Draghi Continues to See ‘Broadly Balanced’ Inflation Risks

European Central Bank President Mario Draghi comments comments on inflation, the economic outlook for the euro-area, exchanges rates, Italy’s Banca Monte dei Paschi di Siena SpA and the region’s sovereign debt crisis.

He made the remarks at a press conference in Frankfurt today after policy makers kept interest rates unchanged at a record low of 0.75 percent.

On rates:

“The decision not to change interest rates was unanimous. Of course there were hints and discussions on how to improve financial conditions but that’s it.”

On negative rates:

“The governing council has not changed the position.”

On inflation:

“HICP inflation rates have declined further, as anticipated, and are expected to fall below 2 percent in the coming months. Over the policy-relevant horizon, inflationary pressures should remain contained. The underlying pace of monetary expansion continues to be subdued. Medium to longer-term inflation expectations for the euro area remain firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2 percent. Overall, this allows our monetary policy stance to remain accommodative.”

“Economic analysis indicates that price developments should remain in line with price stability over the medium term. A cross-check with the signals from the monetary analysis confirms this picture.”

“Risks to the outlook for price developments continue to be seen as broadly balanced over the medium term, with upside risks relating to higher administered prices and indirect taxes, as well as higher oil prices, and downside risks stemming from weaker economic activity and, more recently, the appreciation of the euro exchange rate.”

On Ireland:

“There wasn’t a decision to take. The governing council unanimously took note of the Irish operation. I’m going to refer you to the Irish government and the Irish central bank for the details of this operation. I can only say today that we took note of this.”

“ We took note from an action that has been undertaken by the government.”

“We don’t want to enter into details of the swap.”

“There is no more ELA, that’s a positive fact. I can’t go beyond that, it is in the hand of the Irish government. I am not in a position to give you details.”

“On Ireland really I can repeat what I said before, the council took note. One of the things I can add is there is no more ELA, so that’s a positive step, but I can’t go beyond that because this is entirely in the hands of the Irish government and the Irish central bank.”

“You speak about an agreement and I said there isn’t any decision today. The efforts of the Irish government in this direction, but even more importantly in the economic policy progress, on the financial policy front, that is what really mattered in the end, to reestablish the reputation of Ireland on the financial markets. All in all the outlook is really positive.”

“These are really internal policy matters where, frankly, a president of the ECB has no say.”

On Monte Paschi, Italian elections:

“The Banca d’Italia has done everything it should. Looking ahead it will be important for Monte Paschi to follow through on its restructuring plans. It was me who signed both inspections. Don’t forget it was Banca d’Italia who gave most of the papers to the judiciary. Normally if you have a fraud, the supervisors don’t have police powers.”

“I don’t want to take sides in the Italian elections but you should certainly discount what you read in blogs, etc., as part of the election.”

“One of these powers is the power to either, first of all, judge a manager, a top manager of a bank, proper and fit for the task, and second to remove a manager if you have the sense that he is not proper and fit any longer. That is an essential component of the powers a supervisor must have.”

“Having more powers would have helped, though when you have to deal with fraud, you never know.”

“Monte Paschi is not being resolved.”

On speaking to Spanish lawmakers:

“I’m going be there more to listen and certainly explain the policy of the ECB. I will not dwell into domestic policies. It’s a unique opportunity for me to hear from the legislators of Spain. We are kind of following from a distance the domestic developments.”

On exchange rates:

“On the exchange rate, well, first thing is that the appreciation is in a sense a sign in return of confidence in the euro. Exchange rates should reflect fundamentals. By and large, both the nominal and real effective exchange rates are about their long term average. Exchange rates is not a policy target, but it is important for growth and price stability. We want to see if the appreciation is sustained, and if it alters our assessment of the risks to price stability. Next month we will have the new projections in the meantime we will maintain our accommodative monetary stance.”

“We should always remember that the ECB is independent. We heard all over the world, talking up talking down currencies. The ultimate judge of this strategy is to see what markets make of these statements.”

“If these policies produce consequences on the exchange rate that do not reflect the G-20 consensus, we will have to discuss this. The three things go together. If you threaten one you undermine the other one. Weidmann is absolutely right about central independence.”

