Draghi Says ECB Sees ‘Downside Risks’ on Economic Growth

European Central Bank President Mario Draghi comments comments on inflation and the economic outlook for the euro-area.

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 rate cuts:

“We always think and study and reflect, but we are not committing to or planning anything special. Yes, we have discussed the possibility. We wouldn’t precommit to anything as specific as a rate cut in the future.”

On possibility of a deposit rate cut:

“ We have looked at that. We don’t commit to do anything. The unintended consequences of a measure like that can be serious as it has been shown in other monetary jurisdictions by similar experiences. So, all in all, I think in the past I’ve used the word unchartered waters if we are to get to that mode.”

On exchange rates:

“The exchange rate is not a policy target for us. The nominal and real exchange rates are by and large continue to be near their long term averages. The exchange rate is very important for growth and price stability. We stick with the G20 consensus.”

“We will continue to look at that as part of our overall assessment of the current situation.”

On Italy:

“Markets after some excitement after the elections have now reverted back more or less to where they were before. I think markets understand that we live in democracies. All in all, right now markets were less impressed than politicians and you.”

“Much of the fiscal adjustment Italy went through will continue going on an automatic pilot. All this happens in a general environment where we have many signs that confidence to financial markets of euro area is returning.”

“When I spoke about positive contagion I didn’t mean contagion from financial markets to the real economy -- this is obviously still lagging. If we look at contagion, you’ve seen the contagion to other countries has been muted this time.”

“You know the rules: the ball is in the government’s hands.”

“OMT remains, it is a very effective back stop and it is there. But as I said, the ball is in the government’s hand”

“I can tell you that Italy, like all countries, should continue on the structural reform path.”

On trade agreement:

“We don’t discuss trade but the culture of the governing council of the ECB is one to say a free trade area would be a source of job and growth creation. Some v good work is being done there by others.”

“Unemployment is a tragedy and youth unemployment is an even bigger tragedy.

‘‘It has to do with labor legislation on these countries. Labor legislations in these countries has put all the weight of flexibility on the young people.’’

‘‘Price stability in the best way to support the real economy and jobs. We view maintaining price stab in both directions as the best way to support the real economy and job creation and growth.’’

‘‘Our monetary policy will remain accommodative for as long as needed and we will stay in full allotment mode.’’

On lack of funding:

‘‘We have addressed this squarely and have resolved it.’’

On risk aversion:

‘‘It is quite clear that with a deteriorating economy the non- performing loans increase and risk aversion goes up. We are thinking 360 degrees and we will continue reflecting. Any sign of overcoming this fragmentation through higher cross country credit flows is a good sign. The system is fragmented so any sign of overcoming this fragmentation by higher cross country flows is a good sign.’’

On Ireland:

‘‘The Irish government has undertaken very significant progress, very significant results on several fronts and I never tire of saying so.’’

‘‘Further action is needed, especially on the banking side, on the banking front.’’

On Cyprus:

‘‘There is good progress. We have to keep in mind the solution has to reflect two equally important dimensions: One is debt sustainability and the other is financial stability. Cyprus is a small economy, but the systemic risks may not be small. At the same time, our union is not a transfer union. It’s very important that the Cyprus government takes this opportunity to revisit anti-money laundering legislation.’’

Dutch bank nationalization:

‘‘The goal of this was to ensure the stability of the Dutch banking system.’’

On troika

‘‘I call this the angst of the week. Each week or every two weeks we have a new angst. My suggestion to you is if you get gossip just come over and check with us. The troika functions very well. Neither the ECB nor the commission were born with troika.’’

‘‘The troika set up to cope with an emergency. The ECB works very, very well with the IMF and the Commission. In all frankness we haven’t taken any decision under political pressure of any kind.’’

‘‘Our alleged lower political independence is going to be another angst.’’


‘‘It’s going on. I don’t see any news or any reason to be worried about the progress our legislators are undertaking. We are moving forward, I don’t see much of an issue there.”

“Many people tend to underestimate the amount of political capital that European leaders have invested in the euro. Fragmentation is not worsening it’s actually improving it’s receding. Data about the spreads of the lending rates, the dispersion in the lending rates, the dispersion in the funding rates.”

