Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. We will now report on the outcome of today’s meeting of the Governing Council.
Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. The information that has become available since the beginning of March broadly confirms our previous assessment. Inflation rates are likely to stay above 2% in 2012, with upside risks prevailing. Over the policy-relevant horizon, we expect price developments to remain in line with price stability. Consistent with this picture, the underlying pace of monetary expansion remains subdued. Survey indicators for economic growth have broadly stabilised at low levels in the early months of 2012, and a moderate recovery in activity is expected in the course of the year. The economic outlook remains subject to downside risks.
Medium-term inflation expectations for the euro area economy must continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term. Over the last few months we have implemented both standard and non-standard monetary policy measures. This combination of measures has contributed to a stabilisation in the financial environment and an improvement in the transmission of our monetary policy. We need to carefully monitor further developments. It is also important to keep in mind that all our non-standard monetary policy measures are temporary in nature and that all the necessary tools are available to address upside risks to medium-term price stability in a firm and timely manner.
Let me now explain our assessment in greater detail, starting with the economic analysis. Real GDP contracted by 0.3% in the euro area in the fourth quarter of 2011. Survey data confirm a stabilisation in economic activity at a low level in early 2012. We continue to expect the euro area economy to recover gradually in the course of the year. The outlook for economic activity should be supported by foreign demand, the very low short-term interest rates in the euro area, and all the measures taken to foster the proper functioning of the euro area economy. However, the remaining tensions in euro area sovereign debt markets and their impact on credit conditions, as well as the process of balance sheet adjustment in the financial and non-financial sectors and high unemployment in parts of the euro area, are expected to continue to dampen the underlying growth momentum.
Downside risks to the economic outlook prevail. They relate in particular to a renewed intensification of tensions in euro area debt markets and their potential spillover to the euro area real economy. Downside risks also relate to further increases in commodity prices.
Euro area annual HICP inflation was 2.6% in March 2012, according to Eurostat’s flash estimate, after 2.7% in the previous three months. Inflation is likely to stay above 2% in 2012, mainly owing to recent increases in energy prices, as well as recently announced rises in indirect taxes. On the basis of current futures prices for commodities, annual inflation rates should fall below 2% again in early 2013. In this context, we will pay particular attention to any signs of pass-through from higher energy prices to wages, profits and general price-setting. However, looking ahead, in an environment of modest growth in the euro area and well-anchored long-term inflation expectations, underlying price pressures should remain limited.
Risks to the outlook for HICP inflation rates in the coming years are still seen to be broadly balanced, with upside risks in the near term mainly stemming from higher than expected oil prices and indirect tax increases. Downside risks continue to exist owing to weaker than expected developments in economic activity.
The monetary analysis indicates that the underlying pace of monetary expansion has remained subdued. The annual growth rate of M3 was 2.8% in February 2012, compared with 2.5% in January. In both January and February we observed a strengthening in the deposit base of banks. Annual loan growth to the private sector has remained subdued, with the rate (adjusted for loan sales and securitisation) moderating in February to 1.1% year on year, from 1.5% in January.
The annual growth rates of loans to non-financial corporations and loans to households (adjusted for loan sales and securitisation) stood at 0.6% and 1.8% respectively in February. The volume of MFI loans to non-financial corporations and households remained practically unchanged compared with the previous month.
Money and credit data up to February confirm a broad stabilisation of financial conditions and thereby the avoidance of an abrupt and disorderly adjustment in the balance sheets of credit institutions, as intended by our measures. Funding conditions for banks have generally improved, and there has been increased issuance activity and a re-opening of some segments of funding markets. The demand for credit remains weak in the light of still subdued economic activity and the ongoing process of balance sheet adjustment in non-financial sectors. The full supportive impact of the Eurosystem’s non-standard measures will need time to unfold and to have a positive effect on the growth of loans when demand recovers. In this context, it should be noted that the second three-year longer-term refinancing operation was only settled on 1 March 2012.
Following the stabilisation in the financial environment, it is essential for banks to strengthen their resilience further, including by retaining earnings. The soundness of banks’ balance sheets will be a key factor in facilitating both an appropriate provision of credit to the economy and the normalisation of all funding channels.
