Mario Draghi, President of the ECB,Vítor Constâncio, Vice-President of the ECB,Frankfurt am Main, 14 December 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 President of the Eurogroup, Mr Dijsselbloem, and 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 continue to 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 from January 2018 we intend to continue to make net asset purchases under the asset purchase programme (APP), at a monthly pace of €30 billion, until the end of September 2018, 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. 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 the APP in terms of size and/or duration. The Eurosystem will reinvest the principal payments from maturing securities purchased under the APP for an extended period of time after the end of its net asset purchases, and in any case for as long as necessary. This will contribute both to favourable liquidity conditions and to an appropriate monetary policy stance.
Our monetary policy decisions have preserved the very favourable financing conditions that are still needed for a sustained return of inflation rates towards levels that are below, but close to, 2%. The incoming information, including our new staff projections, indicates a strong pace of economic expansion and a significant improvement in the growth outlook. The strong cyclical momentum and the significant reduction of economic slack give grounds for greater confidence that inflation will converge towards our inflation aim. At the same time, domestic price pressures remain muted overall and have yet to show convincing signs of a sustained upward trend. An ample degree of monetary stimulus therefore remains necessary for underlying inflation pressures to continue to build up and support headline inflation developments over the medium term. This continued monetary support is provided by the additional net asset purchases that we decided on at our October monetary policy meeting, by the sizeable stock of acquired assets and the forthcoming reinvestments, and by our forward guidance on interest rates.
Let me now explain our assessment in greater detail, starting with the economic analysis. The economic expansion in the euro area continued in the third quarter of 2017, when real GDP increased by 0.6% quarter on quarter, after 0.7% in the second quarter. The latest data and survey results point to solid and broad-based growth momentum. Our monetary policy measures, which have facilitated the deleveraging process, continue to support domestic demand. Private consumption is underpinned by ongoing employment gains, which are also benefiting from past labour market reforms, and by rising household wealth. Business investment continues to strengthen on the back of very favourable financing conditions, rising corporate profitability and strengthening demand. Housing investment has also risen further over recent quarters. In addition, euro area exports are being supported by the broad-based global expansion.
This assessment is broadly reflected in the December 2017 Eurosystem staff macroeconomic projections for the euro area. These projections foresee annual real GDP increasing by 2.4% in 2017, 2.3% in 2018, 1.9% in 2019 and 1.7% in 2020. Compared with the September 2017 ECB staff macroeconomic projections, the outlook for real GDP growth has been revised up substantially.
Risks surrounding the euro area growth outlook remain broadly balanced. On the one hand, the strong cyclical momentum, underpinned by continued positive developments in sentiment indicators, could lead to further positive growth surprises in the near term. On the other hand, downside risks continue to relate primarily to global factors and developments in foreign exchange markets.
According to Eurostat’s flash estimate, euro area annual HICP inflation was 1.5% in November, up from 1.4% in October. At the same time, measures of underlying inflation have moderated somewhat recently, in part owing to special factors. Looking ahead, on the basis of current futures prices for oil, annual rates of headline inflation are likely to moderate in the coming months, mainly reflecting base effects in energy prices, before increasing again. Underlying inflation is expected to rise gradually over the medium term, supported by our monetary policy measures, the continuing economic expansion, the corresponding absorption of economic slack and rising wage growth.
This assessment is also broadly reflected in the December 2017 Eurosystem staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 1.5% in 2017, 1.4% in 2018, 1.5% in 2019 and 1.7% in 2020. Compared with the September 2017 ECB staff macroeconomic projections, the outlook for headline HICP inflation has been revised up, mainly reflecting higher oil and food prices.
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 October 2017, from 5.2% in September, reflecting the impact of the ECB’s monetary policy measures and the low opportunity cost of holding the most liquid deposits. Accordingly, the narrow monetary aggregate M1 continued to be the main contributor to broad money growth, expanding at an annual rate of 9.4% in October, after 9.8% in September.
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 increased to 2.9% in October 2017, after 2.4% in September, while the annual growth rate of loans to households remained stable at 2.7%.
The pass-through of the monetary policy measures put in place since June 2014 continues to significantly support borrowing conditions for firms and households, access to financing ‒ notably for small and medium-sized enterprises ‒ 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 an ample 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 in all euro area countries needs to be substantially stepped up to increase resilience, reduce structural unemployment and boost euro area productivity and growth potential. Regarding fiscal policies, the increasingly solid and broad-based expansion strengthens the case for rebuilding fiscal buffers. This is particularly important in countries where government debt remains high. 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 imbalance procedure over time and across countries remains essential to increase the resilience of the euro area economy. Strengthening Economic and Monetary Union remains a priority. The Governing Council welcomes the ongoing discussions on completing the banking union and the capital markets union, and on further enhancing the institutional architecture of our Economic and Monetary Union.
