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Introductory statement to the press conference (with Q&A)

Mario Draghi, President of the ECB,Vítor Constâncio, Vice-President of the ECB,Frankfurt am Main, 7 March 2013

Jump to the transcript of the questions and answers

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. HICP inflation rates have declined further, as anticipated, and fell below 2% in February. Over the policy-relevant horizon, inflationary pressures should remain contained. The underlying pace of monetary expansion continues to be subdued. Inflation expectations for the euro area remain firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term. Overall, this will allow our monetary policy stance to remain accommodative. Available data continue to signal that economic weakness in the euro area has extended into the beginning of the year, while broadly confirming signs of stabilisation in a number of indicators, albeit at low levels. At the same time, necessary balance sheet adjustments in the public and private sectors will continue to weigh on economic activity. Later in 2013 economic activity should gradually recover, supported by a strengthening of global demand and our accommodative monetary policy stance. In order to support confidence, it is essential for governments to continue implementing structural reforms, to build further on the progress made in fiscal consolidation, and to proceed with financial sector restructuring.

With regard to the liquidity situation of banks, counterparties have so far repaid €224.8 billion of the €1,018.7 billion obtained in the two three-year longer-term refinancing operations (LTROs) settled in December 2011 and March 2012. In net terms, this implies that, of the increase in the outstanding volume of bank refinancing through the ECB’s monetary policy operations of around €500 billion between mid-December 2011 and early March 2012, about €200 billion have now been repaid. These repayments reflect improvements in financial market confidence over the last few months and receding financial market fragmentation. We are closely monitoring conditions in the money market and their potential impact on the stance of monetary policy and the functioning of the transmission of our monetary policy to the economy. Our monetary policy stance will remain accommodative with the full allotment mode of liquidity provision.

Let me now explain our assessment in greater detail, starting with the economic analysis. The GDP outcome for the fourth quarter of 2012 was weak, with Eurostat’s second estimate indicating a contraction of 0.6% quarter on quarter. The decline was largely due to a fall in domestic demand but also reflected weak exports. As regards 2013, recent data and indicators suggest that economic activity should start stabilising in the first part of the year. A gradual recovery should commence in the second part, with export growth benefiting from a strengthening of global demand and domestic demand being supported by our accommodative monetary policy stance. Furthermore, the improvements in financial markets since July last year and the continued implementation of structural reforms should work their way through to the economy. At the same time, necessary balance sheet adjustments in the public and private sectors, and the associated tight credit conditions, will continue to weigh on economic activity.

This assessment is also reflected in the March 2013 ECB staff macroeconomic projections for the euro area, which foresee average annual real GDP growth in a range between -0.9% and -0.1% in 2013 and between 0.0% and 2.0% in 2014. Compared with the December 2012 Eurosystem staff macroeconomic projections, the ranges have been revised slightly downwards. The revision for 2013 mainly reflects a more negative carry-over effect from the outcome for real GDP in the fourth quarter of 2012, while the projected path of the recovery has remained broadly unchanged.

The Governing Council continues to see downside risks surrounding the economic outlook for the euro area. The risks relate to the possibility of weaker than expected domestic demand and exports and to slow or insufficient implementation of structural reforms in the euro area. These factors have the potential to dampen the improvement in confidence and thereby delay the recovery.

According to Eurostat’s flash estimate, euro area annual HICP inflation was 1.8% in February 2013, down from 2.0% in January. The on-going decline in annual inflation rates mainly reflects the energy and food components of the price index. Looking ahead, while the monthly pattern of headline inflation rates may be somewhat volatile, underlying price pressures should remain contained given the environment of weak economic activity in the euro area. Inflation expectations are well-anchored and in line with price stability over the medium term.

The March 2013 ECB staff macroeconomic projections for the euro area foresee annual HICP inflation in a range between 1.2% and 2.0% in 2013 and between 0.6% and 2.0% in 2014. In comparison with the December 2012 Eurosystem staff macroeconomic projections, the ranges are broadly unchanged.

In the Governing Council‘s assessment, risks to the outlook for price developments continue to be seen as 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 oil prices, and downside risks stemming from weaker economic activity.

