separating the various effects.
Some of it is actually -- is actually welcome, in a sense, because it shows that there is certain relative price adjustments, certain rebalancing across countries. Some of it certainly reflects prices -- and I would say more about that -- prices in various commodities, energy and other commodities, but by and large we don’t see deflation.
What we see is a protracted period, broadly based and protracted period of low inflation. And low inflation -- you remember that the objective of the ECB is to have an inflation rate which is below, but close to 2 percent. And there are many reasons why this was chosen as the objective of the ECB in many years ago. I think it was, what, 12 years ago, in 2001?
DRAGHI: May 2003. So -- and we can go through this in the oncoming questions if you are interested.
STAFF: Eva Taylor, Reuters.
QUESTION: Mr. President, could you give us a little bit of an explanation of why you decided to have an asymmetric corridor now and whether you discussed cutting the deposit rate into negative territory? And my second question is, the LTRO was on the agenda of today’s meeting. Could you give us a flavor of what the debate on the subject was like? Thank you.
DRAGHI: So in the -- the first question, I would say that in the context -- you have to remember that we are in a context of fixed-rate full allotment in all our ECB refinancing operations, so the EONIA fluctuates between the deposit rate and the main refinancing rate, the MRO rate. So the fluctuation range of EONIA is unaffected by the level of the marginal lending rate.
But we wanted to preserve incentive for banks to pursue an active management of their liquidity positions between the two weekly main refinancing operations. So we left the distance between the marginal lending facility rate and the main refinancing rate unchanged. And this explains why we now have a corridor which is asymmetric.
We discussed -- certainly, as part of the discussion, we also discussed the deposit facility rate and, as I said on other occasions, we are technically ready, and it’s part of our artillery. And in a sense, it also answers the previous question, what are we going to do if we see this low rate of inflation? We don’t see it and we don’t think this is going to happen because we see expectations of inflation firmly anchored at 2 percent or less than 2 percent.
So -- but we want to have some instruments in our artillery, and that is one, and certainly the other one is what you mentioned, the LTRO. Actually, we didn’t discuss this at any -- with any significance today, but it’s a -- there is a whole range of instruments that we can mobilitate, activate if needed.
QUESTION: Yes, good afternoon. The -- cutting the interest rates will not particularly help the tightening of liquidity conditions and the scarcity of credit. One of your colleagues mentioned the possibility of stop sterilizing the SMP purchase of bonds and to reduce the minimum reserve. Did you discuss this? Or is this on the table among the instruments that you mentioned?
And about the scarcity of credit, are you worried that the comprehensive assessment that you’re now conducting could contribute to bank deleveraging and so to the lack of credit to the real economy?
DRAGHI: Thank you. So the first question is whether we -- first of all, we believe that this decrease in interest rate is effective, of course, and we are seeing market reactions to this extent. There are also some more technical reasons why this is effective. Clearly, it reduces the volatility of EONIA, because it restricts the corridor.
And so, in terms of liquidity, let’s not forget that we still are outstanding 730 billion of MRO and LTRO outstanding. Also, we shouldn’t forget that many contracts, many contracts are indexed to money market rates. And so all in all, I think this decision -- these decisions today to support lending to firms and households. Let’s not also forget it will support the recovery through lower real interest rates. So there are various, various reasons to believe that both today’s decisions and our forward guidance have been effective.
Now, on the excess liquidity, I know there is a whole drama about this, but, again, I’ve warned you several times not to think in terms of a precise mechanical relation between the excess liquidity size, the size of -- the excess liquidity, and the EONIA.
Let me give you a very interesting piece of evidence. In March 2012, the excess liquidity was 800 billion. And now it’s 185 and has been hardly an upward movement in EONIA, if you compare the two data. So there isn’t a mechanical or stable relation, and there isn’t any threshold value, and we certainly closely monitor this. And I’ve said this many times.
We don’t want to have undue tightening. But we should remember that the excess liquidity is determined by several factors, one of which, the most important, is the degree of fragmentation. And that has been changing. In fact, some would say that the reduction in the excess liquidity is primarily determined by the diminishing, the decrease in fragmentation.
So I think that’s what I feel like saying. Thank you.
