Press conference following the meeting of the Governing Council of the European Central Bank on 4 July 2013 at its premises in Frankfurt am Main, Germany, starting at 2:30 p.m. CET:
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, which was also attended by the Commission Vice-President, Mr. Rehn.
Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. Incoming information has confirmed our previous assessment. Underlying price pressures in the euro area are expected to remain subdued over the medium term. In keeping with this picture, monetary and, in particular, credit dynamics remain subdued. Inflation expectations for the euro area continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term. At the same time, recent confidence indicators based on survey data have shown some further improvement from low levels. Our monetary policy stance is geared towards maintaining the degree of monetary accommodation warranted by the outlook for price stability and promoting stable money market conditions. It thereby provides support to a recovery in economic activity later in the year and in 2014. Looking ahead, our monetary policy stance will remain accommodative for as long as necessary. The Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period of time. This expectation is based on the overall subdued outlook for inflation extending into the medium term, given the broad-based weakness in the real economy and subdued monetary dynamics. In the period ahead, we will monitor all incoming information on economic and monetary developments and assess any impact on the outlook for price stability.
Let me now explain our assessment in greater detail, starting with the economic analysis. Real GDP declined by 0.3% in the first quarter of 2013, following a contraction of 0.6% in the last quarter of 2012. At the same time, labour market conditions remain weak. Recent developments in cyclical indicators, particularly those based on survey data, indicate some further improvement from low levels. Looking ahead to later in the year and to 2014, euro area export growth should benefit from a gradual recovery in global demand, while domestic demand should be supported by the accommodative monetary policy stance as well as the recent gains in real income owing to generally lower inflation. Furthermore, notwithstanding recent developments, the overall improvements in financial markets seen since last summer should work their way through to the real economy, as should the progress made in fiscal consolidation. This being said, the remaining necessary balance sheet adjustments in the public and private sectors will continue to weigh on economic activity. Overall, euro area economic activity should stabilise and recover in the course of the year, albeit at a subdued pace.
The risks surrounding the economic outlook for the euro area continue to be on the downside. The recent tightening of global money and financial market conditions and related uncertainties may have the potential to negatively affect economic conditions. Other downside risks include the possibility of weaker than expected domestic and global demand and slow or insufficient implementation of structural reforms in euro area countries.
As stated in previous months, annual inflation rates are expected to be subject to some volatility throughout the year owing particularly to base effects. According to Eurostat’s flash estimate, euro area annual HICP inflation was 1.6% in June 2013, up from 1.4% in May. This increase reflected an upward base effect relating to energy price developments twelve months earlier. However, underlying price pressures are expected to remain subdued over the medium term, reflecting the broad-based weakness in aggregate demand and the modest pace of the recovery. Medium-term inflation expectations remain firmly anchored in line with price stability.
The risks to the outlook for price developments are expected to be still broadly balanced over the medium term, with upside risks relating to stronger than expected increases in administered prices and indirect taxes, as well as higher commodity prices, and downside risks stemming from weaker than expected economic activity.
Turning to the monetary analysis, recent data confirm the subdued monetary and, in particular, credit dynamics. Annual growth in broad money (M3) decreased in May to 2.9%, from 3.2% in April. Moreover, annual growth in M1 decreased to 8.4% in May, from 8.7% in April. The annual rate of change of loans to the private sector remained negative. While the annual growth rate of loans to households (adjusted for loan sales and securitisation) remained at 0.3% in May, broadly unchanged since the turn of the year, the annual rate of change of loans to non-financial corporations (adjusted for loan sales and securitisation) weakened further to -2.1% in May, from -1.9% in April. As in April, strong monthly net redemptions in May were concentrated in short-term loans, possibly reflecting reduced demand for working capital against the background of weak order books in early spring. More generally, weak loan dynamics continue to reflect primarily the current stage of the business cycle, heightened credit risk and the ongoing adjustment of financial and non-financial sector balance sheets.
