MARIO DRAGHI, PRESIDENT, EUROPEAN CENTRAL BANK: Ladies and gentlemen, the vice president and I are very pleased to welcome you to our press conference. We’ll now report on the outcome of today’s meeting of the General Council - of the Governing Council.
Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. Incoming information confirms that the moderate recovery of the euro area economy is proceeding in line with our previous assessment.
At the same time, underlying price pressures in the euro area remain weak, and monetary and credit dynamics are subdued. Inflation expectations for the euro area over the medium term to long term continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2 percent.
As stated previously, we are now experiencing a prolonged period of low inflation, which will be followed by a gradual upward movement towards inflation rates below, but close to, 2 percent later on.
Regarding the medium-term outlook for prices and growth, further information and analysis will become available in early March. Recent evidence fully confirms our decision to maintain an accommodative stance of monetary policy for as long as necessary, which will assist the gradual economic recovery in the euro area. We firmly reiterate our forward guidance.
We continue to expect the key ECB interest rates to remain at present or lower levels for an extended period of time. This expectation is 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.
With regard to recent monetary - with recent money market volatility and its potential impact on our monetary policy stance, we are monitoring developments closely and are ready to consider all available instruments. Overall, we remain firmly determined to maintain the high degree of monetary accommodation and to take further decisive action if required.
Let me now explain our assessment in greater detail, starting with the economic analysis. Following two quarters of positive real GDP growth, developments in recent data and surveys overall suggest that the moderate recovery continued in the last quarter of 2013. Looking ahead, our previous assessment of economic growth has been confirmed. Output in the euro area is expected to recover at a slow pace.
In particular, some improvement in domestic demand should materialize, supported by the accommodative monetary policy stance, improving financing conditions, and the progress made in fiscal consolidation and structural reforms. In addition, real incomes are supported by lower energy price inflation.
Economic activity is also expected to benefit from a gradual strengthening of demand for euro area exports. At the same time, although unemployment in the euro area is stabilizing, it remains high, and the necessary balance sheet adjustments in the public and the private sector will continue to weigh on the pace of the economic recovery.
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, notably in the emerging market economies, may have the potential to negatively affect economic conditions. Other downside risks include weaker-than-expected domestic demand and export growth and slow or insufficient implementation of structural reforms in the euro area countries.
According to Eurostat’s flash estimate, euro area annual HICP inflation was 0.7 percent in January 2014, after 0.8 percent in December. This decline was mainly due to energy price developments. At the same time, the inflation rate in January 2014 was lower than generally expected.
On the basis of current information and prevailing futures price for energy, annual HICP inflation rates are expected to remain at around current levels in the coming months. Over the medium term, underlying price pressures in the euro area are expected to remain subdued. 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.
Both upside and downside risks to the outlook for price developments remain limited, and they continue to be broadly balanced over the medium term.
Turning to the monetary analysis, data for December 2013 confirm the assessment of subdued underlying growth in broad money, M3, and credit. Annual growth in M3 moderated to 1.0 percent in December, from 1.5 percent in November. Deposit outflows in December mirrored the strong sales of government and private-sector securities by euro area MFIs, which, in part, could be related to adjustments by banks in anticipation of the ECB’s comprehensive assessment of banks’ balance sheets.
These developments also affected annual growth in M1, which moderated to 5.8 percent in December, but remained strong. As in previous months, the main factor supporting annual M3 growth was an increase in the MFI net external asset position, which continued to reflect the increased interest of international investors in euro area assets.
The annual rate of change of loans to the private sector continued to contract. The annual growth rate of loans to households stood at 0.3 percent in December, broadly unchanged since the beginning of 2013. The annual rate of change of loans to non-financial corporations was minus 2.9 percent in December, after minus 3.1 percent in November.
The January 2014 bank lending survey provides indications of some further stabilization in credit conditions for firms and households and a smaller net decline in loan demand by enterprises. Overall, weak loan dynamics for nonfinancial corporations continue to reflect their lagged relationship with the business cycle, credit risk, and the ongoing adjustment of financial and nonfinancial sector balance sheets.
Since the summer of 2012, substantial progress has been made in improving the funding conditions 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. This is the objective of the ECB’s comprehensive assessment, while the timely implementation of additional steps to establish a banking union will further help to restore confidence in the financial system.
