Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. I would like to thank Governor Coene for his kind hospitality and express our special gratitude to his staff for the excellent organisation of today’s meeting of the Governing Council. We will now report on the outcome of today’s meeting, which was also attended by the President of the Eurogroup, Finance Minister Dijsselbloem.
Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. Incoming information continues to indicate that the moderate recovery of the euro area economy is proceeding in line with our previous assessment. At the same time, recent information remains consistent with our expectation of a prolonged period of low inflation followed by only a gradual upward movement in HICP inflation rates. The signals from the monetary analysis confirm the picture of subdued underlying price pressures in the euro area over the medium term. Inflation expectations for the euro area over the medium to long term remain firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2%.
Looking ahead, we will monitor economic developments and money markets very closely. We will maintain a high degree of monetary accommodation and act swiftly, if required, with further monetary policy easing. We firmly reiterate that we continue to expect the key ECB interest rates to remain at present or lower levels for an extended period of time. This expectation is based on an overall subdued outlook for inflation extending into the medium term, given the broad-based weakness of the economy, the high degree of unutilised capacity, and subdued money and credit creation. The Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation. Further information and analysis concerning the outlook for inflation and the availability of bank loans to the private sector will be available in early June.
Let me now explain our assessment in greater detail, starting with the economic analysis. Real GDP in the euro area rose by 0.2%, quarter on quarter, in the last quarter of 2013, thereby increasing for three consecutive quarters. Recent data and survey indicators confirm that the ongoing moderate recovery continued in the first quarter of 2014 and at the beginning of the second quarter. Looking ahead, domestic demand should continue to be supported by a number of factors, including the accommodative monetary policy stance, ongoing improvements in financing conditions working their way through to the real economy, the progress made in fiscal consolidation and structural reforms, and developments in energy prices. At the same time, although labour markets have stabilised and shown the first signs of improvement, unemployment remains high in the euro area and, overall, unutilised capacity continues to be sizeable. Moreover, the annual rate of change of MFI loans to the private sector remained negative in March and the necessary balance sheet adjustments in the public and private sectors continue to weigh on the pace of the economic recovery.
The risks surrounding the economic outlook for the euro area continue to be on the downside. Geopolitical risks, as well as developments in global financial markets and emerging market economies, may have the potential to affect economic conditions negatively. Other downside risks include weaker than expected domestic demand and insufficient implementation of structural reforms in euro area countries, as well as weaker export growth.
According to Eurostat’s flash estimate, euro area annual HICP inflation was 0.7% in April 2014, up from 0.5% in March. As expected, given the timing of Easter, the increase was mainly due to a rise in services prices. On the basis of current information, annual HICP inflation is expected to remain around present low levels over the coming months, before only gradually increasing during 2015 to reach levels closer to 2% towards the end of 2016. New macroeconomic projections by Eurosystem staff will become available in early June. Medium to long-term inflation expectations remain firmly anchored in line with price stability.
The Governing Council sees both upside and downside risks to the outlook for price developments as limited and broadly balanced over the medium term. In this context, the possible repercussions of both geopolitical risks and exchange rate developments will be monitored closely.
Turning to the monetary analysis, data for March 2014 continue to point to subdued underlying growth in broad money (M3). Annual growth in M3 moderated to 1.1% in March, from 1.3% in February. The growth of the narrow monetary aggregate M1 remained robust but decreased to 5.6 % in March, after 6.2% in February. The increase in the MFI net external asset position, reflecting in part the continued interest of international investors in euro area assets, remains the main factor supporting annual M3 growth.
The annual rate of change of loans to non-financial corporations (adjusted for loan sales and securitisation) was ‑3.1% in March, unchanged from February. Weak loan dynamics for non-financial corporations continue to reflect their lagged relationship with the business cycle, credit risk and the ongoing adjustment of financial and non-financial sector balance sheets. The annual growth rate of loans to households (adjusted for loan sales and securitisation) stood at 0.4% in March 2014, broadly unchanged since the beginning of 2013.