Since the summer of 2012 substantial progress has been made in improving the funding situation of banks and, in particular, in strengthening the domestic deposit base in a number of stressed countries. This has contributed to reducing reliance on Eurosystem funding, as reflected in the ongoing repayments of the three-year longer-term refinancing operations (LTROs). 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 continues to decline further and that the resilience of banks is strengthened where needed. Further decisive steps for establishing a Banking Union will help to accomplish this objective. In particular, the future Single Supervisory Mechanism and a Single Resolution Mechanism are crucial elements for moving towards re-integrating the banking system and therefore require swift implementation.
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.
With regard to other economic policies, the Governing Council notes the initiatives taken by the European Council of 27-28 June 2013 in the areas of youth unemployment, investment and financing of small and medium-sized enterprises, as well as the European Council’s endorsement of the country-specific recommendations of the 2013 European semester. The Governing Council stresses that implementation of these recommendations is essential to contribute to a sustainable recovery in the euro area. Moreover, the new European governance framework for fiscal and economic policies should be applied in a steadfast manner and much more determined efforts should be pursued to carry forward structural reforms to foster growth and employment. In this respect, the Governing Council deems it particularly important to target competitiveness and adjustment capacities in labour and product markets. Finally, the Governing Council welcomes the setting-out of a number of steps towards the completion of the Banking Union as moves in the right direction, but also urges that they be implemented swiftly.
We are now at your disposal for questions.* * *
Question: Mr Draghi, as you were meeting, another central bank in London was also having a meeting of its policy members and, in a break with previous tradition, we have had a very clear forward guidance from Mr Carney, the new governor. I wonder if, because the Bank of England has now changed its style on guidance, it is time for the European Central Bank (ECB) to also step forward with a new policy on guidance. It is clear for Mr Carney’s comments and the market reaction that he has moved the gilt market, he has moved the Sterling curve. Is it time that you put aside the pre-commit barrier to more detailed and specific forward guidance?
Draghi: If you are asking this question, you have not really listened to my statement.
Question: It sounded a lot like the statement I listened to when I was here in June.
Draghi: Yes, that is why I said you haven’t listened carefully. The Governing Council has taken the unprecedented step of giving forward guidance in a rather more specific way than it ever has done in the past. In my statement, I said “The Governing Council expects the key…” – i.e. all interest rates – “…ECB interest rates to remain at present or lower levels for an extended period of time.” It is the first time that the Governing Council has said something like this. And, by the way, what Mark Carney said in London is just a coincidence.
Question: So maybe you can help us out with that. When you say “an extended period of time”, is that a 12 to 18-month period?
Draghi: It says an “extended period of time”.
Question: Did the Governing Council discuss during its meeting the possibility of offering a more concrete forward guidance, perhaps linking the monetary policy path to certain economic indicators? And in your view would such a more formal guidance only really be effective once interest rates have hit bottom?
Draghi: The answer to your first question is “yes”. We discussed several forms of forward guidance and I think my statement says what we will look at in the forward guidance. I can read it again. It says “The Governing Council…”, as I said before, “… expects the key ECB interest rates…” – i.e. including the rate on the deposit facility – “… to remain at present or lower levels for an extended period of time. This expectation is based on the overall subdued outlook for inflation extending into the medium term, ...” – so we will look at the inflation outlook for the medium term – “… given the broad-based weakness in the real economy…” – so we will look at the weakness in the real economy – “… and subdued monetary dynamics.”
We will look at these three things, which is basically consistent with our two-pillar strategy and perfectly consistent with our reaction functions. These are the things we looked at and which led us agree on this fairly specific forward guidance. And incidentally, the Governing Council was unanimous in this formulation.
Question: Mr Draghi, I have two questions. First, can you give us any update on the consultations regarding the ABS market?
And second, several economists have been speculating that the OMT programme is dead or is limited in its effectiveness because an EFSF/ESM programme that would trigger OMTs would never be approved by the Bundestag. This could lead to the question: Does your commitment to do whatever it takes to preserve the euro go beyond the OMT programme or is the OMT programme just an expression of that commitment? Perhaps you could comment on that.
