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, 19 January 2017
Ladies and gentlemen, first of all let me wish you a Happy New Year. 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. We continue to expect them to remain at present or lower 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 we will continue to make purchases under the asset purchase programme (APP) at the current monthly pace of €80 billion until the end of March 2017 and that, from April 2017, our net asset purchases are intended to continue at a monthly pace of €60 billion 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 will be made alongside reinvestments of the principal payments from maturing securities purchased under the APP.
The Governing Council today also decided on further details of how the Eurosystem will buy assets with yields below the interest rate on the deposit facility under its public sector purchase programme. These decisions will be published in a separate press release at 15.30 CET.
The monetary policy decisions taken in December 2016 have succeeded in preserving the very favourable financing conditions that are necessary to secure a sustained convergence of inflation rates towards levels below, but close to, 2% over the medium term. Borrowing conditions for firms and households continue to benefit from the pass-through of our measures. As expected, headline inflation has increased lately, largely owing to base effects in energy prices, but underlying inflation pressures remain subdued. The Governing Council will continue to look through changes in HICP inflation if judged to be transient and to have no implication for the medium-term outlook for price stability.
A very substantial degree of monetary accommodation is needed for euro area inflation pressures to build up and support headline inflation in the medium term. If warranted to achieve its objective, the Governing Council will act by using all the instruments available within its mandate. In particular, 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 0.3%, quarter on quarter, in the third quarter of 2016, after recording a similar pace of growth in the second quarter. Incoming data, notably survey results, point to somewhat stronger growth in the last quarter of 2016. Looking ahead, we expect the economic expansion to firm further. The pass-through of our monetary policy measures is supporting domestic demand and facilitating the ongoing deleveraging process. The very favourable financing conditions and improvements in corporate profitability continue to promote the recovery in investment. Moreover, sustained employment gains, which are also benefiting from past structural reforms, provide support for private consumption via increases in households’ real disposable income. At the same time, there are signs of a somewhat stronger global recovery. However, economic growth in the euro area is expected to be dampened by a sluggish pace of implementation of structural reforms and remaining balance sheet adjustments in a number of sectors. The risks surrounding the euro area growth outlook remain tilted to the downside and relate predominantly to global factors.
According to Eurostat, euro area annual HICP inflation increased markedly from 0.6% in November 2016 to 1.1% in December. This reflected mainly a strong increase in annual energy inflation, while there are no signs yet of a convincing upward trend in underlying inflation. Looking ahead, on the basis of current oil futures prices, headline inflation is likely to pick up further in the near term, largely reflecting movements in the annual rate of change of energy prices. However, measures of underlying inflation are expected to rise more gradually over the medium term, supported by our monetary policy measures, the expected economic recovery and the corresponding gradual absorption of slack.
Turning to the monetary analysis, broad money (M3) continues to expand at a robust pace, with its annual rate of growth increasing to 4.8% in November 2016, up from 4.4% in October. 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 8.7% in November, up from 8.0% in October.
Loan dynamics followed the path of gradual recovery observed since the beginning of 2014. The annual growth rate of loans to non-financial corporations was 2.2% in November 2016, after 2.1% in the previous month. The annual growth rate of loans to households was 1.9% in November, after 1.8% in October. Although developments in bank credit continue to reflect the lagged relationship with the business cycle, credit risk and the ongoing adjustment of financial and non-financial sector balance sheets, the monetary policy measures put in place since June 2014 are significantly supporting borrowing conditions for firms and households and thereby credit flows across the euro area. The euro area bank lending survey for the fourth quarter of 2016 indicates that credit standards for loans to enterprises are broadly stabilising, while loan demand has continued to expand at a robust pace across all loan categories.
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% without undue delay.
Monetary policy is focused on maintaining price stability over the medium term and its accommodative stance supports economic activity. In order to reap the full benefits from our monetary policy measures, other policy areas must contribute much more decisively, both at the national and at the European level. The implementation of structural reforms needs to be substantially stepped up to increase resilience, reduce structural unemployment and boost investment, productivity and potential output growth in the euro area. Structural reforms are necessary in all euro area countries. In particular, reforms are needed to improve the business environment, including the provision of an adequate public infrastructure. In addition, the enhancement of current investment initiatives, progress on the capital markets union and reforms that will improve the resolution of non-performing loans, are a priority. Fiscal policies should also support the economic recovery, while remaining in compliance with the fiscal rules of the European Union. Full and consistent implementation of the Stability and Growth Pact over time and across countries remains crucial to ensure confidence in the fiscal framework. At the same time, it is essential that all countries intensify efforts towards achieving a more growth-friendly composition of fiscal policies.
We are now at your disposal for questions.* * *
QUESTION: Mr Draghi, you indicated that the ECB stands ready to do more if the outlook deteriorates. Is the ECB also ready to do less if it continues to outperform? I think last time you indicated this was a high-class problem. I just wondered if you had any update on that.