Turning to the monetary analysis, monetary figures for January 2013 support our assessment that the underlying pace of monetary expansion continues to be subdued. The annual growth rate of M3 remained broadly unchanged at 3.5% in January, after 3.4% in December 2012. The annual rate of growth of the narrow monetary aggregate, M1, increased to 6.7% from 6.3% in December 2012. The deposit base of MFIs in a number of stressed countries strengthened further in January.

The annual growth rate of loans (adjusted for loan sales and securitisation) to non-financial corporations stood at -1.5% in January, after -1.3% in December 2012. The annual growth in MFI loans to households moderated slightly to 0.5%, from 0.7% in December. To a large extent, subdued loan dynamics reflect the current stage of the business cycle, heightened credit risk and the ongoing adjustment of financial and non-financial sector balance sheets. At the same time, available information on the access to financing of non-financial corporates indicates tight credit conditions for small and medium-sized enterprises.

In order to ensure adequate transmission of monetary policy to the financing conditions in euro area countries, it is essential to continue reducing fragmentation of euro area credit markets and strengthening the resilience of banks where needed. Decisive steps for establishing an integrated financial framework will help to accomplish this objective. The future Single Supervisory Mechanism (SSM) is one of the main building blocks, together with a Single Resolution Mechanism (SRM). Both are crucial elements for moving towards re-integrating the banking system.

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.

While the accommodative monetary policy stance will continue to support the recovery in the euro area, it is essential that fiscal and structural policies strengthen the prospects for economic growth over the medium term. As regards fiscal policies, the European Commission’s 2013 winter forecast reflects progress in reducing fiscal imbalances in the euro area. The euro area-wide general government deficit is expected to have declined from 4.2% of GDP in 2011 to 3.5% of GDP in 2012 and is projected to be reduced further to 2.8% of GDP this year. Governments should build on this progress with a view to further restoring confidence in the sustainability of public finances. At the same time, fiscal consolidation must be part of a comprehensive structural reform agenda to improve the outlook for job creation, economic growth and debt sustainability. In the view of the Governing Council, it is of particular importance at this juncture to address the current high long-term and youth unemployment. To this end, further product and labour market reforms are needed to create new job opportunities by supporting a dynamic, flexible and competitive economic environment.

We are now at your disposal for questions.

Second, can you say today that there

* * *

Question: I would like to have your comments on the uncertainty created by the recent Italian elections, where most voters voted for parties that reject the fiscal discipline that you advocate. Also, the political system seems to be dysfunctional. There’s no government, for instance, at the moment that could apply for the OMT if the need arose. That’s the first question.

The second question is about the difficulty of credit reaching the real economy, especially small and medium-sized enterprises, and you mentioned the need for integrating the financial system better. I was wondering if, on a shorter term, the ECB is considering other options like changing collateral requirements or even a scheme akin to the funding for lending of the Bank of England?

Draghi: On the first question: as you have seen, markets – after some excitement immediately after the elections – have now reverted back more or less to how they were before. I think markets understand that we live in democracies. The euro area comprises seventeen countries. Each country has at least two sets of elections: national and regional. So that makes 34 elections over a time span of about three or four years. That’s democracy and it’s very dear to all of us. All in all, markets were less impressed than politicians and you. You also have to consider that much of the fiscal adjustment Italy went through will continue on automatic pilot. And also, if you consider this year, the net supply of government bonds is considerably less than last year – if I’m not mistaken it’s about €30 billion. So it’s very much a matter of rolling it over. All this is happening in a general environment where we have many signs that confidence is returning to the financial markets of the euro area. And to use a word which I have used in the past, namely “contagion” – by the way, I saw it was misinterpreted, I meant contagion between financial markets, and not positive contagion from the financial markets to the real economy where I have been always careful in explaining that it is actually lagging – you have seen, certainly, that the contagion to other countries has been muted this time, contrary to what might have happened about a year and a half ago, and this is another positive sign.

On OMT, the rules are what they are. So, we will see, and it’s not in our capacity. The ball is entirely with the governments. I have said this time and time again. OMT remains, it’s in place. It’s a very effective backstop and it’s there. But you know the rules and, as I’ve said, the ball is in the governments’ court. Now, on credit and fragmentation, obviously we always think and study and reflect, but we are not committing or planning anything special. I may say a few more things about credit and fragmentation later, but I’m just responding to your specific question.