To sum up, 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.
In order to support confidence, sustainable growth and employment, the Governing Council calls upon governments to restore sound fiscal positions and implement strong structural reforms. Commitments under the Stability and Growth Pact need to be fully honoured and weaknesses in competitiveness forcefully addressed. National policy-makers need to fully meet their responsibilities to ensure fiscal sustainability, to increase the adjustment capacity of product and labour markets, to enhance productivity and competitiveness, and to ensure the soundness of their financial system. In particular, countries which have suffered losses in cost competitiveness need to ensure sufficient wage adjustment and foster productivity growth.
Let me conclude by recalling that the single monetary policy naturally focuses on maintaining medium-term price stability for the euro area as a whole. It is up to national policy-makers to foster domestic developments which support the competitiveness of their economies. Both prudent fiscal policies and competitive and flexible product and labour markets are of crucial importance for the functioning of the euro area economy.
We are now at your disposal for questions.* * *
Question: Two questions: when one hears the sort of comments, the rumbling, from the ECB Council, from various members, there is already a talk of concern about an exit strategy from the lush money that we have at the moment. Is it indeed too early to even mention such a thing as exit strategy?
And second, in terms of the second longer-term refinancing operation (LRTO) and the lowering of the collateral requirements, how concerned are you – or are you concerned – that due to the low collateral requirements, maybe some banks are being kept alive or afloat with the help of ECB money that should not really to be kept afloat?
Draghi: On the first question, what did you call them: “mumblings”, “rumblings”, comments? Well, I think the President of the ECB is the one who will have the last word on this. But the question, in substance, calls first and foremost for an assessment of the impact that the two LRTOs have had on the banking system and, more generally, on the financial system. Let us not forget that all the data that we discussed today do not take into account the impact of the second LRTO. So, it is, by necessity, only a partial analysis that is possible today. Furthermore, the LTROs are powerful and complex measures that have affected all funding channels – in a sense, all the items of the balance sheets of banks – in a variety of ways. First and foremost, we have to look at exactly what is happening here. We certainly know what we have discussed on other occasions, namely that the two operations have provided relief from, or have avoided, a major credit crunch and have eased the funding pressures on banks and credit systems. But there is far more that needs to be looked into. Second, we have to assess the outlook for price stability from month to month. That is what we have in mind. I think that, given the current conditions for the situation of, and especially the outlook for, prices, there seem to be – as I have said – no inflationary pressures and inflation expectations are firmly anchored over the medium term. Or, expressed in a better way, there are inflationary pressures that come from the higher oil prices, from higher indirect taxes in the short term, but inflation expectations are firmly anchored over the medium term. And, given current conditions with respect to output and unemployment – with the latter at a historical high – talking about any exit strategy would, for the time being, be premature.
Your second point on the lowering in the collateral. Let me say it once again – we have included what we call additional credit claims in the ensemble of collateral that we have traditionally accepted. These credit claims have a haircut that is extraordinarily high – the average is 53%, but it can go up to 75%. The intent of the risk managers is to make these claims equivalent in terms of risk to the traditional claims. Furthermore, when they are traded, they are traded and valued at market prices. So, these haircuts are applied and when the claims are not traded, they have an internal valuation. All in all, I do not, therefore, think that we need to fear what you said at this point in time.
Question: You just said that you do not see inflationary pressures in the medium term. At the same time, in your introductory statement, you included a new sentence saying that you have to address any inflation pressures in a firm and timely manner. These two statements seem to go in opposite directions. Can you please explain in more detail what the risks of second-round effects are at the moment, in your view?
My second question is: shaky Greek banks have just been hit further by the Greek PSI deal. What are the risks that this will make it necessary for the ECB to drop some of them as counterparties, or is the Governing Council indeed already looking at cutting particular banks off from ECB financing?