Oh, yes, yes, yes. You also asked about the comprehensive assessment, whether this would cause deleveraging. We don’t think so. We don’t think so. We want banks that certainly do the right deleveraging of NPLs and other non-performing assets, but I don’t think this comes as an unexpected market. It was already active in asking for it. And if -- the comprehensive assessment will shed light on the banks’ balance sheets. And that’s what the private sector wants in order to be convinced to put money into this industry.
That’s where the credibility of -- that’s why the credibility of the comprehensive assessment is so important. In the end, when all is said and done, that’s the ultimate objective, namely to have the private sector investing in the banking sector. And I think that’s the main primary objective.
Of course, we want to reach many other objectives with the comprehensive assessment, but the idea of coming out with banks that in order to become stronger and healthier have to be more transparent is really underlying the whole process. Thank you.
STAFF: Claudia (inaudible)
QUESTION: Good afternoon. Why is the prolonged period of low inflation representing a risk if expectations are still so well anchored?
DRAGHI: Yeah. Well, why -- why -- why our, may I say, founding fathers actually wanted to have something below but close to 2 percent, well, there -- there were three reasons. First of all, they very wisely thought about possible measurement errors in the HICP data, and so they wanted to keep a significant cushion between the price behavior and deflation. In other words, you may well have a situation where you think that -- where you think you are at, say, 1 percent inflation and instead it turns out that you are at minus 2 percent. And it’s happened -- fortunately, in other parts of the world, but it’s happened before.
The second reason is that -- and this is very relevant now -- is that the -- they thought about the adjustment within the euro area, their rebalancing of different country members in the euro area. They knew that these countries are very different. And so the possibility of having imbalances was always being looked at and thought.
Now, in order to rebalance these -- this equilibria, countries have to go through a relative price adjustment, in other words, through, I would say, a readjustment of their prices in order -- since they don’t have the exchange rate, they have to readjust their prices.
Now, this readjustment is much harder and difficult if you have zero inflation than it would be if you have two. And that was the second reason. The third reason is that, as we have discovered in many countries, in many other jurisdictions, the effectiveness of monetary policy is reduced -- certainly, the effectiveness of standard measures of monetary policy is greatly reduced as you reach the lower bound of inflation, as you go down to zero.
Finally, there is a third -- a fourth reason why you want a 2 percent inflation, especially in the current stage of a recovery, which is still -- it’s proceeding. It’s proceeding, but it’s still relatively weak. It’s uneven. As I’ve said many times, it’s fragile, and, most importantly, starts from low levels, so the unemployment rate is still very high, incidentally. It looks like -- it looks like it’s stabilizing, but it’s stabilizing at the top.
So it’s very important at this point in time to have lower real interest rates. I think that’s why it’s important to have an inflation rate which is close, below 2 percent.
QUESTION: Yeah, Geoff Cutmore, CNBC. Thanks very much for letting me have the question. What seems to be astonishing about today’s announcement is how unprepared the market generally was for it. And I’ve seen various comments that it was a shock announcement, that it was very aggressive, and it’s clearly taken the market by surprise when you look at the reaction in euro-dollar and some of the equity markets.
So my question really is about the communications strategy currently that you’re pursuing and the fact that you decided to make this announcement today. And I ask you if you could put some texture on this. Do you think that the markets have become overly complacent and doubted the credibility of your will to act? You can clearly see in euro-dollar that people seem to have taken it for granted that there wouldn’t have been a cut now or possibly even in December.
And I saw one market commentator describe you as having a peashooter to deal with the deflationary tanks that were approaching you. Well, it seems to me that you’ve pulled out a bazooka or possibly even an antitank weapon today. Could you put some texture on the communications strategy for us?
DRAGHI: Yeah, I -- in doing so, I think I will abstain about judging markets. This is one of the hardest things, and it’s usually useless, because they go and do what they want, so -- no matter what.
So but I -- I will actually urge all of you to read the introductory statement that I read at the last press conference. And it does say -- it says the Governing Council confirms that it expects the key ECB interest rates to remain at present or lower levels for an extended period of time. Then it says, 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.
