Ladies and gentlemen, welcome to our press conference. Today is the first time that I have had the privilege and pleasure of chairing the meeting of the Governing Council of the ECB. I am delighted to proceed now with our well-established practice of real-time communication and to report on the outcome of our meeting, together with the Vice-President.
Based on its regular economic and monetary analyses, the Governing Council decided to reduce the key ECB interest rates by 25 basis points. While inflation has remained elevated and is likely to stay above 2% for some months to come, inflation rates are expected to decline further in the course of 2012 to below 2%. At the same time, the underlying pace of monetary expansion continues to be moderate. After today’s decision, inflation should remain in line with price stability over the policy-relevant horizon. Owing to their unfavourable effects on financing conditions and confidence, the ongoing tensions in financial markets are likely to dampen the pace of economic growth in the euro area in the second half of this year and beyond. The economic outlook continues to be subject to particularly high uncertainty and intensified downside risks. Some of these risks have been materialising, which makes a significant downward revision to forecasts and projections for average real GDP growth in 2012 very likely. In such an environment, price, cost and wage pressures in the euro area should also moderate; today’s decision takes this into account. Overall, it remains essential for monetary policy to maintain price stability over the medium term, thereby ensuring a firm anchoring of inflation expectations in the euro area in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term. Such anchoring is a prerequisite for monetary policy to make its contribution towards supporting economic growth and job creation in the euro area.
The provision of liquidity and the allotment modes for refinancing operations will continue to ensure that euro area banks are not constrained on the liquidity side. All the non-standard monetary policy measures taken during the period of acute financial market tensions are, by construction, temporary in nature.
Let me now explain our assessment in greater detail, starting with the economic analysis. Real GDP growth in the euro area, which slowed in the second quarter of 2011 to 0.2% quarter on quarter, is expected to be very moderate in the second half of this year. There are signs that previously identified downside risks have been materialising, as reflected in unfavourable evidence from survey data. Looking forward, a number of factors seem to be dampening the underlying growth momentum in the euro area, including a moderation in the pace of global demand and unfavourable effects on overall financing conditions and on confidence resulting from ongoing tensions in a number of euro area sovereign debt markets. At the same time, we continue to expect euro area economic activity to benefit from continued positive economic growth in the emerging market economies, as well as from the low short-term interest rates and the various measures taken to support the functioning of the financial sector.
In the Governing Council’s assessment, the downside risks to the economic outlook for the euro area are confirmed in an environment of particularly high uncertainty. Downside risks notably relate to a further intensification of the tensions in some segments of the financial markets in the euro area and at the global level, as well as to the potential for these pressures to further spill over into the euro area real economy. They also relate to the impact of the still high energy prices, protectionist pressures and the possibility of a disorderly correction of global imbalances.
With regard to price developments, euro area annual HICP inflation was 3.0% in October according to Eurostat’s flash estimate, unchanged from September. Inflation rates have been at elevated levels since the end of last year, mainly driven by higher energy and other commodity prices. Looking ahead, they are likely to stay above 2% for some months to come, before falling below 2% in the course of 2012. Inflation rates are expected to remain in line with price stability over the policy-relevant horizon. This pattern reflects the expectation that, in an environment of weaker euro area and global growth, price, cost and wage pressures in the euro area should also moderate.
The Governing Council continues to view the risks to the medium-term outlook for price developments as broadly balanced, taking also into account today’s decision. On the upside, the main risks relate to the possibility of increases in indirect taxes and administered prices, owing to the need for fiscal consolidation in the coming years. In the current environment, however, inflationary pressure should abate. The main downside risks relate to the impact of weaker than expected growth in the euro area and globally. In fact, if sustained, sluggish economic growth has the potential to reduce medium-term inflationary pressure in the euro area.