Draghi: As regards your first question I have said that in the short term, inflation is now at 2.6%, compared with 2.7% in the previous months. This is due to persistently high energy prices, indirect taxes and, more generally, also high commodities prices. Our medium-term projections show that inflation will stay above 2% in 2012 and will decline to below 2% in 2013. This is a case of simply mechanical updates. Of course, we will certainly monitor any pass-through with great attention. And this concerns not only energy prices, but also – I would say – exogenous prices movements. We will see this, and we will carefully monitor that. And we will react in a timely and speedy fashion.
As regards your second question about the Greek banks – Greek banks’ capital have basically been wiped out by the private sector involvement (PSI). There is a recapitalisation fund of €50 billion in place, €25 billion of which should and will become immediately available for the recapitalisation of the Greek banks and thereby for retaining them as counterparties in monetary policy operations. In the meantime, we are assessing the conditions of the Greek banks until this money becomes available. In any event, this is going to be a temporary decision. We will be distinguishing between Greek banks that are viable, i.e. can be retained as counterparties for monetary policy operations, and those that are not going to be viable as counterparties for monetary policy operations. This is a process that is actually taking place right now. Of course, the sooner the €25 billion become available, the sooner will this problem be resolved.
Question: I have to get back to your inflation comments. You say you will pay particular attention to the pass-through of several effects of the crisis – now to me that sounds like you are stepping up your rhetoric on the inflation front. It sounds to me like you may be a bit more concerned about inflation risks down the road. So, have you spoken specifically about risk of second-round effects or do you see them already, and how much were German wage deals and wage claims part of the discussion in the Council today? That’s my first question.
And the second one, if you do expect inflation to fall back in line with price stability early in 2013, that seems that you are perfectly well covered on your primary mandate. And at the same time, the recent data we have seen in the euro area has not been so great and unemployment is actually on an upward trend. Given that this is your secondary mandate, do you see room to do something to address this issue?
Draghi: On your first point, I don’t think I am stepping up my rhetoric on inflation. I think the ECB has always said that increases in oil or other commodity prices, to the extent that they are passed through to prices wages and margins, ought to be contrasted. So there is nothing new in this. I am not inventing anything on this. I would not comment on an individual wage settlement such as the one you mentioned. But that’s one case where we certainly are giving a lot of attention to pass-throughs and we also have to take productivity into account. That is the other dimension we have not talked about.
On your second point, our primary mandate is to maintain price stability, and to a great extent, fiscal consolidation will on the one hand stabilise financial markets and improve the financial conditions for the private sector. On the other, it is certainly creating a short-term contraction, though I have to say that the estimates of the effects on output are already included in our projections. So it will necessarily cause a short-term contraction. That’s why we said repeatedly that structural reforms are essential to produce sustainable long-term growth, which will re-absorb this unemployment. I think the historical experience has shown clearly that there is no trade-off between inflation and unemployment that can be sustained through time.
Question: Are you seeing any signs that euro area banks are becoming addicted to the ECB’s cheap money and what is your plan, what are you going to do to prevent this from happening?
And my second question is: why have you decided now to give national central banks the option not to accept the limited amount of bank bonds that are guaranteed by countries which are in an EU-IMF programme, in their lending-on function.
Draghi: No, we don’t see any signs that banks are becoming addicted to the ECB. But the two LTRO operations are, and I did say this on other occasions, a window of opportunity. They are a window of opportunity for governments to undertake both fiscal consolidation and structural reforms. In a sense, they may benefit from this relative quietness – quietness may be a too strong word – relative peace of financial markets, but it is also a window of opportunity for banks to repair their balance sheets, to deleverage what they ought to deleverage in an orderly fashion. If you want me to give you one primary achievement of the LTROs, it is that it gave banks room for deleveraging in an orderly fashion. So for the time being, we would all see this. Also, let’s keep in mind that it is not capital, but liquidity that we provide banks with. So if a bank does not have capital it would better raise it now, because it won’t have more capital through this liquidity.