To sum up, the economic analysis confirms our expectation of 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 the picture of subdued underlying price pressures in the euro area over the medium term.
As regards fiscal policies, euro area countries should not unravel past consolidation efforts and should put high government debt on a downward trajectory over the medium term. Fiscal strategies should be in line with the Stability and Growth Pact and should ensure a growth-friendly composition of consolidation, which combines improving the quality and efficiency of public services with minimizing distortionary effects of taxation.
When accompanied by the decisive implementation of structural reforms, these strategies will further support the still-fragile economic recovery. Governments must, therefore, continue with product and labor market reforms. These reforms will help to enhance the euro area’s growth potential and reduce the high unemployment rates in many countries.
We are now at your disposal for questions.
STAFF: Geoff Cutmore?
QUESTION: Thank you very much. I note the position that you’ve stated, that you continue to monitor the emerging market volatility. I think we’d be interested to know what in your assessment is the cause of this current phase of emerging market FX volatility, what measures you might think, then, are appropriate for the ECB to bring to bear to deal with any threat to euro area export markets as a result of an ongoing round of this FX volatility. Thank you.
DRAGHI: Thank you. We - the discussion today focused - was a broad discussion. It focused on the contingencies that may suggest policy action by the ECB. And it specifically was focused on what could be the downside risks and what could make the downside risks as we still see materialize.
So the reasons for this situation in the emerging market economies are quite complex and are outside the control of - certainly of the euro area policy authorities or certainly outside the monetary policy. So we are - so far, we are witnessing this development. So far, I should say that the euro area economy and euro area financial markets have shown a good deal of resilience with respect to these developments. And in a sense, much more resilience than it was the case almost a year ago, well, eight, nine months ago.
Part of this result is due to the fact that short-term volatility in interest rates was not transmitted to an equally long-term volatility along the yield curve. In other words, the one-year onward interest rates remain anchored, no matter what the short-term volatility was. And this is something that should be appreciated as one of the positive outcomes of our forward guidance.
So basically, we watch, we monitor this volatility, but this volatility happens within a range that we set ourselves, and it’s not being transmitted, so far, at least to the long term. And we see that this is the outcome of our forward guidance, really.
STAFF: Stefan Riecher, Bloomberg.
QUESTION: Good afternoon, Mr. President. I noticed that you said that the general inflation numbers came in lower than expected. So I’m wondering - let’s assume that next month’s inflation number comes in at the same level in the general inflation and this would be lower than expected again. Would that be reason enough for the ECB to act and cut interest rates?
And second question with regards to ending the sterilization of bond purchases under the SMP, has that been discussed? And under what circumstances would you end sterilizing? Thank you.
DRAGHI: OK. I will first answer the second question. It’s not been - it’s one of the many instruments that we are looking at. It’s not been discussed. We had a broad discussion about all the instruments, but let me say that the committees - the relevant committees of the ECB have been studying all these measures so that, by the time - and if we are to decide to activate the measures, we are ready to go.
Now, what instruments we will decide to activate - as I think I’ve said last time - will depend on the contingencies that we will have to face. And the two contingencies that I mentioned are, really, an unwanted tightening of the monetary policy that comes from the short-term markets and gets propagated to the long term or - and a worsening of the medium-term outlook for inflation.
And so now I come to the second - to your first question, really, which is, what does it mean, a worsening of the medium-term outlook for inflation? Well, we have to ask ourselves, what are the reasons for this - such an event? By the way, incidentally, we have acted in November already, so we take an action, and we are now witnessing some of the, I would say, responses of both financial markets and the real economy to that action. Of course, it’s going to take a relatively long time for interest rates to propagate their action to the economy.
But let’s ask ourselves what are the causes for such - for such behavior of inflation. First of all - first of all, we have to dispense once more with the question, is there a deflation? And the answer is no. There’s certainly going to be a subdued inflation, a low inflation for an extended, protracted period of time, but no deflation. The inflationary expectations continue to remain anchored, firmly anchored, and as I think I’ve dealt with this on other occasions, we don’t see much of a similarity with what happened in Japan in the ’90s, early 2000s.
Consider that - if we look at the - what is the definition of deflation, that is a broad-based fall in price, self-feeding onto itself, on - happening in a variety of countries. And we don’t - we don’t see that. Just to give you another piece of information, during the deflation time in Japan, 60 percent or over 60 percent of the all commodities was experiencing a decline in prices. The same percentages for the euro area average are much lower.
