Mario Draghi, President of the ECB,
Vítor Constâncio, Vice-President of the ECB,
Frankfurt am Main, 20 July 2017
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 Dombrovskis.
Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. We expect them to remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases. Regarding non-standard monetary policy measures, we confirm that our net asset purchases, at the current monthly pace of €60 billion, are intended to run until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. The net purchases are made alongside reinvestments of the principal payments from maturing securities purchased under the asset purchase programme.
Our monetary policy measures have continued to secure the very supportive financing conditions that are necessary to make continuous progress towards a sustained convergence of inflation rates to levels below, but close to, 2% over the medium term. The incoming information confirms a continued strengthening of the economic expansion in the euro area, which has been broadening across sectors and regions. The risks to the growth outlook are broadly balanced.
While the ongoing economic expansion provides confidence that inflation will gradually head to levels in line with our inflation aim, it has yet to translate into stronger inflation dynamics. Headline inflation is dampened by the weakness in energy prices. Moreover, measures of underlying inflation remain overall at subdued levels. Therefore, a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to gradually build up and support headline inflation developments in the medium term. If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, we stand ready to increase our asset purchase programme in terms of size and/or duration.
Let me now explain our assessment in greater detail, starting with the economic analysis. Euro area real GDP increased by 0.6%, quarter on quarter, in the first quarter of 2017, after 0.5% in the last quarter of 2016. Incoming data, notably survey results, continue to point to solid, broad-based growth in the period ahead. The pass-through of our monetary policy measures is supporting domestic demand and has facilitated the deleveraging process. The recovery in investment continues to benefit from very favourable financing conditions and improvements in corporate profitability. Private consumption is supported by employment gains, which are also benefiting from past labour market reforms, and by increasing household wealth. Moreover, the global recovery should increasingly lend support to trade and euro area exports. However, economic growth prospects continue to be dampened by a slow pace of implementation of structural reforms, particularly in product markets, and by remaining balance sheet adjustment needs in a number of sectors, notwithstanding ongoing improvements.
The risks surrounding the euro area growth outlook are broadly balanced. On the one hand, the current positive cyclical momentum increases the chances of a stronger than expected economic upswing. On the other hand, downside risks primarily relating to global factors continue to exist.
Euro area annual HICP inflation was 1.3% in June, down slightly from 1.4% in May, mainly due to lower energy price inflation. Looking ahead, on the basis of current futures prices for oil, headline inflation is likely to remain around current levels in the coming months. At the same time, measures of underlying inflation remain low and have yet to show convincing signs of a pick-up, as domestic cost pressures, including wage growth, are still subdued. Underlying inflation in the euro area is expected to rise only gradually over the medium term, supported by our monetary policy measures, the continuing economic expansion and the corresponding gradual absorption of economic slack.
Turning to the monetary analysis, broad money (M3) continues to expand at a robust pace, with an annual rate of growth of 5.0% in May 2017, after 4.9% in April. As in previous months, annual growth in M3 was mainly supported by its most liquid components, with the narrow monetary aggregate M1 expanding at an annual rate of 9.3% in May 2017, unchanged from April.
The recovery in the growth of loans to the private sector observed since the beginning of 2014 is proceeding. The annual growth rate of loans to non-financial corporations remained stable at 2.4% in May 2017, while the annual growth rate of loans to households increased to 2.6%, from 2.4% in April. The euro area bank lending survey for the second quarter of 2017 indicates that credit standards for loans to enterprises and loans to households for house purchase have further eased and that loan growth continues to be supported by increasing demand. The pass-through of the monetary policy measures put in place since June 2014 continues to significantly support borrowing conditions for firms and households and credit flows across the euro area.
To sum up, a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis confirmed the need for a continued very substantial degree of monetary accommodation to secure a sustained return of inflation rates towards levels that are below, but close to, 2%.
In order to reap the full benefits from our monetary policy measures, other policy areas must contribute decisively to strengthening the longer-term growth potential and reducing vulnerabilities. The implementation of structural reforms needs to be substantially stepped up to increase resilience, reduce structural unemployment and boost productivity growth. Regarding fiscal policies, all countries would benefit from intensifying efforts towards achieving a more growth-friendly composition of public finances. A full, transparent and consistent implementation of the Stability and Growth Pact and of the macroeconomic imbalances procedure over time and across countries remains essential to bolster the resilience of the euro area economy.