The April 2014 bank lending survey confirmed the stabilisation of credit conditions for loans to enterprises and households. Credit standards over the previous three months remained broadly unchanged for loans to enterprises but were eased in net terms for households. Broadly in line with these results, in the survey on the access to finance of small and medium-sized enterprises (SMEs) for the period October 2013-March 2014, SMEs reported that bank loan availability had become less negative and had actually improved in some euro area countries. According to both surveys, the general economic outlook contributed less negatively or even positively to these developments. At the same time, banks still reported tight levels of credit standards when seen in a historical perspective.
Since the summer of 2012, substantial progress has been made in improving the funding situation of banks. In order to ensure an adequate transmission of monetary policy to the financing conditions in euro area countries, it is essential that the fragmentation of euro area credit markets declines further and that the resilience of banks is strengthened where needed. In this context, the ongoing comprehensive assessment of banks’ balance sheets is of key importance. Banks should take full advantage of this exercise to improve their capital and solvency position, thereby contributing to overcome any existing credit supply restriction that could hamper the recovery.
To sum up, the economic analysis confirms our expectation of a prolonged period of low inflation followed by only a gradual upward movement in HICP inflation rates towards levels closer to 2%. A cross-check with the signals from the monetary analysis confirms the picture of subdued underlying price pressures in the euro area over the medium term.
Regarding fiscal policies, according to the European Commission’s spring forecast, the general government deficit in the euro area is expected to decline further, from 3.0% of GDP in 2013 to 2.5% this year and to 2.3% in 2015. The government debt-to-GDP ratio is expected to stabilise at 96.0% in 2014 and to decline to 95.4% in 2015. In view of still rather high debt ratios and to improve fiscal sustainability, euro area countries should not unravel progress made with fiscal consolidation and should comply with their commitments under the Stability and Growth Pact. At the same time, comprehensive and ambitious structural reforms in product and labour markets are warranted to lift the euro area’s growth potential, improve its adjustment capacity and reduce the high unemployment facing many euro area countries today. To this end, the Governing Council concurs with Tuesday’s ECOFIN Council communication that decisive policy action is needed in countries where macroeconomic imbalances hinder the smooth functioning of Economic and Monetary Union.
We are now at your disposal for questions.* * *
Question: In the opening statement, you reiterated the line that there was unanimous agreement about the willingness to use unconventional tools if there was too prolonged a period of low inflation. But is there total agreement about exactly what is meant by the phrase "too prolonged a period of low inflation"? And would you mind enlightening us about when a prolonged period of low inflation becomes a too prolonged period of low inflation?
And just a second issue, if I may. We are hearing more and more complaints from Paris about the strength of the euro. Would you like to respond to them at all?
Draghi: Yes. On the first question, the too prolonged period of low inflation, you have a period like that when you see that the risks of de-anchoring medium-term inflation expectations are increasing. That is a definition that takes into account the two elements of this concept. One is the level of inflation, and that is to say low inflation, and the other one is the length of time while one has low inflation. I think I've said several times that the longer is the period, the bigger are the risks for a de-anchoring of inflation expectations. So that's the answer to the first question.
To the second question, I would say that over the last few days we received plenty of advice from political figures, from institutions and, almost every day now, on interest rates, on exchange rates but also, on the other side of the scale, on the excess liquidity. So we are certainly thankful for this advice and certainly respect the views of all these people. But we are, by the Treaty, we are independent. So people should be aware that if this might be seen as a threat to our independence, it could cause long-term damage to our credibility.
Question: I have two questions – one a follow-up question on exchange rates. The introductory statement confirmed that the ECB has worries about the high exchange rate. Is intervention in the foreign exchange markets a possibly useful tool to lower the exchange rate? And has it been discussed by the Governing Council today?
