Draghi Says Euro-Area Inflation Risks Are ‘Broadly Balanced’

European Central Bank President Mario Draghi comments on inflation, the economic outlook for the euro area and the developments in Cyprus.

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 importance of the euro:

“People underestimate the amount of political capital invested in the euro. They vastly underestimate the amount of political capital that’s been invested in the euro. It’s a very important thing, it’s a project in the European Union. There is no plan B.”

On rates:

“The discussion was extensive, all in all, the consensus was for the time being not to look at rates.”

On inflation:

“Based on our regular economic and monetary analysis, we decided to keep the key ECB interest rates unchanged. HICP inflation rates have declined further as anticipated and price developments over the medium term should remain contained. Inflation expectations for the euro are continue to be firmly anchored.”

“The ongoing decline in annual inflation rates mainly reflects the energy component of the price index.”

“Price developments in the medium term should remain contained in an environment of weak economic activity in the euro area.”

“Inflation expectations are firmly anchored and in line with price stability over the medium term.”

“Risks to the outlook for price developments continue to be broadly balanced. Underlying monetary expansion continues to be subdued.”

“Price developments should remain in line with price stability over the medium term.”

On economic development:

“Weak economic activity has extended into the early part of the year and a gradual recovery is projected for the second half of the year subject to downside risks. Against this backdrop our monetary policy stance will remain accommodative as long as needed.”

“We will monitor all incoming information and assess the outlook for price stability. It is essential for governments to intensify structural reforms at national level.”

“As said on previous occasions we will continue with fixed rate tender procedures with full allotment as long as necessary.”

“Recent data and indicators confirm that the economic weakness extended into the early part of the year. Looking forward euro area export growth should benefit from a recovery in global demand.”

“The improvements in financial markets since last summer should work their way into the real economy, notwithstanding recent developments. This should help stabilize euro-area economic activity and lead to a gradual recovery in second part of the year.”

“Tight credit conditions will continue to weigh on economic activity. Risks include the possibility of weaker than expected domestic demand and slow or insufficient implementation of structural reforms in the euro area.”

“This economic outlook for the euro area remains subject to downside risks, including even weaker than expected domestic demand and slow or insufficient implementation of structural reforms.”

“Annual growth rate of loans to non-financial companies and households remained broadly unchanged in February. Subdued loan dynamics reflect the current stage of the business cycle, heightened credit risk, and the ongoing adjustment of balance sheets.”

“It’s essential that the fragmentation of financial markets is reduced further.”

“Further decisive steps for establishing a banking union will help accomplish this objectives.”

“As regards fiscal policies, euro area governments should build on their efforts to reduce deficits and implement structural reforms. Fiscal strategies need to be accompanied by growth enhancing reforms to support employment wage setting should become more flexible and better aligned with productivity.”

“On the standard side, we acknowledge that the continuation of last year fourth quarter has extended into this year and shows weakness. Second we have now the confirmation that HICP is edging down well below 2 percent though with some volatility and certainly dependent on energy prices and also exchange rate developments.”

“We see now that this weakness is extending to countries where fragmentation is not an issue, although tentatively we see signs of reducing fragmentation at least on the funding side, also in the stressed countries, our monetary policy will remain accommodative.”

“Don’t forget Eonia is 6.7 basis points, almost zero. We will assess all the incoming data and will stand ready to act. As far as nonstandard measures, we are looking at various instruments, various tools, we will take into account other countries experiences. We will see which ones are either feasible or effective in out specific institutional context.”

“On the other hand the role of national central banks in assessing credit quality becomes important. We will have to rely on other actors, and the role of national central banks in assessing credit quality becomes important.”

“I acknowledge the weakness that has been transferred into the first part of this year, that HICP has been edging down, and that the weakness has been spreading to countries where there’s no fragmentation.”

“Even in stressed countries, we see some diminishing fragmentation on the funding side.”

On Cyprus:

“The ECB had presented a proposal where no bail in of insured depositors was foreseen. All the proposals by commission and IMF. had the same feature. Then it started a prolonged negotiation. The outcome of which was what you saw. That was not smart, to say the least, and was quickly corrected the day after in a Eurogroup teleconference.”

“What was wrong with the Cyprus economy doesn’t stop being wrong if they’re outside the euro. The restructuring of the banking system would be needed anyway, whether you’re in our out. To be out doesn’t preserve the country from the need for action. Exit entails many risks, big risks.”

“My sense is that a country would find itself having to pursue the reforms in a much more difficult environment.”

“We acted exactly within our mandate. We would have been acting politically if we had not done this. ELA could be extended only to solvent and viable banks. In the absence of a program, these bans would not have been solvent and viable, and at that time the governing council assessed there was no program in place. On all other occasions, there was a program in place.”

“I don’t think that the view that we are acting politically is actually correct. We have a mandate that has been given to us by the legislators and we are acting within that mandate.”