Turning to the monetary analysis, the annual growth rate of M3 increased to 3.1% in September 2011, up from 2.7% in August. The annual growth rate of loans to the private sector, adjusted for loan sales and securitisation, was 2.7% in September, unchanged from August. As in August, inflows into M3 also reflect the heightened tensions in some financial markets. In particular, inflows into money market fund shares/units, as well as into repurchase agreements conducted through central counterparties, appear to have significantly affected monetary developments in September. The annual growth rate of M1 increased to 2.0% in September, from 1.7% in August.
On the counterpart side, the annual growth rate of loans to non-financial corporations and to households in September, adjusted for loan sales and securitisation, remained broadly unchanged compared with August, at 2.2% and 2.6% respectively. These figures do not signal that the heightened financial market tensions have affected the supply of credit up to September. However, as such effects can manifest themselves with lags, close scrutiny of credit developments is warranted in the period ahead. Taking the appropriate medium-term perspective and looking through short-term volatility, underlying broad money and loan growth have stabilised over recent months. Overall, the underlying pace of monetary expansion thus remains moderate.
The overall size of monetary financial institutions’ balance sheets remained broadly unchanged over the past few months. The soundness of bank balance sheets will be a key factor in reducing potential negative feedback loop effects related to tensions in financial markets, thereby facilitating an appropriate provision of credit to the economy over time. We therefore welcome the agreement of the European Council to proceed with the increase in the capital position of banks to 9% of core Tier 1 by the end of June 2012. We also fully support the call to national supervisors to ensure that banks' recapitalisation plans do not lead to excessive deleveraging.
To sum up, based on its regular economic and monetary analyses, the Governing Council decided to reduce the key ECB interest rates by 25 basis points. While inflation has remained elevated and is likely to stay above 2% for some months to come, inflation rates are expected to decline further in the course of 2012 to below 2%. A cross-check with the information from our monetary analysis confirms that the underlying pace of monetary expansion continues to be moderate. After today’s decision, inflation should remain in line with price stability over the policy-relevant horizon. Owing to their unfavourable effects on financing conditions and confidence, the ongoing tensions in financial markets are likely to dampen the pace of economic growth in the euro area in the second half of this year and beyond. The economic outlook continues to be subject to particularly high uncertainty and intensified downside risks. Some of these risks have been materialising, which makes a significant downward revision to forecasts and projections for average real GDP growth in 2012 very likely. In such an environment, price, cost and wage pressures in the euro area should also moderate; today’s decision takes this into account. Overall, it remains essential for monetary policy to maintain price stability over the medium term, thereby ensuring a firm anchoring of inflation expectations in the euro area in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term. Such anchoring is a prerequisite for monetary policy to make its contribution towards supporting economic growth and job creation in the euro area.
Turning to fiscal policies, all euro area governments need to show their inflexible determination to fully honour their own individual sovereign signature as a key element in ensuring financial stability in the euro area as a whole. The Governing Council takes note of the fiscal commitments expressed in the Euro Summit statement of 26 October 2011 and urges all governments to implement fully and as quickly as possible the measures necessary to achieve fiscal consolidation and sustainable pension systems, as well as to improve governance. The governments of countries under joint EU-IMF adjustment programmes and those of countries that are particularly vulnerable should stand ready to take any additional measures that become necessary.
It is crucial that fiscal consolidation and structural reforms go hand in hand to strengthen confidence, growth prospects and job creation. The Governing Council therefore calls upon all euro area governments to accelerate, urgently, the implementation of substantial and comprehensive structural reforms. This will help the euro area countries to strengthen competitiveness, increase the flexibility of their economies and enhance their longer-term growth potential. In this respect, labour market reforms are essential and should focus on measures to remove rigidities and to enhance wage flexibility, so that wages and working conditions can be tailored to the specific needs of firms. More generally, in these demanding times, moderation is of the essence in terms of both profit margins and wages. These measures should be accompanied by structural reforms that increase competition in product markets, particularly in services – including the liberalisation of closed professions – and, where appropriate, the privatisation of services currently provided by the public sector. At the same time, the Governing Council stresses that it is absolutely imperative that euro area national authorities rapidly adopt and implement the measures announced and recommended in the Euro Summit statement of 26 October 2011.