Question: Given that you have actually revised downwards the economic outlook, I just wonder if, first of all, you discussed a rate cut today and if everybody on the Council was in agreement that you should not change them today. And second, given that the confidence recovery hasn’t, as yet, filtered in any meaningful way into the hard data – we saw German factory orders today, which was much worse than expected – are you prepared to say “we are ready to cut if this does not filter through soon”?

And my second question is, to go back to the transmission mechanism, which you have described as the number one challenge: while the OMT has helped the sovereign bond market, it hasn’t helped, for example, corporate lending, as my colleague referred to, so if you haven’t got anything up your sleeve to repair the transmission mechanism for small companies, small businesses, again how long will you wait until you decide to take some action there?.

Draghi: To the first question: yes, we have discussed the possibility of doing it. So there was discussion. The prevailing consensus was to leave the rates unchanged.

To the second question: we will not precommit, as you know, to anything as specific as a rate cut in the future. But let me just quickly go through the outlook and the narrative behind this. As I said in the Introductory Statement, the downward revision is due to a carry-over from a weak fourth quarter of last year, but the recovery path is by and large unchanged. And the inflation projections are basically in line with our medium-term price stability objectives and inflationary expectations are solidly anchored. We are actually seeing a dichotomy between the hard data which, as you said a moment ago, are on average disappointing and a broad indicator of soft data, of survey data, of sentiment data, which almost uniformly are positive. We also continue seeing mostly positive signs on the financial markets, which offer testimony to the return of confidence I mentioned before. Again, funding for banks is proceeding well. We’ve observed a significant strengthening of the deposits even in the banks located in the stressed countries. Funding for sovereigns is also quite well advanced with respect to last year. Target2 balances continue to improve. LTRO repayment is another sign of return of confidence. By the way, in the Introductory Statement I wanted to also indicate the issue of net injection. You remember the injection of the two LTROs was barely more than €1 trillion. But that was the gross injection. The net injection was something like €500 billion, so about 40% of that has been now repaid. This squares with the fact that the overall balance sheet of the ECB has shrunk now to the minimum of what it was a year ago, in March last year. And the access of the banks of the euro area to the Eurosystem credit facility keeps on going down. So, all this points to less fragmentation. There is increased cross-border activity with other euro area countries and with the rest of the world, the net external assets of euro area banks continue to improve, and there are flows from core to non-core countries. When we talk about credit, you are right: SMEs – there is a lot of heterogeneity here between countries and between companies. The large companies have no problems in financing, in funding themselves. The SMEs do, and this continues. This shows that the situation is still fragile and it is more fragile, I would say, in the real economy. We have to distinguish, here, the outlook for the short term, which shows weak consumption, weak investment overall, weak domestic demand and high unemployment. But in the medium term, we continue seeing the beginning of a gradual recovery, which is basically caused by three factors. First, stronger world demand, meaning more exports. Second, our monetary policy stance, which will remain accommodative as long as needed, and we will remain in fixed rate full allotment mode as long as needed. We think that this will indeed make a positive contribution, as I’ve said, when all this has found its way through the economy. And we also see less fragmentation. But it’s still important for the national governments to continue with structural reforms. And the third factor: Some countries, especially the ones that have front-loaded the fiscal adjustment, will actually see a gradual reduction in the contractionary effects of the fiscal consolidation. And that’s going to be another factor which gradually, by the year end probably, will also contribute to this recovery.

Question: First, the ECB staff macroeconomic projections foresee inflation to be, on average, 1.6% this year and 1.3% next year. Is 1.3% still in line with the definition of price stability, i.e. “below, but close to, 2%”? Is the ECB credible with regard to this objective?

Second, can you say today that there is no discussion in this house about the ECB redefining, or even quitting, its role in the Troika?

Draghi: I gave you ranges for inflation in the coming year. We cannot be precise and I think we have to look at the medium term. At the moment, inflation expectations are firmly anchored and in line with our medium-term price stability objective. We will monitor the situation very carefully.