We are now at your disposal for questions.
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Given that you see inflation at 1.7% in 2020, do you consider that sufficient progress on inflation in the medium term? Does that in any way affect your current plans for the asset purchase programme?
My second question is on the corporate sector purchases. You said in October that they would remain sizeable. Were any further details decided in that regard? Could you clarify whether that might mean that we will see the same amount of corporate bonds being purchased? Or will simply the proportion in the overall programme be higher?
Draghi: The answer to the second question is: I can't elaborate. It remains sizeable. We haven't discussed that today. So the terms of language will remain the same as last time. On the first question, by and large the overall discussion today reflected the increasing confidence that we have in the convergence of inflation towards a self-sustained inflation path in the medium term and towards our objective. Generally speaking, the growth news is very positive; I can elaborate on that. So all in all, the revision in the macroeconomic projections goes in the right direction.
A follow-up question on when, do you reckon, will you give us more of an idea of what the QE programme or the asset purchase programme will look like after September? There is much speculation it could be as late as July, perhaps June; perhaps you already have a vision or an idea. Second question would be on whether you had in the Governing Council, or you yourself, thoughts about what it means that the ultra-loose monetary policy stance is most likely still in place when we see the economy cooling down once again, meaning that you could be left with not a lot of ammunition as a central bank to counter an economic downturn i.e. a reduced trend of inflation. What's your idea here?
Draghi: The second question, I cannot answer that: we haven't discussed that. Frankly, it doesn't seem likely today. Actually in a sense it seems even more a remote possibility than it would have been a year ago or even six months ago.
But on the other point, if we go through the statement I just made, just let me go step by step. First of all the forward guidance on interest rate is unchanged. We say we continue to expect interest rates to remain at the present level for an extended period of time and well past the horizon of our net asset purchases. Second, we confirm that from January 2018 we intend to continue to make the net asset purchases under the asset purchase programme at a monthly pace of 30 billion until the end of September 2018, or beyond if necessary and in any case, until the Governing Council sees – et cetera – so there isn't any change in the language or intentions. Third, quite important, the Eurosystem will reinvest the principal payments from maturing securities purchased for an extended period of time after the end of the net asset purchases and in any case as long as necessary.
Then we add the considerations on inflation where, even though the situation on growth has improved – and by the way: will continue to improve – has improved more than expected and will continue to improve, that's what all sentiment indicators say and also our staff projections say. The news on inflation remains somewhat muted. We say price pressures remain muted and have yet to show convincing signs on a sustained upward trend. So the conclusion is: an ample degree of monetary stimulus therefore remains necessary for underlying inflation pressures to continue to build up and support headline inflation developments over the medium term. So, no change all throughout.
Did you discuss cutting the link in your guidance between the APP and inflation and what is your view on that question?
Secondly, on the 1.7% inflation prognosis, do you maintain what you said last year that 1.7% is not really in line with the target?
Draghi: First of all, we didn't discuss cutting the link. That was not discussed. It's probably worthwhile spending a word on that. As you noticed, we haven't used the word recovery; we use the word expansion. As the economic expansion gains further strength and keeps on broadening, naturally the stimulus will come. We said that in the introductory statement; it will come from all the elements of the package. Therefore, as a consequence, also the component coming from the forward guidance of interest rates will gain further and further importance. So this is a natural process led by the recovery. In this sense our monetary policy accompanies the recovery, as I had chance to say in a speech some time ago. But we haven't discussed cutting the link, no. We aren't there.
Now, the other point is 1.7%. Well, see, we defined it; the answer is, it's close but below 2%. How close is it? The issue here is more how strong is the convergence path towards a self-sustained and sustainable inflation rate which is close to but below 2% in the medium term. The developments that we are witnessing in the real economy certainly increase our confidence for an output gap that will get closed in the course of the next year and improving conditions in the labour markets, which in due time should increase pressure on nominal wages. As you know, that has been one of the variables we've been looking more at as one of the drivers of the underlying inflation and therefore one of the drivers for a sustained progress in headline inflation.
Given the favourable economic outlook and also given the revisions for growth – which is significant, which you mentioned – will you permanently review the APP while it is running? Or are the volumes and duration of the programme, let's say, carved in stone at least until September next year?
My second question is also on the APP. Has there been again the discussion today about the open-ended design of the APP?