Draghi: With regard to the ABS market, the ECB now has an advisory role. As I have said on other occasions, the ECB is part of a task force with the European Investment Bank (EIB). There are several aspects of the ABS market that need to be taken care of before it becomes a realistic possibility, and both institutions are actively working on that. We will see what comes out of this work and then we will make up our minds.
With regard to the OMT programme, it is ready to be activated. The conditions are known and it is as effective a backstop as ever.
Question: Mr Draghi, allow me to ask you a question related to the famous question of the derivatives of the Italian Treasury. Now, disregarding whether you had a role in that and disregarding whether there are €8 billion or €16 billion losses, as the future “Regulator Maximus” of the Banking Union, do you think that it is a prudent praxis that national treasuries invest taxpayers’ money in derivatives, in gambling bets?
Draghi: Regardless of my involvement, I think I should address this. Incidentally, it is not the first time that I do so – you must have covered this item of news before, namely three years ago, six years ago and nine years ago. As far as the operations that were carried out while I was at the Treasury are concerned, they have been closed, they have been praised by Eurostat and the European Commission in several public statements. They did not embellish the figures, because you cannot embellish what is already known. The figures have all been communicated before, accounted according to the regulations existing at the time and they were all made in the interests of the Italian Treasury. Any treasury that is acting in the interests of its country performs this operation. This is why they are done. As you can see in the press communiqué of the Commission at the time, it forms part of the active management of public debt wherever this is deemed to be sold. Having said that, it is absolutely essential to have full transparency. I believe that yesterday and today you have had occasion to read what the Minister of Economy and Finance said in the Italian parliament. I would refer to that. But I would restate what he said, that absolute transparency and proper accountability are essential.
Question: Would you call it prudential?
Draghi: When the Treasurer deems it so, yes. It is a form of insurance. For example, if you issue in foreign currency, you want to hedge yourself against the exchange rate risk.
Question: When you refer to an extended period of time, could you give us a little bit more firm guidance as to how long that will be? Is it at least six months, at least twelve months, could it be much longer or could it be years? Also, what would really have to happen for you to drop that policy and how will we know that you are about to drop it? In this regard, was this decision unanimous and why did you think that this was the best possible way of giving forward guidance of all the many ways you said you discussed today?
Draghi: Well, I said an extended period of time is an extended period of time: it is not six months, it is not twelve months – it is an extended period of time.
Question: It is longer … Draghi: No, I didn’t say that. Together with the sense of the length of time, you also have to look at three sets of economic variables, namely the medium-term outlook for inflation, the economy and monetary dynamics. Monetary dynamics means monetary aggregates and credit flows. What the Governing Council did today was to inject a downward bias in interest rates for the foreseeable future linked to its assessment of these three sets of variables. The decision was unanimous, which is also quite important.
Question: First, was the “unanimous decision” just on the forward guidance or also on interest rates?
Second, does this new forward guidance policy change the extent to which your mind is open about other policy measures, in particular the negative deposit rate. Is this still on the table? Is your mind still as open as it used to be? What does forward guidance change about that?
Draghi: With regard to the first question, we had an extensive discussion about a possible interest rate cut. We went through a series of arguments, some in favour and some not so in favour. To mention some of them, on the one hand we had some monetary tightening in the main monetary variables. As I mentioned in the Introductory Statement, we also had weak monetary developments both in M3 and in the credit flows. On the other hand, we have seen that our baseline scenario, which foresees a gradual recovery by the end of the year, seems to be gradually being confirmed by a variety of soft indicators coming out on the positive side. There were several reasons one way or another and, after this extensive debate, we basically came to a unanimous agreement on the forward guidance. Let me also add that 50 basis points is not the lower bound. I was asked about that by someone before. And as to whether this leaves our minds open about cuts in other key rates, I think I have hinted at this before. The sentence mentions: “Key ECB interest rates” – including the rate on the deposit facility. Also, I should add that liquidity will remain ample and I confirm what we said last time and what some of us have also said in various public statements that, all in all, our exit is very distant.