On your second point, let me clarify what we are talking about: involved are bank bonds, bonds issued by banks and guaranteed by the governments, by the national governments of the countries where these banks reside. This guarantee is given by governments based on a crisis arrangement established by the European Commission. And it does not come for free, so banks pay for this. These banks can use these bonds as collateral when borrowing money from their respective NCB and then later from the ECB. Now, sometimes it happens that they give this collateral to NCBs of other countries. So we are talking about bank bonds guaranteed by their own government, given as cross-country collateral to another NCB. Then we decided that we would not share the risk arising from this type of bond but that each NCB should bear the risk of accepting these bonds. So, after all this had taken place, it was only natural to say then that each NCB is free to accept or reject these bonds, because, after all, the risk would fall only upon the specific NCB. But when all this is said and done, we are really talking about peanuts. So it is completely and materially irrelevant, and unfortunately, there was major confusion in communications. I forgot to mention that the bonds that would be subject to this treatment would only be the bonds issued by countries that have a programme with the IMF/ EU, or bonds which are below the required collateral eligibility. So we are really talking about a very narrowly restricted set, and it seemed only natural, since NCBs were taking all the risk, to grant NCBs freedom to decide whether they wanted to take it or not. That’s the whole sequence. But it is simply one of those things which was overblown in communication terms.
Question: Why did you do it now and not earlier?
Draghi: Well, it was a series of decisions really over several months, because it did not come all at once.
Question: First, do you support the Irish government’s campaign to restructure the Anglo-Irish Bank promissory note scheme?
Second, what do you say to Irish people who are preparing to vote “No” in the forthcoming referendum on the fiscal treaty?
Draghi: I answered your second question last time. I am fully confident that they will vote in favour of the fiscal treaty. The Irish government and the Irish people have undergone a very harsh fiscal consolidation programme, and they deserve to be praised for their efforts.
In answer to your first question, we take note of the scheduled end-March redemption of the promissory notes and a subsequent reduction in Emergency Liquidity Assistance provided by the Central Bank of Ireland. We expect that the future redemptions will be met according to the schedule to which the government has committed itself. As Ireland strives to regain market confidence – and frankly I have very few doubts that it will succeed – it is of the utmost importance that the commitments of the Irish State are met in line with standing contracts and agreements.
Question: You are referring to the deferral arrangement that was made last week. I was referring in my first question to the broader government campaign to reschedule the promissory note scheme at large. This is a €31 billion promissory note which is to be repaid over the course of 20 years. The government wants to replace it with EFSF bonds or ESM bonds. Do you support that?
Draghi: I would simply say that I take note of this.
Question: I note your comments earlier, but can we take from that that the ECB wasn’t in favour of the way that the payment to Anglo-Irish Bank was made last week or do you feel that the payment was materially met?
And then, in terms of the broader restructuring, are you optimistic at this point that there is going to be some kind of broader deal and do you think that is going to materially improve Ireland’s financial position?
Draghi: I can respond on this specific operation that has been undertaken, and as I have just said, we have taken note of it. After all it is a completely Irish operation. The ECB is not part of it, as it is “the redemption of the promissory notes and a subsequent reduction in Emergency Liquidity Assistance provided by the Central Bank of Ireland.” Again it is of the utmost importance that the commitments of the Irish State are met in line with standing contracts and agreements. The main reason is that we really think that the Irish government has a very good chance of returning to markets.
Question: First, a clarification about Greece – I am a little bit confused. Did you intend to say that you are considering cutting off some Greek banks from financing operations with the ECB? In what timeline is this consideration going to take place?
And second, you have been talking about the effects of the three-year LRTOs: today does not appear to have been a good day for the markets – the Spanish auctions did not go very well and spreads are back up in Spain and Italy. Is it right to conclude from that that, in a way, the beneficial effects of the three-year LRTOs are about to vanish as far as their market impact is concerned?
Draghi: On the first point, we have a €50 billion recapitalisation fund as established by the programme. Of that, €25 billion will become available and will allow the recapitalisation of Greek banks so that they can become full counterparties in monetary policy operations. Of course, some of the Greek banks will need to be restructured. I have no precise description of the restructuring plans that are meant to be undertaken in the coming weeks. But, basically, the first €25 billion should become available in a relatively short time. At that point, the banks that are viable to become counterparties in monetary policy operations would do so and the others would not, which means that they would go on Emergency Liquidity Assistance (ELA). Let me give the floor now to the Vice-President.