With regard to the Troika, I will start with a joke. I will call it the “ Angst of the week”. Every week there is a new Angst. For example, there was the Angst about the enormous size of the ECB’s balance sheet after the two LTROs, but now it is shrinking quickly. So each week or every two weeks we have a new Angst. I suggest that as soon as you hear any gossip or see “friendly fire”, you come over and check with us first, before writing about something that may not exist. The Troika functions very well. We are in an emergency situation and have been for several years now. But neither the ECB, nor the Commission, were born with the Troika. The Troika is an organisational arrangement that was set up to cope with this emergency. The Troika has to look at the whole of Europe. We believe that the ECB has some value to add to it in its field of competence, namely the financial sector. It works very well with the IMF and the European Commission, but you should keep in mind that we do not sign the memorandum of understanding, only the IMF and the Commission sign. We act in liaison. Moreover, the fact that we are responsible for monetary policy demands that we be part of this team, but this has raised questions about the political independence of the ECB. In all honesty, however, I and the Executive Board and Governing Council of the ECB, have not taken any decisions under political pressure of any kind, and I think that we have given plenty of evidence of our political independence. This seems to be another Angst, by the way, our alleged lower level of political independence. So let me respond to this Angst as well.

Question: Given the recent rally in stock markets, do you see a risk at the moment that the cheap money in the system is fuelling an asset price bubble? And going back to your staff projections, is inflation or deflation the bigger risk at the moment?

Draghi: I will answer your second question first. We have not observed changes in prices that would indicate risks of either inflation or deflation. Obviously it is not a very liquid market and, at times, it is also volatile, so one has to treat this observation with some caution. Furthermore, if we take deflation to mean a generalised fall in prices across sectors and a self-feeding fall in prices, we have not seen that. We have seen lower prices for certain products, certain sectors and certain countries – and higher prices in other countries by the way – and this is part of the overall rebalancing of the euro area and should be taken by and large, but not in all cases, as a good sign.

The other question about whether we fear there is a bubble is very hard to answer, because you are asking me whether the stock prices that we are seeing now are right or wrong. It is very hard to say. Much of this, at least as far as the euro area is concerned, has to do with the return of confidence. However, stock prices went up all over, and in other countries, such as the United States, this might have to do with the increased prospects of a recovery. So, I would say that the question is too difficult to answer in a clear and unambiguous way.

Question: I have a couple of questions about the Dutch bank SNS REAAL. First, what is your opinion about its nationalisation? Was it wise, in your opinion, to burn all the shares and the subordinated bonds? And second, were you informed in advance by Minister Dijsselbloem that he was going to take this unique decision? After all, this has never been done before in Europe.

Draghi: Well, let me first say that we do not, by and large, comment on the nationalisation of banks. But if I have to judge the objectives of this decision, the goal was to ensure the stability of the Dutch banking system. The government’s comprehensive reform agenda must continue. The ECB was not informed by Minister Dijsselbloem, but Governor Knot made the Governing Council aware during an informal discussion. And the ECB has, on other occasions, maintained that the bailing-in of creditors is an effective way to support capital positions. So, for the ECB, a bail-in is a good thing, by and large, provided it does not affect financial stability. In all these issues, you have to find an equilibrium between, on the one hand, debt sustainability and not using taxpayers’ money (i.e. bailing people in) and, on the other hand, financial stability.

Question: You mentioned that you are always thinking about ways to improve monetary transmission. Can you give us a sense of what you are thinking about? What are you studying? What kind of thing out there could improve that transmission? Your tone today kind of sounds like there is not a lot left in the ECB’s toolkit. What type of thing are you thinking about that could help, and are you maybe just waiting for more evidence that the transmission mechanism is broken before you do it?

And secondly, you have made references in the past to the June EU summit and the unity of purpose of European leaders. After the Italian elections and some of the uncertainties about the single supervisor and the banking union, and with the French Industry Minister talking about whether the ECB should be monetising debt, do you sense some cracks in this sense of unity that you talked about last year?

Draghi: I will answer the second question immediately. No, I don’t. The unity of purpose of the leaders in the European Council has not been affected at all by the developments that you have mentioned. You may, for example, have discordant views within a particular government. And by the way, those views were immediately corrected by the Finance Minister of the government in question. I am not sure what you mean by uncertainty about the single supervisor. I can talk at great length about the SSM, as I now do in each press conference. But I do not see any news or any reason to be worried about the progress that our legislators are making in their discussions about the SSM and the progress that is actually being made with the preparatory work. We are moving forward. I do not see much of an issue there. So, that unity of purpose is not in question. And as I have said on other occasions, many people tend to underestimate the amount of political capital that European leaders have invested in the euro. And they often do so at their own expense.