Draghi: Yes, actually it's one question, really. The programme has been discussed, designed and decided upon a month-and-a-half ago. Today the issue was not discussed at all. That is what stands in place both as far as the size, the volumes, the timing and the open-endedness of the programme.
The Federal Reserve yesterday increased interest rates again. It looks like it is going to happen again very soon and apparently more rapidly than we all saw it, which means that the gap between the interest rates in Europe and America becomes more and more wide. Isn't the Governing Council concerned that this might have quite significant effects and negative effects for the European economy?
Secondly, touching again on the inflation outlook, given the really robust economy at the moment and having in mind the discussions you had in Sintra over the last two years about the reasons of low inflation and now looking at the new projections, is it really very likely that we will see the 2% in the foreseeable future again?
Draghi: On the first question, the difference in the monetary policy decisions and therefore in the interest rates decisions that were taken on the other side of the ocean reflects the different positions of the two areas in the economic recovery. Economic recovery in the United States is - at the present time, by the way, it's stronger in Europe than in the United States - but the stage at which the economic recovery is in the United States is more advanced and especially so when we look at the wages behaviour, the nominal wages behaviour. So the monetary policy does reflect differences in the stage at which the two jurisdictions are.
But the other question you asked is whether this affects negatively the European economy. We haven't seen any effect from this, meaning that the present constellation of rates by and large reflects the differences in the stage at which the two economies are. About whether we are confident whether we'll reach our objective, the answer is: today certainly more than we were two months ago. That is certainly so. It's pretty clear that the strengthening of the economy is the basis upon which the output gap will close, the labour market conditions will improve. We discussed exactly this in Sintra and in other places; how in the end wages will react to these improving conditions in the labour market, in spite of the many factors that I've discussed in Sintra. These factors are there, it's no question. But by and large they tend to be factors that will disappear. The negative effect of these factors will disappear with the continuing improvement in the labour market.
Some of your colleagues – like Mr Coeuré or Mr Weidmann or Mr Knot – have expressed confidence that the asset purchases will end in September; do you share their view?
My second question, the ECB has also bought Steinhoff bonds last summer and the company is now in trouble; do you take any consequences for the APP because of that? Or are you investigating to take consequences?
Draghi: We didn't discuss this today, by the way, but the last discussion we had a month-and-a-half ago showed that the Governing Council, its vast majority, wants to keep, to retain the open-endedness feature of the asset purchase programme as it's been designed in the last monetary policy council. So that's the answer to the first point and it's motivated by, basically, the fact that in spite of the significant improvement in the real economy, in GDP growth, in the labour market and frankly in all sentiment indicators, in all business confidence, consumer confidence indicators, in production indicators, PMIs, we see this momentum continuing unabated and broadening its scope. In spite of this, the decision is justified by developments on the inflation side - and, as you know, our mandate is defined in terms of price stability. So ultimately that is our yardstick and because of that, the Governing Council wants to maintain a steadfast commitment to price stability in keeping, in retaining the open-endedness of the programme.
Your second point about the bonds, well, first of all let me say that this programme is one of our policy tools that we consider important – very important – for the attainment of our mandate. The scope of the programme is not to maximise profits or to avoid losses, so let's keep this in mind. Having said that, running such big corporate programmes, it's not unusual that losses may be happening. By the way, as regards all other central banks that ran similar programmes, do we know whether they had losses or not? No, because they are not disclosing the issuers, the issues, the volumes, the holdings; they're disclosing very, very little. So if anything, we are different because we are much, much more transparent about our programme. Let me also say that we are consulting with the Governing Council. So I cannot elaborate a lot about what we are going to do next.
Certainly we have a risk framework which has served us very, very well since the beginning of the existence of the ECB. Certainly if we need to draw lessons we'll do – we'll certainly draw lessons from this experience. We are always open to improve, but as I said it's been very, very good. Also as soon as we got news, we stopped buying. So we did what was required from us to do. Also let me add that the losses that had been reported are by and large exaggerated by a factor of 10 with respect to the actual measure of the losses. But having said that, having said all this, the losses are there. They are not realised and so the issue is, who's going to pay for these losses? The answer is that these losses really represent a small digit factor number of our €1.6 billion net interest income we produced last year.
So just to follow-up to that answer on the Steinhoff debt; is the consideration at the moment about selling your holding of the debt?
For the second question I'd just like to clarify your answer to the question about whether 1.7% inflation is good enough because you seem to be saying that if the output gap closes as we expect and the recovery continues as we expect, then 1.7% is in fact good enough. Would that be a fair reading of your assessment?
