Nov. 8 (Bloomberg) -- European Central Bank President Mario Draghi said the economic outlook is worsening and the bank stands ready to activate its bond-purchase program if governments fulfil the necessary conditions.
“We are ready to undertake” Outright Monetary Transactions, “which will help to avoid extreme scenarios,” Draghi said at a press conference in Frankfurt today after policy makers left the benchmark interest rate at a historic low of 0.75 percent. “The risks surrounding the economic outlook remain on the downside” and underlying inflation pressures “should remain moderate,” he said.
Draghi indicated the ECB is likely to lower its economic forecasts next month as the sovereign debt crisis curbs growth in Germany, the region’s largest economy. He stopped short of signalling a further rate cut, saying the ECB’s monetary policy is already “very accommodative” and the announcement of its bond program has led to “a series of improvements” on financial markets.
Still, “the chances are high that the ECB will need to come up with additional measures to support the euro-zone economy,” said Carsten Brzeski, an economist at ING Group in Brussels. “A rate cut, even if it will not come next month, could be part of the measures.”
While bond yields have fallen in Spain and Italy since the ECB unveiled its OMT program, investors are still waiting for Spain to request aid from Europe’s bailout fund, a pre-requisite for the ECB to actually intervene in debt markets.
Spanish Prime Minister Mariano Rajoy said on Nov. 6 he needs to know how much the ECB would push down Spain’s borrowing costs before his government applies for aid and signs up to the conditions attached.
“It’s entirely up to Spain and the Spanish government to take the decision,” Draghi said. “The ECB can’t give any assurances ex ante. The Governing Council will take the decision in total independence. There isn’t any automatic quid pro quo.”
Spanish 10-year bonds fell for a second day as Draghi spoke, pushing the yield up to 5.85 percent. The euro weakened before recovering to trade little changed at $1.2736 at 5:10 p.m. in Frankfurt.
Economic confidence in the 17-member euro area dropped to a three-year low in October, adding to signs that the region is in recession after gross domestic product fell 0.2 percent in the second quarter. Third-quarter GDP is due on Nov. 15.
In Germany, Europe’s largest economy, reports this week suggested growth is grinding to a halt. Exports, factory orders and industrial production all fell more than forecast in September. Last month, business confidence dropped to a 2 1/2 year low.
The European Commission yesterday lowered its 2013 growth forecast for Germany to 0.8 percent from 1.7 percent and said the euro-area economy will expand just 0.1 percent after contracting 0.4 percent this year.
Draghi said the ECB will take the weaker outlook into account when it publishes new economic and inflation forecasts next month.
“Certainly the outlook is being revised and there’s a picture of a weaker economy,” he said. “The Governing Council decided to keep interest rates unchanged. We have not discussed what we’re going to do next year in terms of monetary policy.”
Asked why the ECB didn’t cut rates today given the outlook, Draghi said policy makers currently consider risks for price stability to be “broadly balanced.” The bank has done a lot to support the economy, he said. Still, “we also stand ready with our normal monetary policy instruments” should further accommodation be needed.
“We have pencilled in an interest-rate cut in December,” said Howard Archer, chief European economist at IHS Global Insight in London. “However, it is very possible that the ECB could delay trimming interest rates until early 2013 due to concerns that the impact of a near-term cut could be diluted by the problems in monetary policy transmission channels.”
Draghi sought to end a debate on whether the central bank will do more to ease the debt burden of Greece, where Prime Minister Antonis Samaras yesterday gathered the support of enough lawmakers to pass austerity measures needed to unlock the next tranche of European funds.
The ECB can’t take losses on the Greek bonds it holds and has already distributed any profits made on them to governments, Draghi said.
“It’s up to the governments to decide whether they want to use these profits for Greece,” he said. “The governments actually committed themselves to do so. So, the ECB is by and large done.”
To contact the editor responsible for this story: Craig Stirling at firstname.lastname@example.org