Also, we should take some perspective with respect to these figures. I mean, if we look - if we look at low inflation, inflation rates in euro area, now, they are not much, much lower than what they have - what there are in the United States, with a recovery which is way more advanced than it is in - in the euro area. I think that’s the one perspective.
The second perspective is, if we look back to the other - to what was the inflation, following the last two - the previous two financial crises, previous to Lehman, we see that inflation was about the same following the Asian crisis at the end of the ’90s and following the 2009 crisis, Lehman crisis.
So this gives some perspective. I’m not saying this to ignore the risks of having low inflation for a protracted period of time. This is a risk by itself, because it’s quite clear that the longer is the time that - first of all, adjustment with low inflation is more difficult. And, second, the very fact of having a low inflation for a protracted period of time is a risk by itself. So it warrants close attention by the ECB.
If we - if we look at, however, the causes of this low inflation, we see that primarily this low inflation is driven by food and energy prices. The second cause might be weak demand, high unemployment, weak demand. Now, as we are seeing over the last few months, this is a modest recovery that it somewhat shows more encouraging signs and - so we see that the demand side is getting stronger, not weaker.
As I said many times, we’ve got to be extremely cautious with this recovery, because it’s still fragile and it’s still uneven. And it really starts from low levels of activity. But so far, it’s proceeding.
Then we also asked ourselves whether there is any evidence of people postponing expenditure plans, which is - which is a fact that you would watch in a deflationary environment. And we haven’t - we haven’t got evidence of this at this point in time.
Amongst various things, we see that consumers’ confidence is actually rising, and savings rates have been stable at least until the third quarter of 2013, when we have the data. So it’s just - but it’s a complex picture, because on the other side of the scale, we see, for instance, that the increases in value-added tax rates have not been passed through in Italy, and so far not in France. And we saw that the figures for retail sales over Christmastime were not encouraging.
So this shows that even though we have a gradual signs of recovery, the pricing power by the firms is still very weak or is still weak. Then we move to supply, and when we look at supply, we have to - we observe that much of the adjustment, much of the decline in inflation, in core inflation, actually comes from the four program countries, Spain, Ireland, Portugal, and Greece.
So all in all, this would signal more a relative price adjustment than any deflation phenomenon taking place. So I tried to give you a sense of how complex is the picture, and which would explain why before taking any decision today we would wait, we would wait. Thank you.
STAFF: Brian Blackstone?
QUESTION: Brian Blackstone with the Wall Street Journal. Back to inflation, even after your lengthy explanation, you mentioned taking more time, you mentioned in the introductory statement further information and analysis being available in early March, is that - is that an indication that may be the - you’re postponing action rather than just -
DRAGHI: I’m sorry?
QUESTION: - that you’re postponing additional stimulus, rather than just deciding not to do it today? And what kinds of things should people who follow the ECB be looking at to see if your medium-term outlook on inflation is changing?
And my second question is on quantitative easing and some of the comments that you made in Davos. You mentioned the prohibition against monetary financing and that the U.S. - the ECB doesn’t have bond purchase plans, like the Fed, the Bank of Japan, and the Bank of England. Why is buying government bonds for monetary policy purposes monetary financing? Thank you.
DRAGHI: Yeah. Well, on the - the reason - in a sense, the reason for today’s decision, not to - not to act is - has really to do with the complexity of the situation that I’ve just described and the need to acquire more information.
In this sense, today’s instance is different from what we had in November. Now, in what sense it’s different? Well, there is one thing. First of all, the macroeconomic projections by the staff, which will be coming out in early March, at our monetary policy meeting in March, for the first time will contain forecasts for 2016. And that’s a very significant change in our analysis, significant change in information set that we use for our analysis.
The second - the second factor that led us to sort of reflect is that, when we look at monetary and credit developments by year end, which, as I said, look subdued, although they are stabilizing especially the credit flows, I would - if there is a question about money, I will answer that, because these figures have to be interpreted to a certain degree of care this time.
Anyway, these figures for credit flows are - we believe, and we think we have evidence - that are influenced by - affected by banks’ behavior in view of the asset quality review performed by the ECB in the course of 2014, because the data upon which this asset quality review is going to be performed are data of year-end 2013. So it will not - one would not rule out a sort of behavior by the banks that would like to present their best data by the end of 2013, which means that this is going to affect credit flows, which means that we may have different figures in the next - in the next coming - in the coming weeks about that.