Now, in unchanged, it has changed. Since then, it has changed. And it has changed in a variety of ways. First of all, it’s now -- as I was saying before, broadly based over a certain -- certain category of goods. We see that it’s now based on services, energy, processed food, in general, non-energy industrial goods, unprocessed foods. So it’s fairly broad-based.
It’s also changed in the sense that if you look at the annualized -- if I can find them, I’ll even give you the numbers, but -- the annualized figures for inflation -- the quarterly annualized figures for inflation, they do actually go down in September and October. So that’s the other -- that’s a big change.
So, basically, we observed what’s happened, and that’s exactly what our forward guidance was saying. So if it were to change, we do change, in the sense -- I have to remark that the credibility of our forward guidance comes out strengthened out of this decision today.
STAFF: Jean Philippe Lecou (ph) (inaudible)
DRAGHI: I’m trying to find (OFF-MIKE) OK, I’m sorry. Go ahead, yes. Please.
QUESTION: (OFF-MIKE) microphone functions. Yes. The question out of colleague for -- was more focused on the communications strategy. Maybe you ate my words. If you say that today within the Governing Council the question was not so much if to act but when to act, and so you decided to act very - - in a reflex way today. The motive is more to create a kind of surprise and to obtain a more better reaction (inaudible) yes, reaction...
DRAGHI: I see your point. I see your point. And, no, that’s not the reason. The reason why a significant majority of the Governing Council members thought it was time to act was exactly what I said before. Last month, we said if the protracted -- if this outlook of inflation, it says, is unchanged, overall subdued outlook for inflation extending into the medium term, that’s changed. So since the last time I read this statement, there have been changes. And these changes have been judged to be of significance, both category of goods-wise and length -- time of length-wise.
And even -- so if we can -- we can go in further detail, of course, into further detail about explaining this, but these two things are important. I’m sorry. You had another question?
QUESTION: (OFF-MIKE) because on the announcement today, it is written that the rate cut will only enter into function on the 13th of November and not now, immediately. What is the proposal on this?
DRAGHI: Now I -- you are catching me unprepared on this. And...
DRAGHI: Please, please.
(UNKNOWN): No, that’s the date of the next operation, main refinancing operation. So it’s coming.
DRAGHI: Thank you.
STAFF: Suzanne Lynch, Irish Times.
QUESTION: Good afternoon. I just have a question as regards Ireland. It’s preparing to become the first eurozone country to finish a bailout program. The Irish government has said that it may not seek a precautionary credit line. Commissioner Olli Rehn has said that it’s very possible also that Ireland could exit without a precautionary credit line and (inaudible) the commission would be prepared to back this if Dublin decides to go alone. Would the ECB be comfortable with Ireland exiting its program without a precautionary credit line of some kind? And, secondly, do you think a decision has to be made by December the 15th on this?
DRAGHI: Well, first of all, I think the Irish government has to be congratulated for the progress and overall the success of its action over the last -- over the few -- over the last few years. The Irish program remained on track. And progress was there in many areas. Certainly, more action is needed on certain areas, especially the banking sector.
The decision on whether a program is needed is entirely in the hands of the Irish government, so that’s up to them to ask for the program. The ECB, and in general the other institutions, the IMF and the commission, would say that certainly it would be useful to have a precautionary program in place, but it’s also true that the success has been quite significant. So it’s up to the Irish authorities decide what they want to do, and we certainly don’t want to interfere.
STAFF: Gentleman from Irish Television?
QUESTION: Sean Wheeland (ph) from Irish Television. Mr. Draghi, relating to the comprehensive assessment of the banks -- and you mentioned there’s more to be done on the Irish banking situation -- on Tuesday, Olli Rehn said that you have an incentive to avoid, as he put it, crap on your hands in terms of these assessments, looking back at what happened in 2010 in Ireland, in Spain, and in Germany. Does this mean that you’re inclined now in this forthcoming assessment to go harder on those three countries’ banks and their regulators?
DRAGHI: Why? I mean, why is this? I think both in -- in all these countries, to a different degree, of course, significant progress has taken place. The rules of the AQR and the stress tests are going to be the same for everybody. We don’t plan any difference across countries.