On euro-area economy:

“The economic weakness in the euro area is expected to prevail in the early part of 2013. In particular, necessary balance sheet adjustments in the public and private sectors will continue to weigh on economic activity. Later in 2013 economic activity should gradually recover, supported by our accommodative monetary policy stance, the improvement in financial market confidence and reduced fragmentation, as well as a strengthening of global demand. In order to sustain confidence, it is essential for governments to reduce further both fiscal and structural imbalances and to proceed with financial sector restructuring.”

“Euro area real GDP declined by 0.1 percent, quarter on quarter, in the third quarter of 2012, following a contraction of 0.2 percent in the second quarter. Available data continue to signal further weakness in activity in the fourth quarter and at the beginning of 2013. This weakness reflects the adverse impact of low consumer and investor sentiment on domestic expenditure, as well as subdued foreign demand. However, financial market sentiment has improved and the latest survey indicators confirm earlier evidence of a stabilization in business and consumer confidence, albeit at low levels. Later in 2013 a gradual recovery should start, with domestic demand being supported by our accommodative monetary policy stance, the improvement in financial market confidence and reduced fragmentation, and export growth benefiting from a strengthening of global demand.”

“The risks surrounding the economic outlook for the euro area continue to be on the downside. They relate to the possibility of weaker than expected domestic demand and exports, slow implementation of structural reforms in the euro area, as well as geopolitical issues and imbalances in major industrialized countries which could both have an impact on developments in global commodities and financial markets. These factors have the potential to dampen the ongoing improvement in confidence and thereby delay the recovery.”

“According to Eurostat’s flash estimate, euro area annual HICP inflation was 2.0 percent in January 2013, down from 2.2 percent in November and December and from 2.5 percent in October. On the basis of current futures prices for oil, inflation rates are expected to decline further to below 2 percent in the coming months. Over the policy-relevant horizon, in an environment of weak economic activity in the euro area and well-anchored long-term inflation expectations, underlying price pressures should remain contained.”

“Turning to the monetary analysis, the underlying pace of monetary expansion continues to be subdued. The annual growth rate of M3 decreased to 3.3 percent in December 2012, from 3.8 percent in November. Shifts from overnight deposits to short-term time deposits led to a decrease in the annual rate of growth of M1, which declined to 6.2 percent in December, from 6.7 percent in November, and outflows from marketable instruments dampened overall M3 growth. A further strengthening in the deposit base of MFIs in a number of stressed countries took place in December, in combination with further capital inflows into the euro area, both of which continued to reduce fragmentation.”

“As regards other policy areas, structural reforms and fiscal adjustment can complement each other, thereby improving the outlook for job creation, economic growth and debt sustainability. Past policy action is bearing fruit, in terms of both the unwinding of existing fiscal imbalances and the reduction of current account deficits. In particular, in several countries with particular adjustment needs, contained growth in unit labor costs signals greater price competitiveness and exports are performing better. Governments should build on the progress achieved in fiscal consolidation, strengthen competition in product markets and continue with labor market reforms. This would boost the euro area’s growth potential, reduce high structural unemployment and improve the adjustment capacities of the euro area countries.”

“The governing council is convinced that they’re already taking these decisions that are compatible with price stability and job creation. We are not doing the exactly same things that are done at the Fed in America? Oh well, institutions are different. But the ECB can hardly be blamed for providing a policy that is not accommodative.”

On lending/LTRO:

“With regard to the liquidity situation of banks, counterparties have so far repaid €140.6 billion of the €489.2 billion obtained in the first of the two three-year LTROs settled in December 2011 and March 2012. This reflects the improvement in financial market confidence. Repayments are provided for in the modalities of the three-year LTROs and are at the discretion of the counterparties, who must appropriately assess their funding situation, their ability to provide new loans to the economy and their resilience to shocks. We will closely monitor conditions in the money market and their potential impact on the stance of monetary policy, which will remain accommodative with the full allotment mode of liquidity provision.”