The third reason is what we briefly touched upon before, which is - are the developments in the emerging market economies. And there the need is to see - to look through this recent high volatility in these economies in all parameters of these economies and see whether this is a temporary phenomenon, or is it something that is going to stay with us for some time? Clearly, the consequences on the world growth and the world development are different. And also, how broad is this weakness in emerging market economies isn’t clear yet, so we will need - we’ll need further analysis.
Finally, there’s another piece of information which we don’t have yet and what’s going to come out probably next week. I just - I can’t remember now exactly when, and that’s the number for the last quarter of 2013 GDP. And that is also something - but having said that, we are - we’re really - as I said several times, we are willing and we are ready to act. We stand ready to act.
We confirmed our forward guidance, so interest rates will stay at the present or lower levels for a protracted period - for an extended period of time. So that’s what I - what I would answer to that.
About my - what I said in Davos, let me just - yeah. Let me say one thing. First of all, we see that lending is stabilizing, but remains weak. So things may get better, but they may stay where they are or even get worse. So the question is, what are we going to do about that?
First of all, we see that not all lending is actually doing poorly. If we look at corporate bond issuance, basically, lending coming from capital markets, that is not doing poorly. So it’s the bank-lending channel that we have to concentrate on. Incidentally, if you take the credit flows figures of the last - of the last two months, and which are - which are negative, but not as negative as before, in the sense it’s stabilizing the - and you add to this the corporate bond issuance by the known financial companies, by the corporates, you see that you are not exactly at zero, but you are very close to a level of zero change in credit flows.
So, in other words, the corporate bond issuance almost compensate the fall in credit flows between the last - in the last two months of the year. So I’m saying this, because we’ve got to focus on the bank lending channel.
Now, also, when we look at - now, we have a piece of information to assess - which would be helpful to assess the conditions of the banks at this point in time. We had a bank-lending survey. The bank-lending survey, amongst other things, assesses the - how the credit standards change in time depending on different sorts of effects, on different sorts of factors.
And - so one factor we look at is, is risk perception by the lenders, by the banks. And the fairly interesting thing is that usually when risk perception - risk perception, we look at what is the effect of a certain risk perception upon lending. And we see that now the effect of risk perception on bank lending in the euro area is by and large at the same level as it was in 2010 and even earlier, even pre-crisis levels.
So this doesn’t mean that risk perception is disappeared. Risk perception is there, but its effect on tightening has considerably - is considerably less than it was before. So all this shows that there is a - not only that there is greater confidence in the banks, in the lending process, because we said that really confidence increased since July 2012, but also that this confidence is translating itself into a - sort of a better lending condition. That’s another factor that we got to focus on it.
Also, we should also say - spend a word on what’s the effect of AQR on lending. It’s pretty clear that, in view of also what I just said, banks - in view of the AQR - had made some deleveraging, also in some circumstances, significant deleveraging. And - so the short-term consequences of the AQR is that banks have to clean up their balance sheets. They know that we will shed on what is in their balance sheets, so they want to be presenting balance sheets that are clean, and this has a negative effect on credit.
But in the medium, long term, which is the place - which is now - which is now, because the data are 2013, to the AQR will be positive for lending, because it will increase the confidence in the banking system, it will reopen capital markets for banks, as we are already seeing, and it will suggest to take what supervisors call prompt, corrective action, namely raising capital standards, provisioning, and so on.
So - and we are already seeing this, by the way, and we are welcoming this action that takes place even ahead of our AQR. So all this means that, in not a long time, we’ll have a resilient - more resilient banking sector capable of lending more than you would if the AQR had not been there, because we tend to forget that basically concealing the evidence of the banks’ balance sheets, preserving their opaqueness doesn’t help lending, in fact, hurts lending.
So that’s the other factor. And, finally, is what I said - what I hinted at in Davos, ABS. We think that a revitalization of a certain type of ABS, a so-called plain vanilla ABS, capable of packaging together loans, bank loans, capable of being rated, priced and traded would be a very important instrument for revitalizing credit flows and for our own monetary policy.
Incidentally, our own monetary policy is also going to benefit from the AQR, because if the bank-lending channel works, we will see interest rates translating themselves into lower lending rates, which is - yes, I think it’s - I’ve answered your point. It’s just too long.