“If you compare the last 6 months they are all on the decrease. The dispersion is now lower as it was in the first six months of last year. We see signs that it’s improving. You have to assess these improvements against the background of a very weak economy, of course. These improvements are bound to be gradual, slow but they are there.”

On monetary policy:

“Fragmentation has been for quite a while, although it is receding, an obstacle to our monetary policy. You should remember that the fragmentation started with the sovereign debt crisis that later propagated to the banking sector.”

“You know the rules of OMT, OMT cannot be used to enhance the return to the market.”

On inflation:

“The underlying pace of monetary expansion continues to be subdued. Inflation expectations for the euro area remain firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2 percent.”

“The ongoing decline in annual inflation rate mainly reflect the energy and food components. Inflation expectations are well anchored and in line with price stability over the medium term.”

“The governing council’s assessment risks to the outlook for price development continue to be seen as broadly balanced over medium term.”

“The 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.”

“So far we see the inflation expectations are firmly anchored.”

“We don’t observe much of a change in the price of insuring against either inflation or deflation.”

“It’s not a very liquid market so we have to take these observations with some caution. If we mean by deflation a generalized falling prices across sectors, we have not seen that.”

“We have seen lower prices for certain products, certain sectors and certain countries and higher prices in other countries and this is part of the overall rebalancing of euro area and this by and large should be taken as a good sign.”

On economic development:

“Later in 2013, economic activity should gradually recover, supported by a strengthening global backdrop our accommodative monetary policy stance. Necessary balance sheet adjustments in the public and private sectors will continue to weigh on economic activity.”

“This repayment reflects improvements in financial market confidence over the last few months and receding fin markets fragmentation.”

“Our monetary policy stance will remain accommodative with the full allotment mode of liquidity provision. Recent data and indicators indicate economy should start stabilizing over first part of the year.”

“The improvements in financial markets since July of last year and the continued implementation of structural reforms should work their way through the economy. The projected path of the recovery has remain broadly unchanged.”

“The governing council continue to see downside risks surrounding economic outlook to the euro area. The ongoing decline in annual inflation rates mainly reflect the energy and food components. Risks relate to possibility of weaker domestic demand and exports, slow implementation of structural reforms.”

“The underlying pace of monetary expansion continues to be subdued. Annual growth in MFI loans to households moderated slightly. To a large extent, subdued loan dynamics reflect the current stage of the business cycle, heightened credit risk and the ongoing adjustment of the financial and non-financial balance sheets.”

“Available info on the access to financing of non-financial corporates indicate tight credit conditions for small medium sized enterprises.”

“In order to ensure adequate transmission of monetary policy to the financing conditions in euro area countries, it is essential to reduce fragmentation in credit markets and to strengthen resilience of banks where needed.”

“The future SSM is one of the main building blocs together with a single resolution mechanism.”

“While the accommodative monetary policy stance will continue to support recovery in euro area, it’s essential that fiscal and structural reforms strengthen the prospects” for recovery in the medium term.

“The downward revision is due to a carry-over from a weak fourth quarter from last year.”

“The recover path is by and large unchanged.”

“The funding for sovereigns is also quite well advanced with respect to last year. Target 2 balances continue by and large to improve. LTRO repayment is another sign of return of confidence. The net injection was something like 500 billion so about 40 percent of that has been repaid.”

“All this points out to less fragmentation. There is increased cross border activity by other euro area countries and the rest of the world. There are flows from core to non-core countries. The large companies by and large have no problem in financing and funding themselves. The SMEs do and this continues.”

“In the medium term we continue seeing the beginning of a gradual recovery.”

“Our policy stance is accommodative and we will remain in full allotment mode as long as needed. We think that this will indeed have a positive contribution when all this will find its way through economy.”

“It is important by the national governments to continue with structural reforms. Some countries, especially ones which have front loaded fiscal adjustment, will see a gradual reduction in contradictory effect of fiscal consolidation. This will also contribute to this recovery.”

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