We are now at your disposal for questions.* * *
Question: President Draghi, welcome to Frankfurt. I have a few questions about today’s rate decision, which came as a bit of a surprise. Was the decision unanimous? And can you explain the reasoning behind it, because if the economy needs it and there are very few upside risks to inflation left, why did you not cut by 50 basis points, or are you going to do that next month?
Draghi: Lots of questions, in one short question. But, yes, the decision was unanimous. Second, why did we do it? I think I did say why in the statement, but the points are basically the following: first of all, we observed a weakening of various components of aggregate demand, mainly consumption and foreign demand. We observed a worsening, both in hard data and survey data – worsening Purchasing Managers’ Indices (PMIs), especially in manufacturing, in new orders growth, etc. We have also had two or three Consensus forecasts – we have the Eurobarometer and Consensus Economics showing that the likelihood of the weakening of the economic situation has gone up. We have concluded that the present situation would have a dampening effect on wages, prices and costs, so that our decision today is expected to maintain price stability in the medium term.
Question: Can you tell us if you can envisage a time frame for when the Securities Markets Programme (SMP) will stop and if its continuation is conditional on the countries or if it is, at least, a factor that the countries adopt the measures that they are asked to take, that they have committed to take? I am referring, in particular, to a letter that you yourself were a co-signatory to, together with Mr Trichet, in the summer for Italy.
Draghi: The Securities Markets Programme (SMP) always has had, and was meant to have – as it has been stated since the very beginning – three characteristics. First of all, it is temporary. Second, it is limited in its amount and, third, it is justified on the basis of restoring the functioning of monetary policy transmission channels. So we should keep this in mind because this in a sense answers all the questions that one might have. The relationship with conditionality should be viewed from this perspective. We want our monetary policy to function. And I think that is where the main justification for the SMP lies.
Question: One of the many uncertainties, of course, that was not mentioned in so many words is Greece. It seems that the decisions that were made at the Euro Summit in Brussels might all be up in the air. How concerned are you about a blow-up of the Greek situation?
Draghi: It is very hard to respond on a situation which is itself evolving swiftly. We are monitoring the situation closely and we are absolutely confident that if the measures that have been set out in the programme are implemented, together with the deliberations of the European Council, together with the strengthening of the banking system, together with the decision that the European Council has taken about the EFSF, that all this will quieten many concerns. But, first, we should go back to the first point I made, namely the implementation of the right economic policies. Other than that, it is very hard to comment on political developments in Greece now.
Question: First, Mr Draghi, you seem quite sure that the inflation rate will be below 2% next year. Why is that? Are we heading for a recession in Europe and in the world ? Second, if I talk to international companies, especially big German companies, they do not tell me anything about recession: they are doing quite well. Why is there a contrast between your interpretation and that of the companies?
Draghi: There is no contrast. What we are observing now is slow growth heading towards a mild recession by the end of the year. The effects on inflation are different. Essentially, we have here a base effect, a purely statistical effect, whereby inflation will go down substantially in the course of 2012, to at, or below, 2%. So it will be consistent with our medium-term definition of price stability. In this sense, we are confident that our decision today is absolutely consistent with maintaining price stability. On top of this the weakening of the business cycle will in itself have dampening effects on wages, prices and costs, which will in turn have a dampening effect on inflation. I should also add that long-term inflation expectations are solidly anchored at 2% or even slightly less than that.
Question: I would like to ask, Mr Draghi whether it is possible for the ECB to allow the Chinese government to deal with the debt crisis in the future?
Draghi: These are really decisions that are not in the realm of the ECB’s competence: we know that there are discussions between the IMF and the Chinese government, but we are not part of them.
Question: Mr Draghi, a question about Italy, which is at the forefront of the current situation. Despite the ECB’s intervention, yields on ten-year Italian bonds are substantially higher than 6%, with an inversion of the yield curve. Is this of concern to the ECB? Did you analyse this particular situation in your meetings today and yesterday?