STAFF: Johanna Treeck, please.
QUESTION: Johanna Treeck, Market News. Let me try and rephrase that question. Do you have any concerns at all about the legality of quantitative easing via government bonds in the euro zone? And the second question is, on the ABS, I mean, you’ve - I mean, it’s not the first time you’ve mentioned this in Davos. I just wonder, what timeframe are you speaking about? How quickly can we create such a market? Is this something that could happen during the course of this year? Or would it take five years? And perhaps, just on your debate, again, was any of the Governing Council members pushing for a rate cut already this month? Thank you very much.
DRAGHI: I’ll answer first the last question. As I said, we - there was a broad discussion where all instruments of monetary policies were not examined, really, but just talked about. But most - if not all the discussion was focused on examining the additional need for information and the uncertainty that is the key - I think I would say the key substance of the discussion the Governing Council had.
Your first question. What I said on and on, and I continued saying that, that in our - in our pursuit of our mandate of maintaining price stability, all allow - all the instruments that are allowed by the treaty are eligible, eligible. So there is no issue of legality. And at the same time, the treaty forbids monetary financing, so we know what is eligible and what is not eligible.
But all instruments - so I focused on ABS, on private-sector assets, because we have to focus on the bank-lending channel, but this doesn’t mean that other assets are not eligible, provided this doesn’t violate the monetary financing provision. If I’m not mistaken, it’s Article 123, not hard to remember.
DRAGHI: So I will - so that’s - but the key thing is that it’s in order to pursue our mandate of maintaining price stability. I think we have to keep this in mind. Thank you.
STAFF: Suzanne Lynch?
QUESTION: Good afternoon.
QUESTION: Suzanne Lynch from the Irish Times. Just a year ago, the Irish government engaged in an arrangement whereby promissory notes that were used to recapitalize a financial institution were replaced by long-term bonds. At the time, the ECB took note of this, but said it would have to review it to see if it was in compliance with monetary financing rules.
Two questions. Number one, have you or when will you discuss this? And, number two, what kind of demands could you make from the Irish Central Bank if it’s found that these - that this arrangement was, indeed, in breach of Article 123?
DRAGHI: Well, the second question I’ll answer immediately. We will see. So we don’t know in advance. We have to see what we find out.
And concerning your first question is, we are collecting all the necessary information. And the assessment of the Governing Council will be known in due time after the completion of this monitoring exercise. Thank you.
STAFF: Mark Schroers, Boersen-Zeitung.
QUESTION: Mark Schroers with Boersen-Zeitung. Thank you. I have two questions. The first one is also on inflation. You said that the inflation figures in January have been lower than expected also for the ECB. I guess this will reinforce speculation that you have to revise down your March - the 2014 projections in March. A lot of people say that this could be a trigger - or this would be a trigger for additional monetary easing, but on the other hand you said that we don’t have to look only at the figures, but also on the reasons for low inflation. Does this mean that even if you have to revise them down, this is not automatically a trigger for a further rate cut or something similar?
And the second one is a more general one. You stressed in the past several times the need for clear communication, and you also introduced the forward guidance to be more transparent. But if you look at the markets before today’s meeting, there was a higher uncertainty how you would react to the latest developments and what you would decide. Does this mean your communication strategy is failing? Or is it just because you cannot give more certainty if you yourself are uncertain? Thank you.
DRAGHI: Thank you. If you - if you define by uncertainty or poor communication the fact that we don’t announce cuts by the date and the time two or three years in advance, yes, our communication is poor. We don’t do it.
Our duty is to give the markets not what you are - what you seem to be hinting, but give the clearest explanation of what our reaction function is. And I think - well, of course, I’m a biased observer, but I think we have improved this communication. I think markets understand our reaction function better than certainly they did a year ago or two years ago.
And this is a constant improvement, really. We’ve introduced several changes in our communication. In the press conference - and now we come to the firsts question - as you can see, I gave you a fairly complete and complex picture of what we look at in order to decide about further action following a inflation rate which is going to stay lower for a protracted period of time.
It’s - so I think that’s - what I said before in these long answers is enough to construct a fairly accurate, I would say, reaction function, so much so that you ask that question. Thank you.