We are now at your disposal for questions.
Question: Could you give us a bit of a flavour of the discussion at today’s meeting? Mainly, have you held any formal talks about your strategy for the asset purchase programme after December of this year?
My second question is more on the follow-up from your Sintra speech. We’ve seen the euro strengthen on a trade-weighted basis to its highest level since the end of 2014. You used to highlight your concerns about the impact this might have, a strengthening currency, for inflation, so from that standpoint are you concerned that the gains in the currency are already excessive?
Draghi: Let me respond first to your first question and give you a sense of the discussion we had today. We reviewed the economic and financial developments in the euro area, where we took stock of the continuing improvement in growth momentum, but also of the fact that the inflation rate is still subdued - and really there isn’t any convincing sign of pickup for underlying inflation - while noting that the headline inflation will still be fairly volatile in the coming months. There was a general reiteration of the point that convergence of the inflation to our objectives remains conditional upon the very substantial monetary accommodation that is now in place.
So, all in all, one could try to summarise the exchange of views we had saying that it was around the concepts that we’ve expanded on on other occasions, like the concept of confidence that is basically generated by the growth momentum; but also the fact that we need to be persistent and patient, because we aren’t there yet. And prudent. We also were unanimous in communicating no change to the forward guidance; and also we were unanimous in setting no precise date for when to discuss changes in the future.
In other words, we simply said that our discussions should take place in the fall – or in the autumn, since we are in Europe.
Now, concerning your second question, it’s true there have been movements in bond prices, asset prices, exchange rates and so on. But the conclusion is that the financing conditions remain broadly supportive to secure a sustained return of inflation rates towards our inflation aim. Long-term yields have risen, but they still are low by historical standards. Sovereign spreads have tightened, and some issuers have seen even falling rates. The corporate bond spreads have continued to decline. The ten-year GDP weighted average of euro area sovereign yields stands close to its level at the beginning of the year. Bank lending rates continue to be at very supportive levels, and the Bank Lending Survey suggests that banks expect a further net easing of their credit standards across all loan categories in the third quarter.
The repricing of the exchange rate has received some attention during the various exchanges of views, and in various ways. That’s been something that, just as I said, has received some attention.
Question: As my colleague mentioned, there was a sharp reaction from financial markets to your Sintra speech. You must have looked at the Fed experience of 2013. Is there any concern in the Governing Council that the so-called tantrum or a similar reaction can happen in the eurozone when you start discussing changes in your stance?
Draghi: I won’t comment on market reactions, but let me give you the bottom line of our exchanges: basically, inflation is not where we want it to be, and where it should be. We are still confident that it will gradually get there, but it isn’t there yet, and that’s why the Governing Council reiterated the forward guidance, the asset purchase programme, the interest rates and all this package of monetary accommodation; and reiterated that the present very substantial monetary accommodation is still necessary. Let me read the introductory statement: “Therefore a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to gradually build up and support headline inflation developments in the medium term.”
But let me just make clear one thing: after a long time, we are finally experiencing a robust recovery, where we only have to wait for wages and prices to move towards our objective. Now, the last thing that the Governing Council may want is actually an unwanted tightening of the financing conditions that either slows down this process or may even jeopardise it; and that’s why we retain the second bias, or let’s call it, reaction function. “If the outlook becomes less favourable or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, we stand ready to increase our asset purchase programme in terms of size and/or duration.” And I think the Governing Council has given enough evidence that when flexibility is needed to achieve its objectives, it has been very able to find all that was needed. So that’s why we keep this bias.
Question: Your remarks on inflation today seem to be rowing back a little on what you said in Sintra. In Sintra my impression was that you seemed quite confident that reflationary pressures were starting to re-emerge and that the weakness in inflation would be temporary. Today you’re saying that you see no sign of a pickup in headline inflation. Can you maybe explain a little bit how we get to a point where we do see these reflationary pressures where you’re saying there’s no signs of it yet?
For my second question, it seems from what you’re saying today, too, that the exchange rate and also the jump in government borrowing costs is having some impact on your thinking of what you’re going to do in 2018, but we’ve also seen from the reaction to your speech in Sintra and also the taper tantrum in the US that it can be very difficult to control bond markets. How do you see the ECB being able to do this, and would you consider doing something similar to the Bank of Japan, where there is an attempt to manage the yield curve quite carefully and directly?