Question: … and my second question on the negative deposit rate.
Draghi: I think I said that. Ok, I say it once more. I said The Governing Council expects the key ECB interest rates to remain at present or lower levels. One of the key ECB interest rates is the interest rate on the deposit facility. So this decision, this forward guidance, does not preclude any decision on that. We are keeping an open mind. We are technically ready and it has been included in the options we will have in the future.
Question: I feel this is quite a historical moment today, because we have been told for ten years or more “we never pre-commit”. Your predecessor said this and you too have used the same expression. You explained to us the underlying reasons for this decision. But why make this move today? Why this timing? We are not now in an acute crisis. And the second question is on Greece. What is your opinion regarding some expectations on the markets that maybe the Greek debt should be restructured again, in terms of a haircut, because it is the only way to keep the Greek debt sustainable?
Draghi: On the second question, a review is currently under way so it would not be appropriate for me to comment on speculations regarding the outcome. Greece will continue with its economic policy. It has achieved significant progress – just compare the situation now with what it was two, three or four years ago. I think we have to acknowledge this progress.
On the first point, we believe that the outlook for inflation in the medium term is such that it justifies this new way of communicating, this forward guidance. It justifies this new way of communicating a downward bias in interest rates.
Question: Going back to the three pillars that you said would be guiding monetary policy, would I be mistaken in thinking that you are putting more emphasis on the economy than maybe you have in the past? It seems that for years we have heard about inflation, inflation, inflation and now you are talking a little bit more about the economy.
And, second, what would be the economic indicators that perhaps would be most important to you? Unemployment? GDP? Maybe you could elaborate on that a little bit.
Draghi: I would stress that our objective is to maintain price stability in the medium term. I stressed several times that price stability goes in both directions. The economy is in a sense part of this. We at the ECB have always viewed growth as being based on price stability. We look at inflation, we look at the real economy and we also look at monetary dynamics. And this has always been part of our monetary policy structure. It is what used to be called the two-pillar structure. I would not want to dwell at this point in time on which indicators and which precise figures we look at.
Question: You said you do not want to elaborate right now on which figures you are looking at. Did you discuss whether you would like to tie your forward guidance to specific figures? And, if so, could it happen in the future that you might give more specific information about that?
Draghi: I can answer about what the Governing Council feels today. I think the Governing Council feels that it has already taken a very significant step forward. And, frankly, it is too early to speculate on further developments in the communication now.
Question: Can you just give us a little bit more of a flavour of what has happened in the last month in order for you to change this assessment and implement this new communications strategy? A month ago you were talking about what a conservative central bank the ECB is. You were talking about the benefits of low inflation: you can buy more stuff. And now you are kind of going in a different direction, at least on the communications front. And to what extent did the activity in the bond market, especially since the Federal Reserve System’s tapering discussions, affect your decision-making? And is there a risk that central banks around the world, including the ECB, are going to be too influenced by developments in financial markets, when maybe the markets need to be finding a new equilibrium, given the recovery in the global economy?
Draghi: What happened in the last month is the monetary tightening that has taken place in various segments of the interest rate curve, in the presence of a by and large continuing weakness in the economy, in spite of the new soft indicators which seem to point not towards a dramatic improvement, but towards a slower pace of worsening of the economy. I mean a slower pace of worsening of the indicators themselves. In other words, the economy is still shrinking, but it is doing so at a slower pace. This is what happened and this is what made us think about it. We are not reacting to other central banks’ monetary policy decisions. We want to clarify as much as possible our assessment of the medium term outlook for inflation and what our reaction functions are.
Question: Mr Draghi, just following on from that, the statement does explicitly say, and you have just repeated that the recent tightening of global money and financial market conditions and related uncertainties may have the potential to negatively affect economic conditions. So, maybe I am being simplistic here, but given that that was all caused by the Fed’s communication on tapering it now seems that you are reacting with your own communication to the communication of another central bank. To me that looks a bit like you are following on from them, which is not to ascribe any kind of blame or agency, but purely to look at what is happening. I mean that is the only thing that has economically changed in the markets. They have reacted to that and now you find yourselves having to react to that, it seems to me.