STAFF: Reuters (inaudible)
QUESTION: (inaudible) Reuters. Mr. Draghi, two questions. First, to come back to the emerging markets, later this month, there’s going to be a G-20 meeting. Would you support coordinated action to - basically to try to help them, the turmoil end?
And my second question, to come back to the interest rates and instruments, why - what - you say you are seeing a very long - or a long period of low inflation. What instrument would be the best to counter that? And why won’t you just cut rates, if you’re below target anyway?
DRAGHI: The response to the second question is, we want to see clearly through the present uncertainty. When I say that we foresee a low inflation rate for a protracted period of time, it means subject to the information we have now. That’s why it’s so important to analyze the information ahead of taking decisions which will have their effect for a protracted period of time.
Because as we know especially changes in interest rates take time to affect the economy. We think that in - I would say in the last two years, about a year-and-a-half since the market stabilized, the time that it takes for changes in interest rates to affect the real economy has gone down. In other words, the effectiveness of our monetary policy has improved, has increased.
But certainly we want to see exactly what the oncoming information will suggest in terms of causes, in terms of perspectives, in terms of length of this phenomenon. But any price projection, any inflation projection we make is obviously subject to the information or conditional to the information we have up to that time, and so any action we take, any decision we take.
On your first question, there have been calls for greater coordination in monetary policy following the spillovers that monetary policy decisions in one - not really from us - but in one important monetary policy jurisdiction had on the rest of the world.
The - each - let me make a general point here. Each monetary policy authority, each central bank has their own specific institutional set-up. The mandate - so the priority is always to comply with the mandate, which in our case, is to maintain price stability.
So when you - when you look at closely at this, you see that coordination in what this term implies in terms of, really, not taking - well, strict coordination might imply that one authority, one monetary policy, one central bank takes a decision which may not be what the authority would have taken if there were no coordination.
And that’s where this strict coordination becomes difficult, because, first and foremost, we all had to comply with our mandate. And mandates are decided by the - our legislators, national legislators.
At the same time, I think that exchange of information, discussions, can - are extremely useful. And there - we have plenty of opportunities to carry out these exchanges in the G-20, as you said, in the BIS forum, in the IMF, and many other fora. And we can certainly - if we think that’s not enough, we can certainly improve on that. Thank you.
QUESTION: Thank you (inaudible) Nikkei (inaudible) Mr. Draghi, I have a question and a follow-up (inaudible) Indian Central Bank’s governor, Mr. Rajan, has said that - or criticized about selfish economic policies by advanced economies and the international monetary cooperation has broken down. It’s a quote. Do you agree - share this idea? This is a first question.
And second one is, you have said that there’s a difference between the experience in Japan about deflation and the current situation in Europe. But we are living totally different world since the ’90s and 2000s (inaudible) has said that deflationary pressure is common problem among the advanced economies. You have to - you may have to have a fresh view on that. How do you think about this situation? Thank you.
DRAGHI: Thank you. Well, the second question - I think you said it - the situation is completely different from what Japan experienced at that time, in the sense that Japan had deflation, and we don’t. Now, the - of course, the reasons for that may be several. And I’ve gone through the long list of reasons why the situation is different. And there are many reasons.
I mean, the monetary policy activism of the ECB at an early - relatively early stage, the condition of the private-sector balance sheets, both banks and corporates in the euro area, with respect to what it was at that time. And I would just - I had a long list of factors. We went through this during the last press conference.
But the other thing you said is absolutely right. There are certainly some global factors that keep inflation low. It’s not only euro area. I mean, in U.S., inflation is higher than it is in the euro area, but still low, especially low if one considers the state of their recovery, which is way more advanced than ours, really.
So, thank you. Oh. Now, the other thing - the other question you asked was about coordination and selfishness of the monetary policy authorities in the - in U.S., in Europe, and in U.K., and in Japan.
Mr. Rajan is really an excellent economist. So what - what one has to show - what one has to demonstrate to speak of selfishness is the following. One has to show that actions within - within, say, the - the U.S. and ECB and so on actions, monetary policy actions were decided not for the sake of the mandate, but for other reasons. And in so doing, they were harmful to other countries, because otherwise, as I said, the priority for all of us is the compliance with our mandate, which for us is maintaining price stability and for the Federal Reserve is the dual mandate.