Draghi: I reviewed the financial markets developments a moment ago, and I think I put them in the proper context, but nothing like BoJ was discussed. But let me just comment on your parallel with the Sintra speech: our assessment is that what I’ve just said, at Sintra and Tallinn – because we have to go back to that, the Q&A and the introductory statement – aren’t very different. On all occasions what we did was to basically take stock of the unquestionable improvement in the growth outlook in the euro area. Then we asked ourselves the question, “Why isn’t this showing up into a higher inflation rate, headline and underlying inflation?” And we went through a series of reasons that have to do with the labour market, have to do with backward-looking wage negotiations,with productivity, and in Sintra this analysis was quite broad, quite detailed.
And then we said, “Are these factors going to be permanent or temporary?” We said, “Well, they’re going to last some time, that’s for sure, but probably they’re not permanent because as the economic recovery improves and the growth outlook improves, all these reasons will lose some of their effects. For example, the labour market slack may be bigger than previously estimated, but as the economic situation and growth improves, so will the labour market, and this will be absorbed,” and so on for all these various reasons. We think – nobody can be 100% sure, and we think that it’s going to take time but in the end – although, as I said, nobody can be absolutely sure about that – in the end these reasons will lose some of their effects.
Then we said, “Are we there?” and the answer was, “No, we aren’t there yet.” And that’s why in Sintra I used repeatedly the concept – together with confidence, that in the end we’ll get there – the concept of persistence or patience. Persistence in keeping the current stimulus in place. Stimulus upon which all the path of inflation is projected, is conditional. Then we said that our monetary policy will accompany the recovery, and that is, I believe, not only in Sintra, but also in Tallinn, and certainly today. So all this says basically that the ECB, the Governing Council – first of all - trusts the strength and the power of its monetary package in all its elements. Second, it says that the Governing Council is ready to use the flexibility that is needed to make true its monetary policy package. And third, it says that the ECB will stay in the market for a long time.
So in conclusion, I’m not sure I see big differences. Much was made of the word reflation. By the way, reflation means – you have reflation when the price level has fallen below the trend line and it recovers. It recovers from below the trend line: that’s the technical definition of reflation. In the speech in Sintra and before, we said that reflation has replaced deflation – or risks of deflation, really, better. So, no big differences.
Question: I have a general question of how confident you are that it’s actually possible to withdraw that extraordinary stimulus without creating volatility at all: are you confident that such a smooth transition is actually possible?
The second question is on Greece. Greece is very hopeful to go back to the markets to sell debt. How confident are you that the ECB also will be buying government bonds from Greece going forwards?
Draghi: We are confident that this process can be managed in a smooth way, and so we see our programme proceeding in a smooth fashion. As I said, the Governing Council has given enough evidence in the past that it can actually use all the flexibility that is needed.
On your second point, we’ve gone through this several times. First of all, the third review must be completed. The Greek Government has decided, as you said, to tap the market, and of course it’s up to the government to decide about this. The sound implementation of the programme and credibility are essential, however, for restoring market confidence, and we have to take note that the national central bank has expressed some concern about that; although there has been serious progress in place in Greece throughout the last several months. But issuance – the way we see this is the issuance activity should be part of an overall strategy where you have the completion of the third programme and also a return to the market, but it should be in a lasting way. So it’s premature to talk about other things, and what you suggested, or also other programmes.
Question: Please let me again touch on your Sintra speech and on the explanations you have given today. Would you say that there has been perhaps in parts of the economic and financial world a kind of misinterpretation of what you have said in Sintra?
And secondly, in the wake of this speech but also before, in some parts of the market there have been demands that it perhaps would be wise and sensible that the ECB would put forward a kind of road map, a kind of timetable, concerning, of course, tapering, but also concerning possible changes in general monetary policy. Would you say that something like this would be helpful?
Draghi: On the first question, I never, ever comment on market developments.
On the second question, this is exactly what is going to be the substance of our discussion in the fall. So the answer is yes, the ECB considers it useful, important, essential, and that’s the sort of discussions we’ll be having in the fall.
Question: My first question is about technical work. Have you asked ECB staff to start looking into the technical options for QE beyond December, just at a technical level?