And the second question, Governor Luc Coene recently said if the ECB would decide to lower the interest rate on the main refinancing operation, we should also lower the deposit rate to have sufficient impact. Do you agree with his point of view?
Draghi:. On the second question I would refer to Governor Coene.
But on the first question, yes certainly, we had a discussion. Later on I can report the overall tone of the discussion, but basically we had a discussion on the exchange rate. As I've said many times, it's not a policy target, but certainly is very important for price stability and for growth. And the strengthening of the exchange rate in the context of low inflation is cause for serious concern in the view of the Governing Council.
Coene: Well I can only confirm what I said before, that if you really want to have an impact on the markets that if you only change a policy rate and leave the others unchanged, it will have less impact than if you shift the whole corridor down, then you will have a much bigger impact.
Question: It seems like in recent weeks we've had a mix of these very low inflation numbers, but some pretty good economic data. Do you see any evidence that low inflation is actually hurting the euro zone economy? And if it's not, why are you concerned about it?
And my second question, you mentioned a June meeting in the introductory statement. Is this a signal that we should expect something in June?
And on this inflation and bank lending points where you said you'd have more information, what kind of information are you going to be looking for to decide whether to act on your easing bias?
Draghi: Probably the best way to respond to both questions is really to give a flavour of what sort of discussion we had today. I would see this discussion as a preview of the discussion we're going to have next time. And we had an extensive discussion that took note that, while the recovery is firming up in some parts of the euro area, at the same time the Governing Council is not resigned to having low inflation for too long a time, as I said before.
The second point is that it's true that the recovery is proceeding, but it's proceeding at a slow pace and it still remains fairly modest. And there are some downward risks now, and the risks have to do with the possible weakening of global demand, have to do with geo-political risks that are of serious significance and have to do with the exchange rate.
The third point that was touched in the discussion was really the causes of this low inflation. We've discussed this many times and certainly we would view that the most important causes are the energy prices and food prices. I mean, if you take the first quarter of 2012, inflation at 2.7 percent, and you compare it with the current inflation rate of 0.7 percent, of the 2 percentage points difference, 80 percent is due to lower energy and food prices.
But now the question is, and the question that we have to look into is whether there are other factors besides energy and food that could keep inflation low. Well, some of these factors are the exchange rate and the possible weak domestic demand and weak employment figures.
The fourth point we discussed touched on what you actually hinted at, on the relationship between credit flows and the business cycle. And one of the reasons why we haven’t expected a serious pick-up in credit for a while is that there is a lagged relationship between credit flows and the business cycle's recovery, and that's certainly something we want to have our eyes on in the coming weeks and, I would say, the coming months too.
As I said, we discussed the exchange rate. So at the end of this discussion I would say that the Governing Council is comfortable with acting next time, but before we want to see the staff projections that will come out in early June.
Question: Mr Draghi, you just said a second ago that the Governing Council is comfortable with acting next month. Should we understand that to mean that there is a consensus around doing something already? And if so, could you tell us whether that would be a rate cut or what other option you're looking at? And my second point is about what's been happening in the money markets in the last couple of weeks. We've seen a bit more volatility there, especially the short end of the Eonia, there have been spikes above the benchmark rate. So if you could explain a bit how you see this, whether or not that is more as a normalisation in the functioning of the money markets. Or is it something that is a threat and needs to be acted upon?
Draghi: What I would say is that there is consensus about being dissatisfied with the projected path of inflation, and so there is a consensus in not being resigned to this and accepting this as a fact of nature, which would lead to having consensus about action, but, as I said before, after having seen the staff projections that will come out in early June.
On the other point, you are absolutely right. There have been developments over the last few weeks that have increased the volatility of the short-term, the very short-term money market rates and causing spikes in the rate. Now these phenomena are due to a variety of specific factors and a variety of autonomous factors. Rather than looking at this aspect, I would focus on two, in my view, important dimensions of this.
