Draghi Says Downward Revision to Forecasts Is ‘Very Likely’

European Central Bank President Mario Draghi comments on monetary policy and risks facing the euro-region economy.

He spoke at a press conference in Frankfurt today after chairing his first governing council meeting, when the ECB unexpectedly cut the benchmark interest rate by 25 basis points to 1.25 percent.

On today’s interest-rate decision:

“The decision was unanimous.”

“We observed worsening PMIs, especially manufacturing, new orders growth. We also have two or three consensus forecasts, the euro barometer” showing “the likelihood of an economic weakening has gone up. We have concluded that the present situation would have a dampening impact on prices and costs.”

“What we’re observing now is slow growth, heading toward a mild recession.”

Asked it the current interest-rate level is appropriate, he said the ECB never pre-commits on rates.

On rationale for rate cut:

“We concluded there is no threat to price stability were we to lower our interest rate by 25 basis points.”

“As I said before, we’ve looked at the behaviour of several variables of the real economy, we observed the weakening of several aggregate demand components, we looked at survey data showing a worsening, we looked at other forecasts of other organizations and they also showed a weakening.”

“We concluded that there was a weakening of the business cycle and also the likelihood that we might have to revise downward our projections that will be presented next month. No, we don’t foresee deflation.”

On inflation:

While “inflation has remained elevated and is likely to stay above 2 percent in the coming months,” the underlying pace of “monetary expansion remains moderate. Inflation should remain in line with price stability over the policy horizon.”

“Price costs and wage pressures should also moderate. The governing council continues to view the risks to medium-term price developments as broadly balanced.”

“In the current environment, inflationary pressures should abate. The main downside risks remain to the impact of weaker than expected growth in the euro area and globally.”

“The weakening of the business cycle will have a dampening effects on wages, prices and costs, so by itself will have a dampening effect on inflation. Long-term inflation expectations are solidly anchored.”

On the economic outlook:

“The ongoing tensions in financial markets are likely to dampen the pace of economic growth in the euro area in the second half and beyond. The economic outlook remains subject to particularly high uncertainty and intensified downside risks. Some of them have started to materialize.”

He also said the risks are making “downward revisions to economic growth forecasts very likely.”

“Real GDP growth is expected to be very moderate in the second half of this year. There are signs that downside risks have been materializing. Looking forward, a number of factors seem to be dampening the underlying growth momentum in the euro area. At the same time, we expect economic activity to continue to benefit” from emerging market activity.’’

It is an “environment of particularly high uncertainty.”

“Owing to unfavorable effects of financing conditions and confidence,” growth is likely to be dampened.

On Greece:

“It’s very hard to respond about the situation which is fast evolving. We’re closely monitoring the situation and we’re absolutely confident” that if measures are implemented and banking system strengthened, that “will quieten many concerns. Other than that it’s very hard to comment.”

“Until two hours ago, there was a prospect of having a referendum on Greece. That had thrown markets into disarray. People had asked, ‘What kind of question are you going to ask?’”

German Chancellor Angela Merkel and French President Nicolas Sarkozy “were saying one should ask the general question about do you want to stay in the euro zone? That was the meaning of that statement by the heads of state.”

On a possible exit of Greece:

“It’s not in the treaty. We’re all being bound by the treaty. We can’t really conceive of situations that are not envisaged by the treaty.”

“I wouldn’t call my answer legalistic, there’s very little we have other than the treaties. We have to have a full respect for the spirit and the letter of the treaties. And the issue of the breakup of the euro is not a marginal one, and that’s where the power of our treaty comes into question.”

On Ireland:

“One has to keep in mind that the Greek situation is exceptional and unique.”

“We’re confident that the Irish government could comply with the measures announced and the Irish government said they would do whatever it takes. One has no reason to doubt the commitment of the government.”

On bond spreads:

“For a long time, spreads between sovereign bonds in the euro area were very thin, they were not reflecting the different realities of different countries. They were different because their public finances were in different states, their growth prospects were different. Then we had the financial crisis that increased risk aversion by all the investors worldwide and made their analysis more perceptive of the different risks in different countries. That’s how the explosion of sovereign spreads started.”

“As we had under-shooting for a long period of time, we now have over-shooting. The way to react to this is not so much to count on external help that could alleviate the temporary market pressures. The real answer is to count on countries’ capacities to reform themselves with the right policies.”

On ECB’s bond program:

“The securities market program has three characteristics - - it’s temporary, it’s limited in the amount and it’s justified on the basis of restoring the functioning of monetary policy transmission channels. We should keep that in mind because it answers all the questions one might have. We want our monetary policy to function.”

On liquidity operations:

“The provision of liquidity and allotment modes will continue to ensure that euro area banks are not constrained on the liquidity side. All non-standard measures are by construction temporary in nature.”

On euro-region breakup risk:

“The real answer is it’s not in the treaty and I have nothing to add to that.”

On China:

“These are really decisions that are not in the realm of the ECB competence. We know there are discussions between the Chinese government and the IMF but we’re not part of them.”

“We haven’t really been focusing on this and similar situations. But it’s clear that, as I said many, many times, the first and foremost responsibility with maintaining financial stability and orderly financial conditions lies with national economic policies. It’s in a sense pointless to think that sovereign bond rates could be steadily brought down by outer, external interventions. The main pillar of this is the national economic policy response.”

On ECB purchases of Italian bonds:

“We’re not forced by anybody” to buy Italian bonds. “We’re independent and we make our own judgement.”

On fiscal policy:

“All euro-area governments need to show their inflexible determination to fully honour their own individual sovereign signature as a key element in ensuring financial stability in the euro area as a whole.”

“The governing council urges all governments to implement fully and as quickly as possible the measures necessary to achieve fiscal consolidation. The governments of countries under joint EU-IMF adjustment programmes and those of countries that are particularly vulnerable should stand ready to take any additional measures that become necessary.”

“It is crucial that fiscal consolidation and structural reforms go hand in hand to strengthen confidence, growth prospects and job creation. The governing council therefore calls upon all euro area governments to accelerate, urgently, the implementation of substantial and comprehensive structural reforms.”

On his first governing council meeting as ECB president:

“Mr. Trichet did not give me any specific advice on todays meeting but he gave me the comfort of his example.

‘‘For many years, I had the privilege to work with him. I matured in these years.’’

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