Draghi: It wouldn't be a fair reading. Our objective is an inflation rate close but below 2%. By the way, it doesn't mean that it has to be – it can go over 2% and come back. We're talking about in the medium term, let's never forget that and it has to be self-sustainable and self-sustained. Namely, it has to be there without our monetary policy support. So it's quite early before we talk about changing our monetary policy support. Though in the presence of an expansion which is gaining momentum our confidence towards this objective is actually increasing. As I said before, it's certainly greater than it was in the last monetary policy meeting.
On the first point, that's what I meant when I said that I cannot elaborate more when I answered before because we are consulting with the rest of the Governing Council.
The recovery in the eurozone has been going on for four-and-a-half years now, almost five years. Your balance sheet is still expanding and interest rates are expected to stay below zero for the next year or two. Are you concerned that when the next recession arrives, you might be hampered by having too few tools to address that? Is that something that enters into your calculations?
The second question is on the US tax reform. Some European politicians have complained that it discriminates against foreign companies. Have you any thoughts about how the tax reform as it stands might impact the eurozone, might impact investment in Europe and whether there's an unfair element to it?
Draghi: As far as your second question is concerned, I can't really answer. We haven't discussed it. At some point we'll certainly look into the overall tax package and we'll come out with assessments. Don't forget that taxation is not in the realm of our competences. But certainly in order to assess whether this is going to have an impact on the European economy, we will certainly look into this, but we haven't done it yet.
On your first point, it does echo a previous question. At this point in time, this is something the likelihood of which is very, very small. But the issue is important; the issue is more generally one of policy space. Do we have policy space in case something unforeseen, unlikely happens? But the issue of policy space doesn't concern only the monetary policy. It concerns first and foremost the need to make our economies more resilient to unforeseen events which cannot be dealt with by anticyclical policies or by monetary policy. So first and foremost, we say this now, we said it so many times at the end of the introductory statement; this appeal to structural reforms, that's what we should aim at.
Second, the fiscal policy space is also very limited to cope with sudden downturns and that's why we are pleading for rebuilding fiscal buffers using the benefits of this economic expansion.
You've restated that the outlook is dependent on ample support from monetary policy. Do you feel that over the past few months this dependency has decreased, that the expansion as you call it has become less dependent on the support from your monetary policy?
My second question is, chair Yellen just ended her mandate with an interest rate increase. Do you see yourself, although it's still quite some time away, raising interest rates before you go?
Draghi: Well, the answer to the second question is, I cannot say how I see myself. But certainly if we are to raise interest rates, it would be good news all in all because it would mean that we are back on a path to an inflation rate which is self-sustained and sustainable through the medium term.
The answer to your first question is a yes. Our monetary policy has accompanied first the recovery and now is accompanying the expansion of the eurozone economy. As the recovery was gaining strength and breadth, the nominal amount of monetary accommodation has gone down so much that we halved the asset purchase programme monthly flows. So we took decisions to accommodate the monetary size of our monetary accommodation to the growing economy, to the economy which was previously recovering and now expanding.
There's been a lot of talk about perhaps the bond purchases and the asset purchases going beyond September next year. There has also been some discussion about whether or not you have to change policy to make that happen at the ECB. Has that been discussed already and have you been preparing changes to the policy so you can extend the asset purchases beyond September next year?
Also what kind of discussions have been going on within the Governing Council about possible bubbles in sectors of the market or the economy and how exiting the asset purchase plan could impact those bubbles?
Draghi: The answer to the first question is no, we haven't discussed changes.
The answer to the second question is more general: we always discuss financial stability issues. We certainly closely monitor the financial stability risks that may emerge from a situation where we had very, very low interest rates for a long period of time, abundant liquidity for a long period of time. So the ground is fertile for these risks. At the same time, we are not seeing systemically important financial stability risks. We see the local spots where valuations tend to be overstretched. But also as soon as you ask this question, one should also ask the question, how is leverage? Because a bubble is also the outcome of two components. So how is leverage behaving? There, differently from other parts of the world, we don't see leverage for the private sector going up for the whole of the eurozone. As a matter of fact, debt – debt to GDP or debt to value added or debt to assets depending on the measure - actually continues to decrease with different intensity depending on the measure.
So we don't see the other component even in those local situations. Of course we go through different markets. We assess whether the markets are closer or not to develop a financial stability situation. So there are markets where valuations have been more stretched than others. Then we ask ourselves, what is the right answer to this problem? The right answer is to have in place macroprudential instruments that are effective, strong and well-targeted to cope with these risks. Certainly it's not to change monetary policy because of a financial stability risk in a certain part or in a certain market of the eurozone.