Constancio: What is important to underline is that there is a huge amount of money in the second programme approved for Greece to deal with the recapitalisation of Greek banks and also all the operations to restructure the sector, which may involve loss absorption. That is contemplated in this package of €50 billion. Everything will happen in an orderly fashion and according to the plans that have been approved with the Troika. So, no surprises there. That is very important because, in the implementation of these restructuring plans, several things will happen along the way. Some banks that have had a big impact as a result of the PSI, because they had a lot of Greek bonds and so on, may have to be restructured, meaning merging with others, resolved and so on. And as this plan is being applied, some of them may, for a temporary period, lose access to normal monetary operations. They will get ELA and then they will be “solved” according to the plan. The whole plan will be implemented in an orderly fashion without creating any turbulence in Greece as a result of this process. This process was studied in detail in preparation for the second programme. The whole thing is foreseen and it is now going to be implemented and will have some effects in the way Greek banks access the liquidity of the central bank. But there will be no turbulences and no surprises with the implementation of this plan.
Draghi: On your second question, I will not comment on a specific auction. But, by and large, I would read the recent developments not so much as an example of market fragility, but simply as an example that markets are expecting reforms. What markets are saying is that they are asking these governments to deliver, i.e. fiscal consolidation, structural reforms, etc. But I do not think that it is really to be looked at as a specific symptom of market uneasiness, but rather of market attention upon fundamentals.
Question: Can you please confirm that some national central banks swapped their Greek bonds, bought for investment purposes, before the PSI? And can you tell us if the ECB directly holds bonds, regardless of the SMP, for investment purposes? And if the ECB does not make profits on these bonds, how will the institution give the money back and through what channel?
And maybe one last question, at the end of today’s introductory statement, you recall the principal purpose of monetary policy. What is the purpose of this remark? Is it to avoid more unnecessary debates like the one we had in 2007, when the freshly elected President Sarkozy urged the ECB to do more to support the economy?
Draghi: As regards your last point to what are you referring to?
Question: What I mean is “Let me conclude by recalling that the single monetary policy naturally focuses on maintaining price stability...” I just recall that in 2007 President Sarkozy of France had a discussion with your predecessor regarding the role of the ECB. So, what is the purpose of this point?
Draghi: On your first question, as you know, the ECB swapped its bonds for new bonds for various reasons. First of all, the ECB’s SMP holdings of Greek bonds were purchased for monetary policy reasons. For reasons of public interest, that is one main reason. The second is that we believed that they ought to be protected to ensure the integrity of the ECB’s balance sheet, and therefore its independence. But the third reason is that we don’t forget that this money – the money we handle at the ECB – is public money. So, in a sense it was our duty to protect taxpayers’ money in any way possible. And this was the way we chose to do it – namely to swap them for new bonds.
On the second question, here it says that we have one single monetary policy for the whole euro area, and this has to maintain price stability for the euro area as a whole. What this sentence basically says is that there may be heterogeneities – and that’s particularly true at times like this. And these heterogeneities – these differences – may be differences in inflation, growth, employment, competitiveness and productivity. And they may be temporary, like those we have seen in the United States, for example. There was not, until recently, if you compare differences across countries, much of a difference between different states’ performances in the United States and in Europe. And if they are temporary, they will tend to compensate for each other. Or they may be structural. But if they are structural, monetary policy cannot do much about that. If they are structural, it is national governments that have to respond with the right policies – structural policies, but also labour market policies and wage policies. That is what this sentence says, essentially.
Question: Last month you said that we have to get back to normal, classical monetary policy. I am interested in that because you said just a few moments ago that it is too early – premature – to talk about an exit strategy. My obvious question is, when might we return to a classical monetary policy? And I suppose the other question is, will there ever be a classical monetary policy as we knew it, or will monetary policy be different in the future, given what has happened in the last few years?
And my second question is related to that, really. Was there any discussion today about an interest rate increase or cut, either this month or in coming months? Or was there any discussion – if we are talking about exit strategies – about the future of the second €40 billion covered bond programme that you launched late last year?