Second question, I think you already know it. It is becoming traditional. OMT legal documentation. I can read to you what you said last month, but I am sure you can remember, so where is it?
Draghi: On the first question, we are acting in the euro area monetary policy jurisdiction, we look at what the monetary developments have been, we look at the inflation outlook in the medium term, we look at the state of the economy, we look at credit flows which continue to be weaker and weaker. And we take our decisions. It is not that we react to other central banks’ communications; we simply react to what we see as the changes in our medium term outlook. One of the points of discussion is how we best react to any increase in volatility, not caused by our own actions, but by something else that is happening in the rest of the world. Is it going to be a transitory change, is it going to be just short term volatility, or are we in the presence of significant, permanent changes? And that is what justifies our forward guidance today. So that is the answer to your question. And as I said before, during the discussion about whether or not to cut interest rates today, many of these arguments came up. And that is why the decision to give this unprecedented forward guidance was unanimous.
The second point is that OMT legal acts will be ready when OMT is ready to be activated. What is the benefit of having it now? People are working on that by the way. So I am giving you the same answer as last time. It is going to be ready when OMT is ready to be activated.
Question: That is a valuable clarification. So you will publish it when someone applies for OMT and not before?
Draghi: Yes, probably. You have been very good at making a dull question a sexy one, but in fact it is not a question that really comes first in our priorities. Rather, the answer to your question is not one of our priorities now. So when OMT is ready to be activated the documentation will be published.
Question: Portugal yesterday was attacked by the markets and a political crisis is going on. What exactly is the problem? Has there been too much austerity or should maybe Portugal do more?
And then, you were speaking of some risks surrounding the euro’s strength. Does it at present disturb you? I know that you do not have any target for the value of the euro, but would you clarify what you mean when you speak of risks coming from the strength of the euro?
Draghi: I am not sure I actually spoke of risk coming from the strength of the euro. But on the second point, as I have said several times, the exchange rate is not one of our policy targets. We do believe that the exchange rate is important for price stability and for growth. We also believe that exchange rates are not a one-way affair, whereby you simply click something and you change the exchange rate. The exchange rate is determined in the marketplace. There is a G20 statement referring to exchange rates and I think I will stop here.
What else did you ask about Portugal?
Question: Portugal, too much austerity?
Draghi: I think Portugal has achieved very remarkable results. It has certainly been a painful route, and the results that have been achieved have been quite significant and remarkable, if not outstanding. I think we should give credit for this to the Government and especially to Minister Gaspar, who has just resigned. We are also reassured by the new Minister and by everything we know about her, including her personality. She has been regularly attending Eurogroup meetings. So from this point of view, Portugal is in safe hands. I will not comment on the political developments in Portugal, because it would not be my job to do so.
Question: Do you not think that there is a dangerous mismatch in the banking union, in the progress that has been made, because you are proceeding with the supervision and you will start to analyse the balance sheets of the banks this winter I think, but at the same time we have no idea when the single supervisory mechanism will be active. And the governments are now asked to provide a backstop at a very difficult moment. Many governments are in a deep recession, and have to fight this, so for them maybe it would be very difficult to build a backstop for banks in trouble. Do you not think this is dangerous?
Draghi: Well, it is not really dangerous; it is something we have to have on our agenda. In other words, the Single Supervisory Mechanism (SSM) will have to be in place and the single resolution mechanism will also have to be in place for both of them to be effective. I think considerable steps have been achieved by the meetings of the Ecofin and even by the recent European Council. On the backstops, I have said several times that we do not want to repeat the mistakes of the past. If a jurisdiction, if a country, if a monetary area embarks on an asset quality review or stress test, or any examination of the state of health of a banking system, the result of which could be to identify capital shortfalls, it is absolutely essential that both markets and supervisors and governments know what is going to be done about these shortfalls. We cannot undertake exercises without having an answer to what happens if we identify capital shortfalls. So it is absolutely vital that backstops be identified ex ante, before we undertake these exercises. That is I think what the European Council has acknowledged in its conclusions. And so I am pretty confident that we will not repeat the mistakes we made two years ago.