“The annual growth rate of loans to the private sector (adjusted for loan sales and securitization) remained negative in December. This mainly reflected ongoing negative annual growth of loans to non-financial corporations, which was -1.3 percent in December after -1.5 percent in November. However, annual growth in MFI loans to households remained broadly unchanged at 0.7 percent in December. To a large extent, subdued loan dynamics reflect the current stage of the business cycle, heightened credit risk and the ongoing adjustment in the balance sheets of the financial and non-financial sectors. In line with these developments, the bank lending survey for the fourth quarter of 2012 confirms the weakness in credit demand and the continued effect of credit risk considerations on the tightening of credit standards. At the same time, the survey confirms the positive impact of Eurosystem measures on banks’ overall funding and liquidity situation. In particular, banks reported improvements across all funding categories in the fourth quarter.”

“In order to ensure adequate transmission of monetary policy to the financing conditions in euro area countries, it is essential to continue strengthening the resilience of banks where needed. Decisive steps for establishing an integrated financial framework will help to accomplish this objective. The future single supervisory mechanism is one of the main building blocks. It is a crucial move towards re-integrating the banking system.”

“If you look over the last 6 months we certainly had significant improvement on the financial side of the economy. The sovereigns are proceeding with their plans. 55 percent of total sovereign issuance in this m month has come from no core countries, while last year 93 percent of total sovereign issuances was coming only from core countries.”

“Target 2 balances continue to improve. It’s confirmation of the enormous progress these countries have achieved.”

“The repayment of the LTRO is a sign of confidence. It says that many banks that had accessed the LTRO for precautionary reasons, because they were a year ago uncertain about the liquidity situation, the funding prospects, and now they’re less uncertain certainly than they were a year ago, so that is certainly a positive sign. One important detail when we estimate and I can’t get in greater detail, repayment for the second LTRO, we are left quite persuaded that the excess liquidity will be well over 200 billion, confirming the monetary policy stance as being accommodative.”

“We don’t recommit but as I said our policy stance is accommodative, our overnight rate is zero, there are plenty signs we are in a full allotment mode.”

“Overall this gives a picture of less tight financial markets than a year ago. Non-banking corporate funding is also having a good season, corporate issuance is being quite significant.”

“Price stability is more likely than before. Unit labor costs in most of the stressed countries continue to decrease. The fragility is signaled by the credit flows which remained weak. If you look at bond issuance, while large corporates can finance themselves via capital markets, the SMEs that have to finance themselves via the banks, they are constrained. For them, credit remains tight.”

“I wouldn’t make too much of the increase in the EONIA that we have seen recently, because it may be due to a variety of factors. Depending of which banks have actually repaid. I said 200 because... it is out of relation. You have to be very careful to be stuck with the figures.”

“We are still left however, with credit flows that are subdued. Policy is already accommodative and we stand ready to provide more liquidity should it be needed. We cannot address a shortage of capital and we cannot address the risk aversion that has reached high levels in deed. We will continue trying everything we can credit flows will resume within our mandate which is providing price stability. All the actions we’ve taken will in the end find their way through the economy, so much so we see a gradual recovery in the second part of this year.”

On banks, banking union:

“We should say that we welcome the Liikanen report. Especially when risky activities are being ring-fenced. We can’t go on with separate legislations. We will have to converge on one rule for the euro area and possibly for the union.”

“We are waiting for the commission and then we will have to express a legal opinion on this.”

“The legal act of the SSM not approved yet. Once the legislation is in force, the ECB will send a quarterly report to the commission, on the progress. In the meantime we cannot take any binding organizational decisions until the legal text is approved. The number of staff will be part of the actual structure and therefore cannot be defined properly yet. It’s a study, it won’t be the last. Nevertheless, we have started conducting preparatory work. This is done in close cooperation with national central banks. You see a constructive attitude.”

“I agree with you that separation is essential. It’s very important that the governance of the new institution be strongly separated so as to be seen as separated. Not sure if the model would be like in the U.S., with the New York Fed and the Washington Fed. The creation of one supervisor will involve profound legislative changes at national levels.”

“To have one resolution mechanism is very important. It’s not a bailout mechanism, it’s a resolution mechanism. It means that banks could be resolved in a unified way. It means members of the union have the same resolution laws, it means the same category of creditors would be bailed in everywhere in the union. Nowadays, for many banks the cross border activities are so extensive that we need to move from a national to a supranational mechanism.”

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