“We view positively any measure that cuts the link between sovereigns and banks.”

“Cyprus events show that we are ready to act within our mandate. When the governing council objected to ELA, it did that within its mandate. It did not replace what could have been fiscal action.”

“Cyprus is no template. I am absolutely sure --we didn’t have a chance to talk -- that the chairman of the Eurogroup had been misunderstood.”

“It was not a smart move, it’s been corrected.”

On funding:

“We have addressed fully” issue of lack of funding.

“It so happens that this measure works beautifully in some countries and doesn’t work at all in other countries. The issue is to understand why it doesn’t work in certain peripheral countries.”

“One should always be mindful of what the ECB can do and cannot do. We cannot replace lack of capital in banking system, we cannot compensate lack of action by governments. In many countries the most powerful measure is to pay back the arrears. The ECB cannot replace governments on that front. The ECB cannot replace the lack of action by governments on structural reforms. Not all experiences are encouraging, some of these programs have been undertaken, but we’ve seen very little action on the credit side.”

“We will continue thinking about this issue in really a 360 degrees way. In the coming weeks, we will monitor very closely all incoming information on economic and monetary developments and assess any impact on the outlook for price stability. Our institutional setup and the experiences of other countries tell us we need to think deeply.”

“If anything, the events on Cyprus, have reinforced the governing council’s determination to support the euro while maintaining price stability and acting within our mandate.”

“Thanks to OMT and what I’ve called positive contagion in the financial markets, we are now in a position to cope with serious crises without them becoming existential or systemic.”

“There is a very large liquidity surplus. After the Cyprus events, and these are today’s data, we see that target 2 balances continue to decline, and slightly less than 50 percent of the net amount injected by the LTRO has been repaid.”

“Cyprus is no template, Cyprus is no turning point in the euro policy. We have to be able to resolve banks without using taxpayers money and without disrupting the payment system. That’s why we have to have a resolution framework in place.”

On exchange rates:

“Our exchange rate is not a policy target. But our exchange rate is important for growth and for price stability we take into account foreign exchange developments. Like we take into account other developments in the formulation of our policy.”

“We don’t precommit on interest rates.”

“The exchange rate is not a policy target but its important for growth and price stability.”

“The reason for its movements are several. Look what happened to the exchange rate in the past two months, it went up, in the context of high confidence, and then it went down. So we always look at the complete picture, there are many factors that affect the exchange rate level.”

On bail-ins, SSM:

“The entry into force and implementation of the single supervisory mechanism is absolutely essential. There is no better way to prevent this crisis than shedding light of the situation of the banking systems by this oversight that will be in place with the single supervisory mechanism.”

“Any delay on this front is extremely disappointing.”

“We should also ask the question, what makes a bail-in a problem. A bail-in by itself is not a problem. It’s the lack of ex ante rules known to all parties that can make a bail-in a disorderly event.”

“The existence of buffers of bail-in-able assets is essential. We would like to see these rules enter into force not in 2019, 2018, but way, way earlier, like 2015. Its very urgent that we have in place a European framework for resolution, restructuring, and recap of the banking system. These are the lessons I would draw from the Cyprus event.”

“There are different inclinations about mutualizing potential losses stemming from banking systems. The SSM wouldn’t actually call for a mutualization so it could actually speedily proceed.”

“The council is now called to sign these two measures so that they can enter into force as soon as possible.”

“You have a pecking order, ideally uninsured depositors should be the very last category to be touched. There is a specific distinction between different categories of bondholders in the draft directive. Where banks are properly supervised where their size will not outsize the economy where they reside, but they have enough buffers.”

“You want to make sure that there’s a situation where banks are properly supervised, but that they have enough buffers, be that capital or other bail-in-able assets. To a great extent when you look at the other jurisdictions of resolution mechanisms there’s not much of a difference.”

“The FDIC has an explicit distinction between uninsured depositors and bondholders. One wants to make sure the same distinction is going to be present in the commission draft directive.”


“There’s nothing in the market that says ELA is senior, but if you want to remain as a monetary policy counterparty, you’d better be good to that.”

On countries with big banking sectors:

“The recent experience shows that countries where the banking sector is several times bigger than the economy are countries that on average have more vulnerabilities. We’ve seen this everywhere, beginning with U.K. You have to run your country and your banking system in a more conservative way than you would do otherwise.”

“One thing to do is downsize, but you have to run your banking sector in more conservative way than you’d do otherwise. Namely don’t have budget deficits.”

“You realize a country has a wrong business model only when a crisis erupts.”

On monetary policy:

“You also had progress, 2012 has been an extraordinary year in the progress that’s been made at the level of euro-area governments. The buck doesn’t stop with the ECB, it’s really a three pillar construction.”

“It’s important that progress continues.”

“We said we are considering both standard and non standard measures and we are thinking 360 degrees on the non-standard measures.”

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