Draghi: Let me answer quickly on interest rates. No, there was no discussion about interest rate changes. Second, as regards the €40 billion covered bond programme, what is happening here is that, after the LTROs, market conditions have improved considerably, so demand for this type of bond has gone up. This is one of the reasons why we have actually already slowed down the programme considerably and one of the reasons why we will monitor the programme to judge whether it’s appropriate in the present market conditions. This is what we have basically done: we have slowed down the programme and we are monitoring the appropriateness of the programme in the present market conditions.
As regards your first point on when will we go back to a classical monetary policy? Well, that is not an easy question to answer. First of all, we have to understand the precise impact of the two LTROs. Bear in mind that the two LTROs are, to some extent, the most classical monetary policy tool that any central bank has undertaken at this exceptional time. After all, we have not carried out quantitative easing; we are not purchasing bonds outright like other central banks, or purchasing assets outright. We are basically lending money on the basis of collateral, so it is very much a classical monetary policy tool. Second, we are using the lending channel that is typical for the euro area – namely banks. We have the traditional counterparty. So, this is a repo-based monetary expansion, where the real news, the big difference compared with the past, is the maturity that we have introduced. It is a three-year operation, rather than a short-term operation. Basically, we will assess the implications of the LTROs and, as I said before, we will look at the assessment of price stability month by month, and then we will decide. Then we will make up our minds.
Question: You mentioned the importance of wage and price adjustments, especially in the periphery, and given that this will probably lead to a period of disinflation, do you share the view that this means – arithmetically – that some of the core countries will actually need higher inflation in order to achieve your objective of “below, but close to, 2%”? How will you explain that to some of the more inflation-phobic populations in the core, if you share this view?
Draghi: I think that the discussion here is like the one we are having as regards the rebalancing of growth. I think we will have to have rebalancing, with an inflation rate for the euro area which is below, but close to, 2% in the medium term. And this rebalancing should be achieved, ideally, without inflating the good performers. In a sense, I would say that this discussion is like the one where people say that we have low growth in certain areas because the best performers are actually exporting everything, so they should expand domestic demand to absorb some of the supply coming from the other countries. Again, I think the solution would be to make all countries as competitive as the most competitive performer, rather than trying to bring the best performer down.
Question: Can you still reach your “below but close to 2%” goal? If everyone is at 0.5% inflation, the entire euro area will be at 0.5% inflation. So, just arithmetically, don’t some countries have to have higher rates?
Draghi: No, I don’t think so. I think we can have a 2% – or below 2% – inflationary rate for the whole euro area without the need to inflate the good performers. I think it’s a very feasible objective.
Question: I want to go back to the issue of economic growth. You mentioned in the Introductory Statement a couple of the factors that could help the recovery as being foreign demand and low interest rates. What do you see or what does the Governing Council see within the euro area that could generate home-grown demand, given the high rates of unemployment, given the adjustments that you are taking on? Where do you actually see the stimulus to growth occurring from within the euro area?
And my second question is: when you look at the youth unemployment rates, especially in Spain, in Greece, at what point does economic reform – austerity – have such a damaging effect in the near term that it undermines the efforts to reform their economies and to bring their budgets into balance?
Draghi: Well, at the present time – and I did say this in the Introductory Statement – growth can come from two sources, essentially, for the whole of the euro area: foreign demand, where emerging markets have become one of the most important sources; and the very low level of short-term interest rates. Let’s not forget that short-term interest rates are negative at the present time. Having said that, much of the growth in countries, that are now experiencing a fiscal contraction, would have to come from supply reforms. And this drives me straight to the labour market issues and youth unemployment. There are several reasons for youth unemployment and, while I don’t want to dwell on them, it is certainly most developed, or at its highest, in countries that have had, in the past, a so-called dual labour market, where you had one section of the labour market that had all the protection, and another section of the labour market, namely the young, who were basically always hired on a very temporary, short-term basis. They basically had no protection. So, with the crisis, they were the first to remain without a job, which basically says that these countries have to have a reform of the labour market, which not only would free energies but would also allow for a more equitable distribution of the weight of flexibility, which is nowadays fully concentrated on a young part of the population.