The second question is slightly different: five appointments inside the ECB were annulled over the past year, and now the appointment of your own adviser is being challenged in court. What do you intend to do to improve hiring practices in the institution?
Draghi: The first answer is no, it’s not been discussed. They’ve not been tasked.
The second answer is, really, in a sense, we are thankful to the Staff Committee and IPSO when they address mistakes that we, like everybody else, make. Sometimes their concerns are right; sometimes they are not. So we proceed in this way. I sincerely wish to work – not only I, but also the Executive Board Members and senior management – wish to work with the Staff Committee and IPSO. The problem is that it’s very difficult to have trust – you know, trust is a two-way route, where it’s very difficult to trust someone who discusses things on the press and the news wires and so on, each and every time. And frankly, also for the staff, which is a staff of world-class quality, to be seen in the press as being continuously discussed must be – it’s a little sad. So I think that what should be improved, perhaps on both sides, is the way to work together, not necessarily our hiring practices, which, as I said, when they need correction, we correct them without hesitation.
Question: Can I ask you, you also said in the Sintra speech that as the economy continues to recover a constant policy stance will become more accommodative. It looks like the economy will continue to recover even more. You also said that the Governing Council will likely discuss changes in autumn: do you view it as likely that a change in the monetary stance in autumn will be necessary?
Draghi: That’s exactly why we are having this discussion in autumn, and why we didn’t want to set a precise date; because we have to have all the available information at that point in time, which we’ll certainly have by then. It’s going to be a discussion which is made up of different parts. We don’t look only at the growth recovery, of course, in assessing whether the monetary policy stance is appropriate or not. We also have to look at – actually, first and foremost we have to look at the path of inflation, whether it converges in a sustainable and self-sustained manner to our objective. And that’s why I said before: in the presence of this growth recovery, if we are to experience an unwanted tightening of financing conditions that may jeopardise the convergence in the medium term of inflation to our objectives, then we’ll have to act and we’ll have to use the APP bias and other measure as well. That’s why this discussion we’re going to have in the fall is multi-faceted.
Question: Would it be possible that the ECB, for example, takes a general decision on a reduction of the bond purchases first, or quite early, and then decides on the modalities of the purchases later? Would that be an option, maybe?
My second question: you’ve said that there’s no convincing sign of a pickup in inflation yet. For example, wage growth hasn’t picked up yet. Have maybe the fundamentals also changed after the financial crisis, the relations between growth and wages and inflation, or is the convincing sign only if wages really pick up?
Draghi: The answer to the first question is we haven’t discussed that.
The second question really asks whether something has changed following the financial crisis so that the response of wages to an improvement in the labour market is different from what it was in the past, before the crisis; and the answer is yes, certainly. It has changed, and there is a variety of factors why this has changed that I went through explicitly during my speech in Sintra, but as well on other occasions. These are profound changes. The key issue for us is: are they going to be permanent, or structural; or in the end will we go back to a sort of relationship between the labour market, between unemployment and wage growth, like we used to have in the past?
The conclusion we draw – as I said, with great caution, however, because it’s not something where one can be 100% sure – the conclusion we drew is that in the end, yes, we will go back to a relationship like we had before the crisis. I focused on the labour market, but in fact there are other reasons why this response may be delayed. For example, the de-leveraging process is another reason why this is slower than you would have in normal times. In general, after a protracted financial crisis and a long recession like we had, you would expect phenomena like hysteresis, phenomena like, as I said, backward-looking wage negotiations, like the de-leveraging – so it’s a variety of phenomena and some of them have to do with the labour market; others don’t. All throughout, we are confident we are moving through, but it’s a combination of confidence and prudence and patience.
Question: You said you haven’t asked the committees yet to prepare options for an exit. What are the chances that are your next policy meeting you actually have concrete options on the table that you could discuss and take a decision on? Or would you only task committees to prepare options after your initial discussions on a possible exit in the autumn?
My second question is, you’ve highlighted the Governing Council’s flexibility: what do you think are the chances at this point that you would have to change the parameters or the rules of the QE programme again to ensure that there are sufficient assets to buy?
Draghi: I’m sorry, but the answer to the second question is, we haven’t discussed that, and to the first as well. We haven’t discussed what we are going to do in view of September, or even less so what we are going to do after September. As I said, it was a unanimous conclusion, exactly: Don’t set dates. We need to think. We need to have lots of information we don’t have today. There is a lot of uncertainty around. So the Governing Council didn’t want to be forced to take decisions in absence of full information.