The first is that, in spite of the higher volatility, and to some extent the higher levels of the short term interest rate, this stayed within less than one week maturity. It never translated itself to the medium-term yield curve. And this may be due to either - or to both, either/or, either/and - the certainty by the markets that, if we were to see such transmissions, we would certainly act, being one of the contingencies that I mentioned for action, and/or the certainty that these factors are temporary and they will wash away, as it has happened on several other occasions. So I think that's one dimension which is quite important.
The other dimension which is quite important, and it's really worth focusing on, is that the amount of liquidity on the Eonia market has increased quite significantly, which is to some extent a positive sign. The banks are going back to trading on that market and that, in a sense, fragmentation as far as that aspect is concerned, is receding. In other words, banks rely less on the ECB and more on each other.
Question: Two questions. When will you consider that the euro has risen too much? And then the second question, to what extent do you think that geopolitical risk will impact negatively on the economic situation in the euro zone?
Draghi: Yes. Well, the first question is actually very difficult to respond to in precise terms. I can say one thing, that certainly the strengthening of the euro in the context of low inflation and still low levels of economic activity is, as I said, a cause for serious concern in the view of the Governing Council. The geopolitical risk would certainly impact the euro zone if they were to increase and become more material and relevant than they are today.
More, it would impact the euro zone more than other parts of the world. And they have to do not only with the crisis in Ukraine, but also with the economic situation in Russia and with the potential escalation of sanctions. So it's a very complex geopolitical picture which could evolve, and in a sense we're only sure about one thing, that if it does evolve, the euro zone, the euro area and the European Union are going to be impacted more than other parts of the world.
Question: I have two questions. Concerning today's decision, was it unanimous? Or were there any governors who already today were in favour of some form of loosening policy?
And the other, you keep saying that the exchange rate in the context of low inflation is a very serious concern. How does serious concern translate into a policy response?
Draghi: Thank you. Let me say immediately that there wasn't a decision today, in the sense I said it's a preview of the next month's meeting, the discussion we had today. But certainly there is consensus or unanimity in not being resigned to the present low inflation for a too long, too protracted a time. That is certainly a unanimous conviction, and it's also, I would say, reiterated in the introductory statement I read just a minute ago, the Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation.
As I've said many times, the exchange rate is not a policy target but it's a serious concern for our objective of price stability and therefore this concern will have to be addressed.
Question: We have seen on the bond market a sharp decrease of yields recently and just this week an official from the IMF said the markets are maybe too optimistic on the yields, maybe for Greece, Italy and Spain. What's your view on this?
Draghi: Incidentally I said that much of the movements in M3 are being supported by flows from outside the euro area and that is part of the reason why we see this buoyant market for bonds all throughout the euro area. There are several factors. Some of these flows are caused by, in a sense, the geo-political risk that I was mentioning before. We had very significant outflows that have been estimated by some to be in the order of 160 billion euro out of Russia. We have outflows from the rest of the world. We have outflows also caused by a possible re-pricing of risk in some other parts of the world following changes in monetary policies. And all these flows are, in a sense, trying other jurisdictions to see whether there could be a better combination of risk and maturity. And now the emerging markets have lost some of their appeal and the euro area, with the return of confidence in the euro and yields that are still relatively appealing in some parts, especially the periphery, is attractive. So there's no doubt that there are, sort of, quite sizeable flows now that are the main reason for this buoyant market. But that's exactly why one should be extremely careful about not thinking that this would be a good reason for relaxing the policy effort, both on the budgetary and especially on the structural reforms.
Question: Do you think is there any reason for being a sceptic? And what could you say or do as the President of the European Central Bank or as a European citizen to convince us, who will vote in May 25 that the single currency's value is the right thing for everyone?
And the second point, what contribution can the ECB give to those countries that have done just the reforms but where the recovery has not started yet start? For example in Italy, the recovery is there but it's weak. And the European Commission or IMF have downgraded their economic forecasts. What contribution the monetary policy can give?