Question: Mr Draghi, the finance ministers have agreed that the ESM should be just the last resort for means of recapitalisation of banks and they agreed to have a cap, at least initially, of €60 billion for that recapitalisation from the ESM. Do you think that will be enough or do you think it is too tiny a sum?
Draghi: Let me just comment in general on backstops. In principle, we have several backstops. We have the national backstops and we have the possibility for countries to apply for an ESM programme. And the ESM programme means that countries – like Spain, for example, and Spain is a good example – would get money from the ESM in order to recapitalise its banks within an ESM programme. And, incidentally, I think the outcome of this exercise has been quite satisfactory and could actually form a good example. The third backstop is the ESM direct recapitalisation. Now, my understanding of the discussions that are taking place in the Eurogroup is that this ESM direct recapitalisation would become available only after the ECB has taken over its tasks as the single supervisor in the euro area. So, for the time being, this would not be available as an ex ante backstop, that is to say before we undertake the asset quality review.
On the precise amount, I cannot really make any comment: first of all, because it is a decision of the Member States; and second, because it is a decision that has to be calibrated vis-à-vis the eventual shortfalls that may come up. But, as I said, two other backstops are potentially usable to meet the shortfalls that may emerge from the asset quality review.
One last word on this: some people think that, as soon as there is a shortfall in capital in the banking system, these backstops would be used immediately. But that is not the case. When there is a shortfall in capital in a bank, the first thing that a supervisor does is what is called “supervisory action”, namely they ask the bank and the shareholders if they want to increase capital. Then they ask the bank to see whether it can sell some parts or merge the bank and so on and so forth. So, there are several actions that are normally undertaken before one even thinks about using a backstop.
Question: I just have a quick question also on the OMTs, as we are almost one year after your famous “whatever it takes” speech. I think it was also aimed at giving the governments’ time for fiscal consolidation, for strengthening competitiveness, and for strengthening the framework of the euro area. Are you satisfied with what has happened during this last year? Or are you frustrated that there has not been much more progress, for example in terms of the banking union or structural reforms?
Draghi: Well, first of all, I have to say that it is “whatever it takes within our mandate”. Second, the purpose of the OMTs was not really to supplement government action or to be a substitute for government action. OMTs were conceived, designed and meant to address tail risks in the euro area. So it is not right to say that OMTs have decreased the incentives. These are what I call the “heroes of the counterfactual”: If OMT had not been there, then all governments would have behaved very well. We would have a banking union firmly in place now, with the three pillars already decided and legislated. And this counterfactual is a great luxury. But let’s look at the facts. The fact is that OMT has produced universally acknowledged benefits for everybody and that’s it. Now, there have been governments which have used their time well and others less well, but it is completely their own responsibility. It is not that OMT has in any sense changed things. OMT addresses other objectives.
Question: Portugal is going through a political crisis as you know. Do you think it could benefit from the OMT programme?
Draghi: You know what the OMT conditions are and I am not going to repeat them today. You know what the purpose of OMT is. I have just said, it is meant to address the tail risks of the euro area.
Question: A follow-up question regarding the character of unanimity within the Governing Council on this new statement to keep interest rates at present or lower levels for an extended period of time. I am a bit surprised because, from the side of the Deutsche Bundesbank for instance, the President said in some interviews that it is dangerous to keep rates at such a low level for a long time and then you have this discussion...
Draghi: The decision was unanimous and it was taken by all. We had a big discussion about interest rate cuts today, as I said, but not about this particular point you raise. Having said that, I think we would all agree that low levels of interest rates entail serious risks for financial stability. There is no disagreement about that. But, at this point in time, we do not see these risks and we see all the factors that have led us to express this new forward guidance.
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