The other question was on what we are doing about fragmentation? From what you said, it sounds as if fragmentation is worsening. It is not worsening. It is actually improving. It is receding. Again, if I could give you some data, that would be good. I have given you some data about the return of confidence, but there are also data about spreads between lending rates, dispersion of lending rates, and dispersion of funding rates, and if you compare the last six months with the previous six months, they are all on the decrease. In other words, the dispersion of the lending rates of the various countries, the median dispersion, is now lower than it was in the first six months of last year. Now, it has not declined by as much as dispersion on the funding side. That has gone down by much more. But nevertheless, we are seeing signs that it is improving. Now, you do have to assess these improvements against the background of a very weak economy. So, you can see where our credit remains tight, as I have said, and where credit flows are weak. These improvements are bound to be gradual and slow, but they are there. And they are continuing. I do not have anything specific in mind that I can discuss today, but this is certainly an issue that is very close to the Governing Council’s heart – if I can use that word in relation to central bankers. It really has been a key issue for quite some time, and we consider it important for the transmission of our monetary policy.

Question: Just a question on Ireland. Christine Lagarde, in an interview this morning, raised concerns about certain complacency in relation to Ireland and the risk of a relapse. Do you share these concerns, and do you think Ireland does need some kind of support mechanism to help it exit the bailout? And secondly, are OMTs a suitable instrument for that?

Draghi: I will respond to the second question first. You know the rules on the OMTs. You know that OMTs cannot be used to enhance a return to the market. But in principle, there are rules, and countries that comply with these rules are eligible.

The Irish government has made very significant progress and achieved very significant results on several fronts, and I never tire of saying so. Further action is needed, especially on the banking side, on the financial sector front. And I think that is probably what Madame Lagarde was suggesting to the Irish government. This is not the time to rest or be complacent. The Irish government needs to continue its efforts with the same effectiveness that has characterised its actions in the past.

Question: I have a question regarding Cyprus. There have been reports about further capital flight during February from the banks in Cyprus. How do you consider the situation there? Is the flight of deposits concerning with regard to financial stability in the country, and can you give us an idea on the extent to which the Governing Council will accept an increasing amount of ELA to fill up the funding gap at Cypriot banks?

Draghi: What I can say is that there is good progress. For an exact assessment, I would suggest you read the second Eurogroup statement, hinting at the possibility of a programme by the second half of March. We have to keep in mind that the solution has to reflect two equally important dimensions. One is debt sustainability and the other is financial stability. And the Eurogroup is actually working on both of them quite actively. There are two considerations: Cyprus’ economy is a small economy, but the systemic risks may not be small. At the same time, our union is not a transfer union. Finally, let me touch on something that is not exactly within the competence of the ECB, but I judge it to be highly important. It is very important that the Cyprus government takes this opportunity to revisit the anti-money laundering legislation, not so much in terms of legislation, but that it actually accepts international oversight on how effectively this legislation has been implemented.

Question: Mr Draghi, you have repeatedly emphasised the importance of the transmission mechanism, as have a number of your colleagues in the past. Can we infer from that that you would actually implement additional non-standard measures to help improve that transmission mechanism before cutting rates again? Because what would be the point of a rate cut if it does not actually reach the real economy?

My second question is that you said that you had no immediate plans to launch policies to kick-start lending to the real economy, but that you are studying options. Are you focusing particularly on policies that would see the ECB work in tandem with the governments or, at least, seek indemnities, or are you focusing more on options in which the ECB would go alone?