Draghi: on the first question, let me first say that the debate that is taking place this time is actually welcome. It's very good that we have an open debate about the benefits and the costs of living in a monetary union. After all this is democracy. My view is that in the last 20, 25 years we have achieved much through our integration and certainly at least I wouldn't want to go back to the crisis of the seventies or the eighties or even the early nineties. But it's also true that we can't really rest on the memory of past achievements. Again my view is that a good deal of this crisis is also due to the fact that we didn't have enough integration. So rather than going back and re-nationalising our economies, we should rather move forward towards greater integration. But there are two caveats that we ought to have in mind; integration was very good for efficiency but we somehow left aside the equity dimension of our process. And the second point, the new Europe and the proponents of the new Europe will have to explain how this new Europe will create growth and jobs together with stability.
On your other question, well if you look at many countries, take Spain, for example. Or take even Greece. Take Portugal. Take Ireland. They have done many important structural reforms. They are continuing this effort. And you see in all four countries clear signs of recovery. And their projections for the recovery next year are actually not bad.
So it basically says that countries that see their recovery stalling, they have to persevere in the structural reforms, and do basically like the others that have done the reforms that are, indeed not easy, difficult and painful. But there seems to be, as the examples have shown, very little alternative.
Question: My first question is, what is the expected pathway to affect inflation? And more importantly, can inflation expectations, should the Ukrainian crisis escalate? And my second question will touch again the euro exchange rate. You multiple times said that the euro exchange rate is not a policy target in itself. But I would like you to comment maybe, if the Governing Council has some kind of a trigger point where the euro exchange rate is too strong, prompting the bank to act in the future? Thank you.
Draghi: On your first question, I’m afraid the answer is, I don’t know. But what one can tell, is that it depends very much what is going to be the impact of the price of energy, the price of gas especially, and its implications on gas supplies to Europe for the coming year. Other projections about inflation are very, very difficult to make at this stage.
On the second question, I think I’ve answered before. No, we don’t have a trigger. We just see that this is having the effect of basically depressing further the inflation rate. Again, if you take that comparison I made with the first quarter 2012, there are actually two stages. One is in fact when energy prices and food prices had the effect of depressing the rate of inflation. That is not, in fact, as continued beyond, I think, mid-2013. After that, the contribution of energy prices and food prices is not really important. And it’s actually the exchange rate that keeps the inflation rate low and depressed. The exchange rate, both nominal and effective, has appreciated by something like 10 percent since mid-2012 to today.
Question: I have a question also related to Russia. But you said that you’re monitoring closely.
Well, you have Russian money moving back into Cyprus. How is that different, compared to before the bailout was agreed, when this was a big issue with shell companies and money laundering?
Draghi: Well, we have no evidence exactly where these flows go. But if they go to Cyprus, it means that there is this renewed confidence in the economic policies that are being pursued. And as far as I know, the government is acting in compliance with the programmes. So things are falling into place. There is also, as you know, capital controls are being gradually lifted, which also is a sign that confidence seems to have returned.
Question: In your introductory statement, you were saying that member states should comply with their commitments under the Stability Growth Pact. But for some member states, at this moment, the matter is not the rules, but the time. For instance, I’m thinking about Italy that is thinking to postpone the structural balance by one year, or even France, that won’t be able in the near future to be under three percent for the deficit. So my question is, also looking at the latest forecasts of the general economic situation, do you think that for the member states that are willing to undertake the proper reforms, it’s possible to think about a delay on the fiscal targets, or not?
Draghi: Well, I don’t know whether it’s possible or not. This is confidence of the Commission and the Member States in their policy dialogue. What is clear here is that we had rules originally. These rules were broken in the early 2000s by countries like France, Germany and Italy. And after that there was basically some lack of credibility on these rules. And this was certainly a factor that between, say, 2003 and 2009, allowed different member states to pile up stocks of debt that were shown to be unsustainable by the crisis. And some member states, of course not all of them.