The -- let me give you, in a sense, the way that -- I mean, the way in which one would describe a successful, comprehensive assessment, especially a successful AQR. What we need to put in place is a strong routinary process, and that’s -- if we are able to do that, we’ll be successful. And a strong routinary process doesn’t make differences, exceptions. So I think that’s the most important thing, and so we don’t foresee any exception for that. Thank you.
STAFF: Jack Ewing, IHT.
QUESTION: Thank you, Jack Ewing, International New York Times. Mr. Draghi, two questions. First of all, you said that fragmentation has gone down in the eurozone, but how much do you think that this rate cut will help credit flow to some of the countries that need it most? Do you see it reducing fragmentation further? And if so, perhaps you can explain the mechanism where that will happen.
And the second thing is, how much is the Governing Council concerned about the level of the euro against the dollar? And did that play any role in the discussion today? Thank you.
DRAGHI: Thank you. I can answer to the second question. As I’ve said many times, the exchange rate is not a policy target. It’s important for price stability and growth. And certainly it didn’t play any role in today’s discussion. And as far as I can remember, it was not mentioned. So that’s the first answer. But as I said, it remains important for price -- for our price objectives, our stability objectives, and for growth.
On fragmentation, fragmentation has been steadily declining from the July last year to about three, four months ago, all indices, bank indices, both on -- mostly on the funding side, but also TARGET2 and other indices would show that. After that, while we continue to observe improvements in market performance across the board, both interest rates and volatility and all, we’re actually observing that this improvement has stopped.
So fragmentation is basically a little better than it was four months ago, but rather than observing dramatic improvements by month by month, we are observing by and large a static situation. So we are also observing many favorable facts here. For example, interbank lending from the non-stressed countries to some stressed countries has improved, which is a major, major piece of news.
So when we look at the overall areas and the aggregate numbers, we have to say that now we are about the same situation in which we were three months ago. So I think this change in interest rates now will certainly reduce the fragmentation, is something that will help. Banks that are not necessarily the -- also -- but healthy banks that are located in stressed parts of the euro area to have an easier access to the interbank market. So in this sense, it is an instrument for reducing fragmentation.
We are also confident that, as the overall economy situation improves, fragmentation will also decrease, because fragmentation -- let’s not forget -- was started with a very high risk perception, both by the non-core -- by the core countries towards distressed countries for a variety of reasons, but also because of the very same banks in distressed countries had vis-a-vis their -- the private sector working in those countries. And it had much to do with the recession.
So as we come out of that, and we see this, we see the amount of -- for example, we see the amount of what we call the three uncertainties, the political uncertainty, the economic uncertainty, the financial uncertainty, we see that these three categories broadly speaking in the euro area are going down, are decreasing significantly. So we would expect fragmentation, as well, will also decrease. Thank you.
QUESTION: Mr. Draghi, coming back to the issue of market expectations, you mentioned that it’s your feeling that the forward guidance has been strengthened by this decision. On the other hand, one could argue that markets were taken on the wrong foot by today’s decision and you were not successful in guiding expectations as regards your reaction function. I mean, you mention it quite often and almost any meeting you mention it, but on the other hand, still the markets are not quite clear about your reaction function apparently.
DRAGHI: Well, I’m not sure, because the money market structure (ph) has reacted very well. And so I guess our evidence is that actually our forward guidance has been successful. As soon as we issued the forward guidance, we see that the post-May Governing Council decision, the curve flattened and then -- of course, there are other facts that influence money market rates. We don’t live in an island or in another planet.
At the same time, we had several announcements concerning, as you might remember, the tapering or not tapering monetary policy in -- in the largest -- in the largest financial center in the world. We had announcement also in other jurisdictions, as well, and it would be unthinkable that these announcements would not have produced any effect on our own money market rates.
But by and large, as we’ve seen -- we’ve seen a kind of mean reversion. We’ve seen a return of money market rates to levels that were admittedly higher than the ones that were produced in the aftermath of the statement of forward guidance, but certainly below the rates that these announcements had produced.