Draghi: You are asking questions I really can’t answer. What I can say is that fragmentation, although receding, has been an obstacle to our monetary policy for quite a while. Giving it more thought, you are bound to conclude that it is the outcome of many factors, most of which the ECB can do very little about. You should remember that the fragmentation started with the sovereign debt crisis, which later propagated to the banking system. As I said many times, there are three reasons why banks don’t lend. One of them is lack of funding, and we have addressed this squarely and I think we have resolved it. The second is lack of capital, or put differently, the quality of the assets that the banks have on their balance sheets. There isn’t much we can do about that, as I think I said last week, the ECB is not in the business of cleaning banks’ balance sheets. The third reason is risk aversion, and now it is quite clear that with the deteriorating economy, the non-performing loans increase and risk aversion by the banks goes up and further restricts lending. Now, on that front, we are really thinking 360 degrees and we will continue reflecting. What banks do now is that they buy government bonds, or lend to the private sector at a much higher rate than the yields on the government bonds. So, credit is either unduly expensive, given the quality of the client, or it is not there. In other times, the banks of other parts of the euro area would take the opportunity to either buy other countries’ government bonds themselves, so that the yields on those bonds would go down, and the domestic banks would then have more incentives to lend to the private sector, or more rarely, the other countries’ banks would lend directly to the SMEs. Now we don’t see that. Why is that? Because the system is fragmented. Any sign of overcoming this fragmentation through higher cross-country credit flows is a good sign towards a better transmission of our monetary policy into lending rates, into the real economy.

Question: Mr Draghi, you have just said that we know the rules on OMTs. I do not think I am alone in saying that, actually, I do not think we do. The only thing you have published that I am aware of is an approximately 440-word statement that you read out to us in September; other than that it feels a bit like we are slowly piecing together the picture. Would you consider giving us, at some point, a full, written, point-by-point document stating how it works, what a country must do, etc., or is this a deliberate policy to keep it a little bit vague?

Draghi: I am not sure I understand your question. I think, by now, that you have in fact stopped asking questions about how the OMT works because you understand how it works. We have gone through all the conditions that would make a country eligible for OMTs and we have said that this would be a necessary, but not a sufficient, condition for the ECB to step in. We listed the conditions, we specified the role of the European Stability Mechanism, the International Monetary Fund, and so on and so forth. I do not want to go through all of this again and again. If you are referring to the legal documentation, that is a different matter. We are still working on this. It is coming out, but that is it in terms of information on how it works.

Question: I think I have a broad understanding but for example…

Draghi: Broad? I am surprised it is still so broad.

Question: For example, on the question of whether a country can use it when it is returning to the bond markets or not – I would have to go back and check your exact words – but, at one point, it sounded like it was valid for countries that were returning to the markets. But you said just now that actually it is not something that should be used to enhance a return to the market.

Draghi: Exactly. Countries should be in the market under their own steam. To be in the market, I think I clarified what we mean: being able to issue along the yield curve, being able to issue to a fairly broad category of investors, and being able to issue certain quantities. The OMT has never been considered, or created, to support countries in their return to the market. OMT was meant as an effective back-stop that will remove, and has removed, the tail risks from the euro area.

Question: My other question, quickly – just to return to a former “Angst of the week”, which I do not think you have mentioned today – relates to the euro. Is the current level of the euro acceptable? Has the risk of appreciation receded? Have you got any comments on that?

Draghi: Let me go through something that must be dear to your heart. I will not read it all, but the G20 communiqué says: “ We reiterate our commitments to move more rapidly towards more market-determined exchange rate systems and exchange rate flexibility to reflect underlying fundamentals, and avoid persistent exchange rate misalignments and, in this regard, work more closely with one another so we can grow together”. Ministers committed to not commenting on that and so I will not be the first to violate this commitment. As I said, the exchange rate is not a policy target for us. The nominal and real effective exchange rates continue to be in line with their long-term averages. However, the exchange rate, as we have seen in the fourth quarter of last year, when it was weaker, is very important for growth and price stability. We will continue to monitor it; it is certainly part of our overall assessment of the current situation. As I said, we are sticking with the G20 consensus on that. I will not repeat my statement about fruitless chatter; that was the other part, if you were just hinting that I should comment on other people’s statements on the exchange rates.

Question: I want to come back to inflation, as the mid-points of the projections are well below the 2% target and this might increase discussions as to whether the ECB should be more worried about deflation than inflation. Could you just tell us a little bit more about the profile of inflation over the next two years? What do you expect, when will it hit its low and when will it be at, or above, 2% again?

Draghi: I think the introductory statement says something about the macroeconomic projections on inflation. It says: “The ECB staff macroeconomic projections for the euro area foresee annual HICP inflation in a range between 1.2% and 2% in 2013, and between 0.6% and 2% in 2014”. So, in comparison with December 2012 Eurosystem staff macroeconomic projections, the ranges are broadly unchanged. … risks to the outlook for price developments continue to be seen as broadly balanced over the medium term, with upside risks relating to stronger than expected increases in administered prices, indirect taxes as well as higher oil prices, and downside risks stemming from weaker economic activity.” Let me add what I said before, which does not apply mechanically to our situation today: the sustained appreciation of the exchange rate has the potential to alter our risk assessment of inflation.