And so, while at the same time, there was increasing current government expenditure and increasing taxes. So the financial crisis showed all of us that these levels of debt and deficits where unsustainable.
So, undermining the credibility of existing rules is never a good policy that could generate growth, or could actually be sort of a good justification for postponing structural reforms.
Question: Mr. President. I have a question on how confident are you to actually by your actions to drive the exchange rate, because there are a lot of economists or market participants who say that what is needed to really move the forwards market is concerted action. So would you consider something like that? And also, my second question is that, now what we’re hearing from you is that the end of an era that you never pre-commit?
Draghi: We never pre-commit – well, that I think finished a long time ago. But on the other point, you are absolutely right. You know that there is a G-20 statement that says that exchange rate matters are matters of common concern. And so we will have to reflect on this and see. But in our case, certainly, they have an impact on our objective of price stability, and especially, as I said, at this low level of inflation.
Question: Mr Draghi, I’d like you to speak to whether there was a discussion today about the potential for a bridge decision between now and June, focused on the money markets extending of fixed rate full allotment, or something of that nature, while you guys prepare for the new information from the staff forecast?
Draghi: As I said before, there was a discussion about all instruments. The discussion touched upon basically all the range of instruments that we have mentioned during this and other press conferences. And the discussion was basically aiming at what sort of contingencies would require action immediately or later on. So all instruments have been discussed, including the one you mention now.
Question: I have two questions, Mr President. Both are related to Ukraine and the geopolitical tension. I would like to know what sort of discussion did you have in the Governing Council on this geopolitical risk that you cited several times. How long did you discuss that? What was the tone of the discussion? And my second question, related to that, would be, what do you think is the impact of the current tension on the euro exchange rate? Is that one of the reasons that drive up the euro? Because investors are seeing the euro as a safe haven?
Draghi: One thing to remember is that the geopolitical crisis is first and foremost a foreign policy crisis. So we’re not experts about that. We can only try to assess the consequences of a crisis which escalates. And so the ECB has been reflecting on this. The ESRB has a working group monitoring closely the developments from an economic viewpoint.
Some national central banks have working groups also, watching closely what could be the consequences, especially the central banks of the countries that are the main trading partners with Russia and Ukraine.
On your other question, yes indeed. It’s certainly one of the reasons. We’ve been observing now since several months that what supports M3 in the presence of very weak, or weak credit flows, is actually inflows from outside. And some of these inflows from outside come from the regions that we’ve discussed. And they have the effect of keeping the euro strong.
Question: Mr Draghi, we’re in the middle of a vast transformation of economic governance in the euro zone. In light of that, can you tell us anything about your discussions today with Mr Dijsselbloem? And also, perhaps give us an idea of your thoughts at this time on the future leadership of the Euro Group. For example, should there be a permanent presidency?
Draghi: Thank you. On Mr Dijsselbloem, he presented to us all of the work that he is doing with the Euro Group. It was quite an extensive rich, and to some extent a positive presentation, because what we are observing now is that the countries that were under a programme are either exiting the programme, or their prospects if they still are under a programme have considerably improved.
And when you go and follow the list of actions and structural reforms they’ve made, they are quite impressive. Societies have changed, and the recovery has started. In some countries, for example, the unemployment rate – like Portugal – the unemployment rate dropped two percentage points last year. So, I’d say it’s a source of positive appreciation to see the fact that efforts which were so painful, and for such a long time, are producing now some positive outcomes.
So, in a sense, the presentation also shows that the collective, I would say, European way of decision-making that takes place in the Euro Group, is good. It can be, obviously. It’s effective.
On your second question, it’s very hard for me to say what’s best. But I can only repeat what I said before, that our crisis would not have been as severe as it has been if we had had more integration, not less integration. And our future lies with more integration, not with the renationalisation of our economies.
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