Draghi Says Euro Area Growth Risks Remain ‘On the Downside’

European Central Bank President Mario Draghi comments on interest rates, inflation, and the economy.

He made the remarks at a press conference in Frankfurt today after ECB policy makers left the benchmark interest rate at a record low of 0.50 percent.

On monetary policy stance: Underlying price pressures in the euro area are expected to remain subdued over the medium term. In keeping with this picture, monetary and, in particular, credit dynamics remain subdued. Inflation expectations for the euro area continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2 percent over the medium term.

We are not at all oblivious to the fact that inflation in the medium term undershoots our objective of inflation close to or below 2 percent.

Our monetary policy stance continues to be geared towards maintaining the degree of monetary accommodation warranted by the outlook for price stability and promoting stable money market contitions. It thereby provides support to a gradual recovery in economic activity in the remaining part of the year and in 2014.

Looking ahead, our monetary policy stance will remain accommodative for as long as necessary.

On economic outlook: Looking ahead to the rest of the year and to 2014, euro area export growth should benefit from a gradual recovery in global demand, while domestic demand should be supported by the accomodative monetary policy stance as well as recent gains in real income owing to generally lower inflation.

The remaining necessary balance sheet adjustments in the public and private sectors will continue to weigh on economic activity. Overall, euro area economic activity should stabilize and recover at a slow pace.

Now we start seeing possibly the first signs that this significant improvement in confidence and interest rates is finding its way through to the economy.

On risks to the economic outlook: The risks surrounding the euro area economic outlook continue to be on the downside.

Other downside risks include the possibility of weaker than expected domestic and global demand and slow or insufficient implementation of structural reforms in euro area countries.

Annual inflation rates are currently expected to temporarily fall over the coming months.

Underlying price pressures are expected to remain subdued, reflecting the broad-based weakness in aggregate demand and the modest pace of the recovery. Medium to long-term inflation expectations continue to be firmly anchored in line with price stability.

On bank funding: Since the summer of 2012, substantial progress has been made in improving the funding situation of banks and, in particular, in strengthening the domestic deposit base in a number of stressed countries.

It’s essential that the fragmentation of euro area credit markets declines further and that the resilience of banks is strengthened where it is needed.

On fiscal reforms: To bring debt ratios back on a downward path, euro area countries should not unravel their efforts to reduce government budget deficits.

On forward guidance: The Governing Council confirms that it expects the key ECB interest rates to remain at present or lower levels for an extended period of time.

In terms of compressing volatility it was successful, and in terms of short term rates it was partly successful.

There was a discussion whether we should repeat these words each and every time. Because of an excessive prudence, we repeat them today. But we may not repeat them if we judge that you and the markets understand that a certain forward guidance is valid until further notice.

In other words, we may not repeat if we are convinced that you and the markets understand that if we don’t say anything, it doesn’t mean that we have changed our mind -- it means we stay with the same mind until we do change mind.

You have all the parameters in your hands to judge the length of time, especially about when the language of forward guidance might be changed.

On liquidity measures: Liquidity will remain abundant. It will remain ample as long as needed.

Current expectations of rate hikes in money markets are according to our assessment unwarranted.

On the possibility of deflation: If we define deflation as a generalized fall in the price level across broad categories of assets, sectors, in a context of self-fulfilling expectations, we don’t see deflation in any country in the euro area.

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