Draghi: No, we have not really been focusing on this and similar situations in our discussions today and yesterday. However, it is clear that – as I have said many times – the responsibility for maintaining financial stability and orderly financial conditions lies first and foremost with national economic policies. It is really pointless to think that sovereign bond rates could be stably brought down for a protracted period of time by external interventions. The main pillar of this is the national economic policy response, which is made up of two components: first, put your public finance in order and, second, undertake structural reforms. In doing so, competitiveness is enhanced, thereby fostering growth and job creation.
Question: First, the ECB has always argued that the idea of a euro area break-up is absurd. Do you think it is wise now for euro area politicians to be talking about the possibility of one country leaving? Second, you will be here now for an eight-year term, and some people worry what the euro area will look like in eight years’ time. Are you prepared now to make a commitment that you will do whatever is necessary to keep the euro area in one piece, including – if necessary – becoming the lender of last resort to governments?
Draghi: In response to the first question, I think the real answer is that it is not in the Treaty and I have nothing to add to that: it is not in the Treaty.
With regard to the second question, actually I have a question for you: what makes you think that the ECB becoming the lender of last resort for governments is what is needed to keep the euro area together? No, I do not think that this is really within the remit of the ECB. The remit of the ECB is maintaining price stability over the medium term.
Question: Was that it? Are interest rates appropriate now? Are you happy? Or do you still have some powder?
Draghi: I mean the answer to this question – as you know by now, after eight years with Jean-Claude Trichet – is that we never pre-commit.
Question: Jean-Claude Juncker has said today that the euro zone is preparing for a possible exit of Greece. What part would the ECB play in such plans? And the other question is: what message on the euro zone are you going to tell the G20 leaders when you meet them tonight?
Draghi: On the first question, I have answered it already: it is not in the Treaty. We are all bound by the Treaty, and so we cannot really conceive of situations which are not envisaged in the Treaty.
As regards my message tonight and tomorrow in Cannes, it does not really have to do with my hat as ECB President, because I have been invited there as Chairman of the Financial Stability Board (FSB). And it is going to be my last day as Chairman of the FSB, as you know, because I will resign tomorrow. My message will be entirely and 100% based on financial stability considerations and the work the FSB is proposing to the G20 leaders for the coming year.
Question : Could you explain a little more your rationale behind the interest rate cut? If you had kept rates where they were, were you worried that inflation would fall too quickly and that maybe there would be excessive disinflation or even deflation without an interest rate cut?
And also, on the bond purchases, former President Trichet used to say that once the EFSF is operational, the ECB would not be buying bonds anymore. Will you make that same commitment?
Draghi: As I said before, we looked at the behaviour of several variables – the real economy, where we observe the weakening of various aggregate demand components; we looked at survey data, showing a worsening of the indicators that I mentioned before; we looked at other forecasts by other organisations, and they also showed a weakening of this – and then we looked at our monetary analysis. We cross-checked the two and we concluded that there was basically a weakening of the business cycle and also the likelihood that we may have to revise downwards our projections that will be presented next month. And we also concluded that there was no threat to price stability were we to lower by 25 basis points our key interest rates. No, we do not foresee deflation.
On the SMP, as I said before, I think we have to judge the SMP by its stated functioning, its stated intentions, and its stated reasons. Namely, we said it is temporary, it is limited and it is justified by monetary policy considerations. And so, we will assess the SMP functioning from these angles.
Question: One question for President Draghi and one question for Vice-President Constâncio. I am a bit surprised by your somewhat “legalistic” answer on Greece and that is not in the Treaty. If you have senior euro zone politicians talking about Greece potentially leaving the euro zone, is not it up the ECB to consider how this, if it is supposed to happen, can be done technically and whether it can be done technically or not?