So it’s hard. But, I mean, he’s such a good economist and such an excellent central banker that he might have very interesting ideas about, and I’m looking forward to the next G-20 to discussing them with him.
QUESTION: Mr. President, two questions. Yes, we have heard today long explanations why ECB is on standby modus and more infos are needed, the picture is complicated, and so on. Will you have the same in apparent cool attitude if the inflation rate were to be 3 percent than not below, but above the medium-term target? Some observers talked about this and put question on the (inaudible) of the inflation target. What is your opinion on this?
Second question. In the last days, German politicians in recent days, yes, strongly criticized the so-called rotation of votes rule within the Governing Council. From the moment when Lithuania will join the euro, the euro, probably in 2015, the rule will get in the way, and then that means, for instance, that the Bundesbank will be excluded from voting one of five sessions.
Question. Would you say that this rule - that rule was passed 10 years ago in a very much different context is still justified today, at a period where a kind of whatever it takes decisions could be taken and to preserve the euro area and, by the way, by all members, possibly?
DRAGHI: Thank you. No, I don’t have a cool attitude at all with respect to the present level of inflation rates. I just said that low inflation for these levels of inflation for a protracted period of time are a risk - by themselves are a risk for the recovery, at a risk for the real - for the weight of debt in real terms, and are a risk for a variety of reasons.
So let me say one more, one more time that we are alert to these risks. And we stand ready and willing - and we are willing to act. That is a general point I want to make.
The second point is, well, I mean, if you look at the ECB experience since its birth, it has delivered on price stability reaching an objective which is close, but below 2 percent, in a very remarkable fashion, some say more successfully than any other central bank during its time and previously, which meant, also, that at some points inflation was way above 2 percent, and still the ECB didn’t act. And other times, it acted.
Because what matters, really, is the medium-term outlook. And in assessing the medium-term outlook, what matters are the causes that determine an inflation rate to be what it is. So I would still claim we are - we are having a symmetric attitude.
The second question is about rotation. I - well, you see, first of all, this is not a matter for central bankers, but for legislators. Second, it’s in the treaty, so it’s - it’s a fact. I don’t know. I mean, if people change the treaty, people change rotation - I believe it’s in the treaty, if I’m not mistaken, the rotation framework. I don’t want to say something that’s not correct, but at least it certainly is not changeable easily. And it’s - in any event, it’s not - it’s not up to us.
Having said that, I’m absolutely confident that all central banks will have plenty of opportunity to express their policy views and to decide accordingly and to contribute to the general policy decision-making no matter what the rotation scheme is, really. Thank you.
STAFF: Claire Jones, Financial Times.
QUESTION: Claire Jones, Financial Times. Three questions, if I may. First of all -
QUESTION: - you’ve spoken - you’ve spoken about the unevenness of the recovery. It’d be great if you could also speak a little bit about the unevenness of the disinflationary dynamics. You mentioned that in the - in the four program countries that was - it owed something to adjustment, but we’ve also got quite significantly below target inflation in France and Italy, so could you just comment a little bit on the disinflationary dynamics there?
Secondly, on this point about - in the turmoil in emerging markets and central banks having to act within their own mandates, OK, sure, but weren’t a lot of those mandates created in an intellectual climate in which people thought inflation target and plus a flexible exchange rate was enough for the stability of the global monetary system?
Now that that kind of intellectual orthodoxy has been found wanting, is it not a little bit of a copout to just say, well, we have to act within our mandates, if those mandates are just going to lead to a lot of instability and a lot of pain in the global monetary system?
And just lastly, could it - would it be possible for you to just clear up once and for all the issue about monetary financing? Is it not the case that if you want, you can just buy government bonds in secondary markets and that’s not prohibited under the treaty?
DRAGHI: Thank you. I’ll answer, firstly, the third question. Yes, it’s possible. It’s been done. And it was not against the treaty, if you look at - if you think about SMP, that was it.
Then the first question is about unevenness, unevenness of the recovery, and, yes, unevenness of disinflation, too. And I said before that a good part - a good part of the subdued performance of the core inflation is due to the subdued, very subdued performance of core inflation in the program countries.
And some of it certainly is part of a relative price adjustment that is welcome. And some of it is probably based to the weakness of demand and the high levels of unemployment, which are still much higher in the program and in the stress countries that are in other parts of the euro area.
So we look with great attention to these developments because it’s not a one clear-cut cause. It’s both. And one of these causes would certainly have to be looked at with great, great attention.