Question: Mr Draghi, I have two questions. My first question is about a possible free trade area agreement between the United States and the euro area which is in the works apparently. I would like to know what the ECB makes of it, whether this is something that has been discussed and whether it could substantially boost growth prospects for the euro area?

And my second question touches again upon the Italian elections. You said that the OMT programme is there and the election outcome is democracy, but it is difficult to ignore that market participants and observers are wondering whether political developments in Italy might hamper the effectiveness of the ESM and the OMT by making it difficult for a government to sign the memorandum of understanding. So I would like to know what your stance is on this issue and whether it has been discussed?

Draghi: We did not discuss this and we do not discuss trade. The culture of the Governing Council of the ECB is such that if I were to guess my colleagues’ thoughts, they would say that a free trade area would be a source of growth and job creation. I think some very good work is being done there by others. And, of course, everything ought to be also consistent with the multilateral commitments and engagements in which all of us are.

On the second point, I am not sure if I understand. I think this is another Angst. You are asking me to respond to something that does not exist. So I have no response to that. We know what the OMT is. We know the rules, it is there and that is it.

Question: Mr Draghi, you mentioned in your statement youth unemployment. Given that inflation is now well below your target, is there perhaps more room within your price stability mandate to pay more attention to macroeconomic factors, like unemployment and growth, as some other major central banks are doing?

Draghi: On another occasion, I remarked on the very high level of youth unemployment that we are seeing today – and, by the way, unemployment is a tragedy and youth unemployment is an even bigger tragedy. We should ask ourselves why unemployment is so high, and why is it high mostly among young people, and not uniformly high, as it should be in a situation of such weak demand? And the answer has to do with labour legislations in these countries which have basically put all the weight of flexibility upon the young people. And there is very little the ECB can do about that.

On the more general question you asked, we view maintaining price stability in both directions as the best way to support the real economy and job creation and growth. Of course, as I said before, we have to see what we can do and it is not clear that we can do much. We have to address the problem of transmission of our monetary policy to the real economy. As I said before, our monetary policy will remain accommodative as long as needed. And it will stay in the full allotment mode and we will also monitor carefully all markets – credit markets and the EONIA market, both spot and forward.

Question: Last month you said that we have not heard the last word on the Irish promissory notes. So, I wonder, when will we hear the last word?

Draghi: We periodically review compliance with Article 123 by all countries. If I am not mistaken, the review should happen at the end of the year, but the Governing Council will decide in complete independence when to have this review, or a review of similar situations. I do not have a date to give you now. I think there is a date when this is going to be done, and I believe it is at the end of the year, but I cannot let you know for sure

Question: Mr Draghi, I want to come back to Italy. Given the instability after the Italian elections, are you afraid Italy might leave the path of austerity?

And my second question is: how likely is it, in your opinion, that Italy could leave the euro area after a referendum or something else?

Draghi: You are asking me if I am afraid; you are asking me how likely it is. I cannot answer these questions. But I can tell you that Italy, like all the other countries, should continue down the path of structural reforms, which is the only way to restore growth. It should also build on the substantial fiscal consolidation that has been achieved so far. This is very important, because this is what gives credibility in the markets, leading to lower spreads and, therefore, lower lending rates, more credit in the economy and more job creation. This is the path.

Question: Mr Draghi, you talked about the risks that the euro exchange rate can pose to your growth and inflation outlook. Can I just confirm again that you do not believe that the current euro exchange rate levels pose any major risks to your growth and inflation outlook?

And my second question is whether the Governing Council has actually discussed a cut in the deposit rate, and what you think the biggest risks would be if you implemented a negative deposit rate?

Draghi: As you can imagine, I cannot respond to the first question. We never really comment on exchange rates, and even less so on levels of exchange rates, or whether a certain level is appropriate or not.

The answer to the second question is the following: we have looked at that and we do not commit to doing anything. The unintended consequences of a measure like that can be serious, as similar experiences in other monetary jurisdictions have shown. I think in the past I have described this as “unchartered waters”, which is all I can say on the matter.


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