And for Vice-President Constâncio: you have seen in your time here at the ECB President Trichet in the chair where President Draghi is sitting now and you have seen President Draghi today. What is the difference in style and substance in the two leaderships?
Draghi: If I can comment, the second question is much better than the first! But, on the first point, I would not call my answer “legalistic”. There is very little that we have other than the Treaties. In a sense, the remit of this institution is enshrined in the Treaty. So, I do not think “legalistic” would be the right word. We have to have full respect for the spirit and the letter of the Treaties, and an issue like the break-up of the euro area is not a marginal one. So that is when the power of our Treaties comes into question. I do not know whether “legalistic” kind of belittles this concept – it is probably not the right word – but what it is meant to say is that we are using the Treaty as our reference point for decisions in areas as important as this one and, in that sense, it is the right word to use.
Constâncio: On substance, it is the same. Do not forget that President Draghi has been a member of the Governing Council for many years, so he is totally embedded in the approach of the Governing Council over the years and you see also the continuity of analysis in the initial statement and in his answers. Let me remind you that, last month, President Trichet said that the possibility of a rate cut was discussed in the meeting, so the decisions today are not something that are out of line with the continuity of analysis and, as the President explained, the indicators since then have only aggravated and justified today’s decisions. So, I would say no differences on substance. On style, there is the same approach of taking the opinions and inputs of everyone. That is also to say, that there are, as always, personal differences. But I will perhaps protect myself by saying that it is too soon to tell! Just one meeting, just one observation!
Draghi: I would just like to add one thing. I think your question also has a deeper angle than just pure personalities, and the answer to your question is really that continuity, credibility and consistency are of the essence in the way we carry out our jobs.
Question : I didn’t catch your answer about lender of last resort, so I want to ask you once more: in order to help the euro area is the ECB ready to buy more bonds? And for how long?
Draghi: I have answered this question before. Let me just take a step back. For a long time spreads between sovereign bonds in the euro area were very narrow. In point of fact, they did not reflect the different realities of different countries. Countries were different because the state of their public finances was different; because their initial conditions were different: there were countries with low debt and countries with high debt; because their growth prospects were different; and because their competitiveness was different. And then we had the financial crisis at the end of 2007 and in 2008 and 2009. That increased risk aversion among all investors worldwide and made their analysis more perceptive of the different risks in different countries. And that is how the explosion of sovereign spreads started. As we had what the economists call “undershooting” for a long period of time, we may now have “overshooting”. But the way to react to this is not to count on external help that could alleviate the temporary market pressures, instead the real answer is actually to count on the countries’ capacity to reform themselves with the right economic policies – and I listed them before, in response to a previous question.
Question: Mr Draghi, you said the Securities Markets Programme (SMP) is limited, can you tell us what the limit is?
Draghi: You are told what the limit is every week. You receive a communication.
Question: But looking ahead, not looking back.
Draghi: Of course we do not do that. But there is continuous communication every week on the amounts that have been purchased.
Question: And a second question if I may: there are more and more concerns about the balance sheet of the ECB. Some economists say the SMP, but also the credit you give to Greek banks, might cause significant write-downs, especially if Greece fails. As an economist, would you say the Eurosystem can operate on a negative equity capital basis?
Draghi: There is a strange “schizoid” attitude because some people say that our balance sheet is at risk, while others say we should expand our balance sheet to help everybody. In point of fact our balance sheet is not at risk and many things have been decided at the last European Council which made the Greek debt and the Greek counterparties compliant with our requirements. Our requirements for collateral are 1) that counterparties should be sound, and 2) that collateral should be adequate. There have been measures to recapitalise the banks, there have been measures of credit enhancement, and there have been measures giving guarantees for term funding. And there have been other measures that are reassuring as far as the ECB balance sheet is concerned.
Question: Mr Draghi, do you disagree with Mr Sarkozy or Ms Merkel when they say that when the Greek people have to decide about the rescue plan, they have to decide whether or not to stay in the euro area, with this referendum?