Question: Firstly, on the inflation picture at the moment: is it time to look at the inflation target? Has that been discussed? We’ve had all this QE pumped through the system, we’ve done all this extra accommodation, and inflation isn’t where it should be, or where the ECB would like it to be. Is that because the target’s wrong? Or just, now, because of what we’ve seen, it’s going to take a lot longer to get there?
And secondly, with regards to capital keys and the fact that for the third month in a row now Germany has fallen below that, or the purchases for Germany have fallen below that. Price and availability of credit on the corporate side possibly make that more attractive for the programme: has this been discussed or considered?
Draghi: The answer to the second question is that we haven’t discussed that. We haven’t discussed that but, as I said, we gave you enough evidence that it was the case all the time that when the Governing Council needed flexibility to carry through its monetary policy it was successful in finding it.
On the first point, we didn’t actually discuss this, not this time, but on other occasions we briefly touched upon it. Basically, the answer is, first, the reasons that led, to my understanding, all the major central banks in the world to adopt a 2% objective, or around that concept, in the early 2000s, are still valid. And specifically in the euro area, for the ECB, are still valid.
Second, it’s true, our monetary policy measures have been in place now for quite a long time, but they’ve produced very significant effects. We can say that today there were created in the last three years, if I’m not mistaken, around 6 million jobs: much more than any time before the crisis in the same amount of time. All the economic sentiment indicators, the survey indicators, are either at all-time high or close to that. So the policies have been unquestionably successful on the real side of the economy; it’s the response in terms of inflation that we are still waiting for, and looking and monitoring. So the answer to that is, we’ve got to be patient rather than changing the objective.
Also, if you ask yourself how credible is anybody, really – an individual or an institution – that when it doesn’t attain the objective, changes it, and makes it attainable, changing the definition? By the way, the whole reasoning could be done the other way around, if we had inflation 4% and we wanted to bring it down, and we decided that 4% is the new objective. So it’s not very credible. Finally, I think to even discuss changing objectives at this point in time would be destabilising for the expectations. It would be highly destabilising.
Question: What kind of new information would you need to see between now and the fall to convince the ECB that something needed to be adjusted in terms of the stimulus? Would you need to see an upward revision in inflation, for instance, or in the economic forecasts? Or would it be sufficient if growth just continued the way it’s expected to do?
My second question is, does 7 September count as the fall, the autumn?
Draghi: Well, if the Governing Council had decided to define autumn as 7 September, we probably would have said that 7 September is going to be when we’ll decide. So it’s going to be deliberately kept open.
Your other question, what information – it isn’t that we are looking for a specific data point which triggers one behaviour or another. In September we’ll be having the macroeconomic projections, we’ll be having staff macroeconomic projections, so there is more information that we can look at between now and then. It’s basically the sense of the Governing Council that we will have more confidence in taking a decision with more information than we have today.
Question: You said during the opening statement that the recovery has been broadening across sectors and regions. It’s obvious that there are still some trouble spots, still some areas that have high unemployment or where credit is difficult to find: how much does that play into your thinking? How broad does the recovery have to be before you’re going to feel confident about perhaps removing some of the accommodation?
And then a related question: how confident are you that some areas that have been benefitting from the accommodation can stand on their own once conditions go back to normal?
Draghi: Your question actually reminds all of us that what we say about growth momentum, strong recovery, is an average. That in fact, as you said, there are spots which haven’t seen such great recovery, and they, in a sense, don’t appear when we give this average, aggregate description. That is something that should always be kept in mind. When we say we’ve created jobs and the labour market is improving, no question that is true in the aggregate, but still that doesn’t deny the presence of areas where slack remains significant, and unemployment – and youth unemployment especially – remains significant.
Having said that, we should always remember that our mandate is neither growth nor employment, but it’s price stability, and that’s where our monetary policy is geared for, and that’s what we have to look at in terms of deciding whether we’re actually moving successfully. I think that’s my answer.
On your second question, again, in a sense, it goes beyond our remit. We have to take this into account in our minds: our remit is the one of price stability, and that’s what we have to look at, and we have to aim our policy action to that objective.