So what we are -- what we are pretty sure is that the forward guidance has been effective in reducing volatility of the money market rates. It’s also been effective in reducing the sensitivity of money market rates to news that would not warrant any change in fundamentals. In other words, the sensitivity of our money market rates to news coming from the rest of the world, like the ones I’ve mentioned before, we’re pretty sure of that. And we’re also pretty sure that the forward guidance has reduced the sensitivity to -- the excessive sensitivity to news that have to do with our fundamentals.
So that is what we could say, but also I would say that we also -- as I said many times -- we’re somewhat successful also in controlling the level of interest rates, and of recent, the term structures actually flattened. Now, of course, it’s very, very difficult to measure exactly all these effects because there are many other things that are happening at the same time, so you’re never sure whether you’re actually -- it’s your own forward guidance that’s the determining factor or are other factors.
STAFF: Gentleman over here?
QUESTION: (inaudible) from Digipress (ph), Japanese news agency. Let me go back to the topic of deflation or lower inflation. Some experts are saying that now eurozone is facing the risk of deflation, which is similar to Japan’s experience. And of course, Japan has experienced prolonged period of deflation. And some experts are saying that the reason of this deflation is that companies put priority on the adjustment of balance sheet, and they didn’t borrow money from banks, and they didn’t make investments, and this led to deflation. Do you think that the situation of eurozone is now similar to Japan? Thank you.
DRAGHI: Thank you. No, I don’t think it is similar to Japan. I don’t think so. Some -- we have to go back to 2009 and think from -- think since then what things should have happened. Well, it’s quite clear that in different degrees across member countries, both the public sector and the private sectors and the banking sector were all overleveraged. Overleveraged meant to have too much debt. And all the quality of their assets was not -- was not good. So they had to do deleveraging.
We should not forget that there were bubbles in the construction sector in Spain, but more generally it was a situation that in some countries -- not all, not everywhere, but in some countries saw a very high degree of debt that had to be reduced or it had to be reduced the debt to assets or, in the case of the public sector, it was both deficits and debts that had to go down.
So you had a period of time when most countries actually ran a fiscal consolidation program, and on the private-sector side, you had a significant deleveraging both by corporations and by banks. And this, of course, combined with some other changes in the euro area, especially changes in the risk perception that had taken place in 2011. You certainly remember the stress tests, the mark-to-market valuations of debt, the absence of a backstop for a long time, the PSI. All these things have changed the risk perception with respect to sovereign debt.
So all these situations created -- are at the root of the recession. So now we are coming out of that. We are actually - - if you look from distance at the eurozone, you see that the fundamentals in this area are probably the strongest in the world. This is a zone that has the lowest budget deficit in the world. Our primary -- our deficit, public deficit, aggregate public deficit is actually a small surplus. We have a small primary surplus of 0.7 percent compared with -- I think it’s -- what is it, 6 percent or 7 percent deficit in U.S., 6 percent, I think, and 8 percent in Japan. It’s the zone -- it’s the area with the highest current account surplus. And it’s also the area, as we said before, with one of the lowest, if not the lowest inflation rate.
Now, this doesn’t mean automatically -- doesn’t translate automatically into a galloping recovery. But actually, it gives you the fundamentals on which you can pursue -- you can pursue the right economic policies. Structural reforms are the condition necessary and sufficient for this to happen. In absence of that, unfortunately, we should -- we are going to stay here for quite a long time.
STAFF: Claudio Perez (ph), El Pais?
QUESTION: Yeah, this is Claudio Perez (ph) from the Spanish daily El Pais. Mr. President, you have talked about (inaudible) exercise without exceptions. In this sense, do you expect some exceptions on the application of the stated rules by European Commission if a number of European banks need precautionary capital after the stress tests?
DRAGHI: We had -- now, you’re referring to banks that are -- that have been found viable and with regulatory capital which is above the minimum after the AQR, so the AQR has -- is a shot, is an instant shot, and that would -- this would photograph a situation where these banks would actually have -- be having capital which is above the regulatory minimum.
Then we have the stress tests. And the situation that I have described in my letter was, what do we do in that situation if a bank which is OK statically turns out to be wanting of capital, in need of capital under stress? Would you proceed to bailing creditors of this bank right away? Clearly, the situation is difficult, because if you do so, then the creditors will run away immediately and the bank would fail, even though statically is solvent and is viable.