Draghi: That is a different statement. That is why it is so hard to comment on a political situation, because it is evolving so fast. Until two hours ago there was a prospect of having a referendum in Greece. That had thrown markets into disarray, as you have seen in the last two days. Then people focused on what kind of questions were going to be asked in this referendum. And the answer that Chancellor Merkel and President Sarkozy were giving is that you should not ask detailed questions: are you in favour of higher taxes, are you in favour of this and that, etc. But one should ask the general question of whether a country is responsible and wants to stay in the euro area and wants to comply with the responsibilities that come with staying in the euro area. I think that was the meaning of the point made by the two Heads of State.
Question: For the next 36 hours you are President of the Financial Stability Forum (FSB) and of the ECB. You are going to the G20. Which role can you play so that the new rules and the new functioning of the international financial markets can change? And can you act in this direction also as President of the ECB?
And my second question is: can today’s decision about the interest rates help the ECB also to buy less Italian bonds or Buoni del Tesoro Poliennali or Spanish bonds?
Draghi: The answer to the second question is no. They are two separate issues, they have nothing in common.
In answer to the first question, at the Cannes summit I will present the work of the FSB and the proposals of the FSB for the work to be done in the course of next year. There are proposals that concern the global CFI (GCFI) rules, there are proposals that concern the legislative and regulatory implementation of the over the counter (OTC) derivatives rules, where substantial standardisation is in progress, and there are proposals that concern the shadow banking system. We have substantially strengthened regulation for the regulated sector, but now we plan to increase the regulatory perimeter to include institutions that are at present in the so-called shadow or unregulated sector but actually carry out the same activities as banks. So they should be subject to the same rules as banks. These are the main proposals.
Then there will be proposals about how to enhance or change the governance of the FSB. That is going to be the main thrust of my presentation tomorrow.
Question: What do you expect to be China’s contribution at the G20 meeting?
Draghi: Right now, the Chinese economy, even though it is mildly slowing, is probably one of the few sources of growth in the global economy. So I do expect China to make a very important contribution at the current G20 summit.
Question: First of all, in relation to the rather significant discounts which Greece has been offered on its debt, is the ECB any more open to the prospect of some of the other programme countries applying discounts to either their bank debt or to their sovereign debt?
Secondly, you were saying that you do not see any risk of deflation imminently. Is it fair to say, then, that expectations of a further interest rate cut would be fair?
Draghi: I have already answered the second question in saying that we never pre-commit.
On the first question, one has to keep in mind that the Greek situation is exceptional and unique. In spite of the recent turmoil, the sovereign signatures remain a pillar of financial stability in the euro area and in the rest of the world. We are confident that the Irish government can comply with the measures announced, and the Irish government itself said that it would do whatever it takes. So, one has no reason to doubt the commitment of the government.
Question: Your predecessor Mr Trichet was criticised by many Germans for throwing the Bundesbank principle overboard, and a lot of Germans are fearfully asking themselves if you stand in the tradition of the Bundesbank. Perhaps you can give these Germans an answer.
Secondly, did Mr Trichet give you any advice for today’s meeting and, if so, have you followed it?
Draghi: No, Mr Trichet did not give me any specific advice for today’s meeting, but he gave me the comfort of his example, of his being a role model. I had the privilege to work with him for many years.
On the first question, I have great admiration for the tradition of the Bundesbank. I was in the Treasury in Italy in the 1990s and we had many opportunities to work with Hans Tietmeyer and Helmut Schlesinger, so I developed a very great admiration for this institution throughout these years. As for the future, let me do my work and we will have periodic checks as to whether I am in sync with this tradition or deviating from it.
Question: A question about Italy: you said that countries should make reforms by themselves and that they should not count on external help, but do you think, realistically, that Italy can make reforms at the moment? Or, to put it another way, do you not think that the ECB will be forced to buy Italian bonds for a long time?
Draghi: The answer is that we are not forced by anybody. We are independent and make our own judgement.
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