On the second point, the mandates and coordination and cooperation, you know, this has been actually - mandates - the present mandates have been crafted at a time - at different times, first of all. But this issue of coordinating monetary policy in order to minimize spillovers on other countries has been with us, I would say, since the Second World War, was with us during the period of fixed exchange rates when coordination was at the maximum with - during the Bretton Woods period. And it’s been with us afterwards, after that when we had flexible exchange rates.
At times, at times, these coordination efforts had been successful. If we think about the Louvre Agreement, the Plaza Agreement in devising new systems of exchange rate regimes. So one would certainly not rule this out. When this coordination doesn’t hamper the compliance with national mandates, not at the time when this has been decided, nor in perspective, then it’s certainly something that one can discuss.
But one of the reasons why these coordination arrangements have failed was exactly that at some point in time they were going against the compliance with national mandates. And we - all of us have in our memories the various examples of coordination arrangements that have - that have collapsed because of this.
QUESTION: Thank you. My first question is if you discussed today also the possibly of buying equities and the possibility of a rate cut. And my second is - you said that this - the present level of inflation will be for many months. Don’t you think that this in any - I mean, so 0.7, 0.8, don’t you think that this is a sort of failure already of the central bank monetary policy?
DRAGHI: The - on the second point, as I said before, we discussed all instruments, but, frankly, we didn’t discuss buying equity. We haven’t reached that point yet. So it - on the - on the first question is - you know, it’s - we are looking through this. We’re certainly - and the fact that we are spending so much and analyze inflation shows that we are still determined to reach a - to achieve an inflation target of close, but below 2 percent.
We have to judge the - in a global disinflationary environment, we have to judge our performance according to whether in the medium term our target is being achieved. So, thank you. Yes?
STAFF: The last question to Domenico Conti.
QUESTION: Mr. President, Domenico Conti of Ansa. Thank you for this last question. Two questions. First of all, again, about QE, in case the ECB ever were to embark on QE, the fact that there’s already in place an outright market purchases program, the OMT, would that be an impediment to buying government bonds or other assets in the markets? So I’m just talking about a theoretical hypothesis here.
And my second question is about the asset quality review. In the press release that was released about the AQR, the press release mentions the fact that together with common equity tier one instruments, additional capital instruments that mandatorily convert to CET1 may be eligible. I was wondering if among those instruments the ECB could also consider hybrid securities and if those hybrid securities could be part of hypothetical market purchases by the ECB. Thank you very much.
DRAGHI: Thank you. Mr. Constancio, who actually delivered the communication together with the chairman of the supervisory board, Daniele Nouy, last Monday, I think, will respond to the second question.
On the first question, no, I don’t think - I don’t see any - offhand, I mean, I may be wrong, but I don’t see any relationship between the - the two programs. OMT is a well-specified program that could be activated if certain conditions are verified. And it’s addressing re-denomination risks to price stability or risks to price stability that would be originating from re-denomination risks.
So - and, no, I wouldn’t say offhand - I mean, that’s - I wouldn’t say there’s any relationship there. Vitor?
CONSTANCIO: Yes, thank you. First, to recall again that this possibility, which is, indeed, in the information note that we published, is subject to several conditions. Just as a reminder, in the first place, it can only be used in the adverse scenario of the stress tests. Why? Because we said for the adverse scenario, the capital requirements may not be demanded immediately. It’s different if it is from the AQR or from the baseline scenario. And then this, of course, would have to be satisfied - any shortfalls would have to be satisfied with other instruments.
For the adverse scenario, which is a scenario, of course, that has some degree of risk of happening, but it’s not a certainty that will happen, so these other type of hybrids are accepted, just for the adverse scenario, first condition.
Second condition, they have to be totally mandatory. They - it’s not - it’s something that must be in the contract, or if you wish, in the terms of insurance of those instruments that the supervisor can convert them into capital. It has to be there.
And third condition, any trigger of - for the conversion has to be in such a way that, of course, it’s related to the threshold of the adverse scenario. So these three conditions have to be fulfilled. So, as you see, it’s a narrow - relatively narrow thing.
About the possibility of the ECB purchasing such instruments, it was never discussed. And I think that it will never be discussed, let alone decided. OK.
STAFF: Thank you very much.
DRAGHI: Thank you.
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