So I think this is a genuine problem. And since then, we have discussed -- we’ve discussed -- and we have statements, by the way, by the -- by the commissioner -- by the Vice President Almunia to this extent. Both the ECB and the commission are working on this. So I am quite confident that by the time we will do the stress tests, there will be in place a way to cope with this problem. Thank you.
STAFF: Mariqua De Fao (ph), Correa (ph).
QUESTION: Thank you. We have less and less questions. But referring to May 2003, you -- if I guess well, you wanted to say something to a possible strategy overhauling which was actually due after five years, or is it in your plans? Many people are talking about that. Many ECB watchers are saying that the strategy overhaul could be needed for inflation or for adding a second column -- another column, for instance, of -- like the role in financial stability of the ECB into the strategy or what you think of this.
DRAGHI: No, I don’t think we had any discussion on this point. I think we are -- we are now in this situation, I’m not sure -- I mean, are you thinking about an extension of our mandate or -- it wouldn’t be up to us to decide what our mandate is. We perfectly happy with what we have today. And so it’s up to the legislators to decide the mandate of the ECB.
We have to, in a sense, apply the mandate, and that’s what we are doing, by the way, with the decision today. We have acted fully in line with our mandate of maintaining price stability with an objective to have an inflation rate close, but below 2 percent. That’s not to be forgotten.
QUESTION: I was referring to the overhauling of the strategy, which was due at the time of Mr. Ising (ph) and Mr. Deusenberg (ph) back then and fixed the 2 percent objective, which was not there before. But, I mean (OFF-MIKE)
DRAGHI: No, I’m sorry. I think you have a longer memory. Maybe Vitor has -- please, Vitor.
CONSTANCIO: I was a member of the Governing Council then, yes.
DRAGHI: That’s right.
CONSTANCIO: No, the 2 percent were there from the beginning. The difference was that in the beginning it was defined that the definition of price stability was to have inflation below 2 percent without any other consideration. So there was many discussions in the media and in the academic circles that that definition meant that if inflation was minus 1 percent, it was OK, because it was below 2 percent. So in May 2003, we clarified that that was not the case, so it was below 2 percent, but close to 2 percent, for the reasons that the president stated in one of his answers.
We -- in -- in May 2003, we changed other small things in the framework. For instance, if you recall in the presentations of the press conferences, monetary analysis came before economic analysis, and it was reversed in that decision of May 2003. It was also clarified that when looking to monetary aggregates, we were looking to a set of aggregates and not just M3.
Also, we changed the way the reference value was dealt with before, until May 2003, and it was then clarified also that the monetary analysis was more directed to medium-term considerations as a way of cross-checking what was the result of the economic analysis.
So there were four or five points of clarification, of fine-tuning of the framework. And the main change was nevertheless the definition of the objective, which before had not this idea of below 2 percent, but close to 2 percent.
STAFF: And the last question...
CONSTANCIO: But it was done.
STAFF: Last question.
QUESTION: Ken Louie Patterson (ph) from Johanns Posten (ph) in Denmark. When you said in your introductory statement that you expect a prolonged period of low inflation followed by an uptick, the October numbers came out more negatively than expected. So what’s your rationale for believing that there won’t be more negative news out there to pull figures even lower and going into deflation, because you’ve continued to say there is a downside risk to the economy? Thank you.
DRAGHI: I think I did say this in the introductory statement. We believe that there are -- we believe -- well, basically, the -- we will be clearer in December when we have our macro projections, but it’s a combination of energy prices and other prices, the weakness of the economy for some time.
So this gives us the -- the evidence to say that it’s going to be -- it’s going to be there for a protracted period of time. And it’s also true that, as the recovery will gain momentum, we also see that the possibility of a return to our inflation expectations levels.
So we are -- we see expectations of inflation firmly anchored at 2 percent. We know that at some point in time, inflation -- actual inflation will drive back. We now see that this point of time is not next month. And that’s what I tried to convey. We will be clearer on the factors behind our subdued -- our outlook of a subdued inflation for a protracted period of time in December.
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