Germany hasn't had a proper government for the last three months and may well not have any until March or April. You mentioned completing banking union in your statement. How confident are you that, considering this lack of political stability in the biggest eurozone economy, the European Union will be able to complete banking union this year?
Draghi: I think your question identifies a real problem we have in a part of the world where democracy exists. So with democracy you have elections; with elections you have governments that need to be formed. The citizens of this part of the world take the time that's necessary to form a government that is stable and effective. So we have our views about what should be done about the eurozone. But of course we are entirely in the hands of the citizens of Europe to decide how to pursue these views in a democratically accepted fashion. So it's not in our hands to decide the timing and, to some extent, even the shape. We have our views; we think technically what should be done in order to make our economic and monetary union stronger than it is today. But how and how fast this would be achieved is not in our hands.
Do you expect another, a fourth adjustment programme for Greece and, if not, how will the liquidity of the Greek banks be insured?
My second question: would you like to comment on the legal prosecutions of the former chief of the Greek Statistical Authority, Andreas Georgiou, as well as three members of the Hellenic Asset Development Fund?
Draghi: On the first question, it's entirely in the hands of the government to decide about a fourth programme. If the Greek economy has fragilities that need to have a programme to be addressed, it will be up to them to decide that. As regards what you asked about liquidity of the banks: what we've seen in the past few years is that liquidity is a consequence of the economic policies that are being pursued by the governments, by the authorities and the reception the markets give to these policies. So they do depend ultimately on the economic policies.
Draghi: I should speak for the ECB only, but we made this point on and on throughout the Eurogroup, in all institutional setups: The independence of the statistical institutions and their people is of the essence for the credibility of the data which form the basis upon which economic policies are designed, accepted, presented and financed in the specific case of Greece. So all actions that tend to undermine this credibility are certainly not to be shared or agreed by the ECB and the Governing Council. Now, all this has been said in full respect of the independence of judiciary of every country, of course.
You today again emphasise that the risks surrounding the euro area growth outlook remain broadly balanced. What about the risks to the inflation outlook, to the medium-term inflation outlook? Up until 2014 the Governing Council in its statement always gave a separate risk assessment for the inflation outlook. If you had to do so today, what would you say are the risks of the downside? Are they also balanced? Are they to the upside?
The other question: in October you've indicated that there will be after September 2018 in any case a kind of tapering, no sudden stop to QE after September. It seems this was not discussed on the Governing Council at that time. Did you discuss it today and would you stick to your wording that there will be no sudden stop?
Draghi: As regards the risk to the inflation, we can safely say that deflation risks have disappeared. That's what we can safely say. We can also safely say that the likelihood of having low inflation in the 0.5%, 0.6% that we've seen until, what, a year ago has certainly decreased. I don't think we can go beyond that, frankly. We cannot go beyond that. We see that the muted response of wages to the improving conditions in the market, in the labour markets and more generally to the closing of the output gap is, if compared with other recoveries and economic expansions, is way slower than we had in the past. So this cautions us – - while we’re confident that things are going definitely better also on the inflation front- that cautions us from making bold statements about the fact that inflation cannot turn down and become again low for long. So we think it's certainly less probable. But I wouldn't go beyond that today.
As regards the sudden stop: sudden stop means that we go from 30 to zero? We never discussed that, period. Whether sudden stop becomes an extension of the programme or becomes tapering, that's what you want to know; we haven't discussed that either.
Dutch Central Bank President Klaas Knot said in a speech late November that the asset purchase programme has run its course and that it should be fully phased out after September. One of his arguments was, I quote, “With GDP growth hitting levels above 2% year-on-year, the monetary policy stance is increasingly out of sync with the business cycle.” Now also given the substantially revised GDP projections upward, do you think he has a point?
Draghi: As regards your first point, that is not the view of the Governing Council.
On your second point: our mandate is not growth, it’s not employment, it's price stability. We are in a condition where we have to infer from the strength of the growth momentum and the improvement in the labour markets what's going to be the ultimate effect on the objective that defines our mandate, which is the inflation rate. We've qualified this objective in saying that the process towards converging, the process of convergence of this inflation rate to our objective, has to be – before we can remove the ample monetary support – it has to be self-sustained, i.e. not in need to be supported by our monetary policy. So that's the yardstick and that's where we are today. That's why we always talk about response of the nominal wages to improving conditions, because that's what we have to understand well; namely the response of nominal wages growth and the reasons why such response is lagging.