I have to add something to what Brian Blackstone asked me before. I said once that the European social model was dead. This is linked to what I said before. My actual statement is that this European social model has to be revisited, and one of the reasons is the reason I gave you. I believe in the values of inclusion and solidarity, but the present rules don’t allow, don’t make this social model – it’s not European, by the way, but a social model that prevails in some countries in Europe, not everywhere – these rules make it unsustainable.
Question: Italy’s spread is also growing again. You talked about reform. Will the labour market reform that the ECB asked for be able to calm down the markets?
The second question is about the credit crunch. In Italy, people say that SMEs don’t receive credit from the banks. The ECB is monitoring the results of the LTRO. Do you think that this kind of operation can help the SMEs and, if so, how?
Draghi: Let me say that the progress that has been made in all countries since last November has been extraordinary. We always point out the shortcomings, but in fact there has been extraordinary progress, not only in financial markets but also in government policies, both on the fiscal side and on the structural side. In any case the progress is not finished yet, and that is what is needed: for it to be finished and for it to start producing growth. That is the answer to the first question.
As for the second question, the two LTROs were conceived and designed to make sure that also small banks, which are also the closest to the SMEs, could have access to that so that we could take this money closer to the SMEs. We are not sure if the SMEs actually got this money, we are only sure that it is now closer to the SMEs. Why is that? Well, first of all, because you need time. You create central bank money. Before the central bank money translates into actual commercial bank money or M3, you need time. Second, banks don’t lend essentially for four reasons. The first is they don’t have money. They don’t have funding. And we certainly took care of that. The second is they don’t have capital. And we cannot take care of that. The third is risk aversion, and to the extent that the risk aversion depends on the perception that the counterparty doesn’t have funding, we have taken care of that. But if the risk aversion perception is one where you have the sense that your counterparty doesn’t have capital, we cannot take care of that. But the fourth reason, and it’s really perhaps the most important reason, is demand. You have credit if you have supply but also demand. We cannot take care of demand other than through the very low level of short-term interest rates.
Question: Was today’s decision taken unanimously?
Question: Given that you said it was premature to talk about any kind of exit strategy, when do you expect the LTRO to really reveal its full force? When will it be possible to make an assessment of this credit operation?
Draghi: I cannot answer when. I can tell you what we do and what we watch to make sure that this huge amount of central bank money we have created gets into the economy. We look at the consolidated bank balance sheets, country by country, and we see whether this liquidity creation translates itself, first, into deposits. It can translate into deposits either because the banks buy securities, government bonds or buildings, or because they lend money. So we look at that. Then if we see that deposits grow and lending grows, we will also observe later an increase in the so-called required reserves on our own central bank balance sheet. But otherwise we have to look at the consolidated bank balance sheets, county by country. And, as you can imagine, we look at them every day. As well as inflation expectations and TARGET2 balances. These are three things that we look at almost every day. Every day actually, not almost every day!
Question: Just two numbers I would like to know about. First, you mentioned that the M3 growth rate is still subdued at 2.8%. From what number on would you say it is healthy?
And second, the inflation rate has now been higher than 2% for 16 months and it will remain so for another nine months according to what you just said. When would you say the goal of reaching price stability in the medium term has not been achieved?
Draghi: The first thing is that M3 fell in absolute value in November and December for the first time in history. The historical average must be in the order of 6% [average annual growth rate of M3 from January 1999 to February 2012 is 6 %]. So we are way below the historical average.
The other thing is, in a sense, more subtle. We do look at numbers obviously, but the thing that we look at mostly is the pass-through. In other words, when you have high inflation, like now, because energy prices go up, this is one thing. But we do not see any pass-through into higher prices of other things, for example, the prices of non-traded goods, labour and other things. But if we are to see that prices are high and the exogenous price increases are passed through, namely through higher prices of the non-tradables, that is when we would have to say our goal has not been achieved. But since we look at price expectations and inflation expectations years in advance, my sincere – not only hope - commitment is that we will act well in advance, before we see these price increases turn into actual, everyday reality.
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