The second question is on the US President-elect, Donald Trump. He's made some comments this week about the dollar that led to a fall in the dollar. I wondered if you were worried about what this might mean in terms of a future currency war or perhaps about some of the other suggestions he's made about an increase in protectionism and how that might impact the eurozone.
Draghi: Well, you asked me whether it's still a high-class problem and the answer is yes, it still is a high-class problem. We haven't discussed it anyway.
The second point, really it's very early for us to comment on the to-be President Trump’s statements. It's just early. The only thing that I can recall as far as exchange rates are concerned is something that you heard me say many times. The exchange rates for us are not a target but they are important for price stability and growth. There is a very strong international consensus in the G20 and the G7 to refrain from competitive devaluations. So there is a whole protocol in the various statements by the G20 and the G7 that basically states how countries should behave with respect to exchange rates.
QUESTION: Two questions for you, Mr Draghi, one on the inflation again. In case it overshoots your target, for how long would you let it overshoot? Have you made up your mind for this in the Governing Council?
The second one on the Brexit front: in her last speech the British Prime Minister made it clear that there will be a hard Brexit. What does it mean for the ECB and for your outlook on inflation and growth? This is not clear now.
Draghi: Now, the answer to the first question lies in what we define as our objective. We define our objective first of all in the medium term, over a medium-term horizon. That's the relevant policy horizon. Second, it has to be a durable convergence, so it cannot be transient. Third, it has to be self-sustained. In other words, it has to stay there even when the extraordinary monetary policy support that we are providing today will not be there. Fourth, it has to be defined for the whole of the eurozone. I think these are the four features that always characterised our objective.
On the second question, I simply say again it's too early to say. The final outcome of the negotiations will be very important. But also, whether it will have economic consequences will depend on the shape of the outcome and the length of time it will take. So it's too early to comment.
Question: Two questions, if I may. We are now seeing quite sharp divergences between headline inflation rates in weaker member states and stronger parts of the region such as Germany. How do you handle the communications and the policy challenges that this presents? I think there are also some concerns that members of the Council think there could be difficulties in finding enough bonds to buy under QE. That could in effect limit your ability to hit your inflation target through the programme as it now stands. If core inflation remains weak and you need to carry on buying in 2018 and even beyond that, how do you intend to do that given that there are these constraints in the assets that can be purchased under the programme?
Draghi: Well, the answer to the second question is actually given by our decision in buying below the DFR rate at shorter maturity, the details of which will be released in the press statement I mentioned before. That has greatly enlarged the eligible universe and we are confident about the smooth implementation of our programme, so we see actually no problems on that front. The whole strategy will be, as I said, delineated in the press statement. But we stand ready to upgrade the strategy or to revise the strategy as needed. Also these purchases below the DFR rate, don't forget, will happen if needed, if they are required.
Now on the other point, it's too early to say. Let me say one thing about the Governing Council of today. The discussion was unanimous in looking back at the monetary policy decisions taken in December and stating that they were the right policy answer to the contingencies as viewed, as estimated in December. More generally there was a sense of satisfaction towards the monetary policy stance that we have been pursuing now since 2014. It's increasingly clear that this policy stance had been successful. We have seen that since 2015 we had each and every quarter GDP growth between 0.3 and 0.6% quarter-on-quarter. We've seen that in December 2016, consumers' confidence is the highest since April 2015. The Economic Sentiment Index is the highest since March 2011. The PMI composite output index is the highest since May 2011. Unemployment in November last year was 9.8%, the lowest since July 2009. So by and large, the euro area has created four and a half million new jobs over the last three years. More directly related to the question you asked, we've seen that the dispersion of the value-added growth across countries is at an all-time low since 1997. So that gives us a sense that if there are heterogeneities – and there are indeed – in the speed with which we are approaching our objective, they can be coped with. It gives us a sense the recovery is resilient. At the same time, we see that inflation is mostly driven by energy prices. We see the underlying inflation pressures remaining subdued and especially nominal wage growth remains subdued. On top of that we see, as I mentioned in the introductory statement, the risk coming from the global uncertainty situation.
Questions: I have two questions, if I may, as well. One is a little bit technical, so going forward from April onwards you're reducing the asset purchase to 60 billion euros. Does that mean that you are cutting all these individual programmes like the sovereign debt and corporate bonds or covered bonds pro rata? Or are you planning on shutting down individual programmes altogether? That would be the first more technical question, as I was saying.
Then the second one is, how do we address German critics? It's getting louder and louder, I would say, with even Wolfgang Schäuble, the [German] minister of finance, of course stepping out and urging for a normalisation of your policy, which is of course quite vocal. So what are you telling them?
Draghi: Well, the response to the first question is we haven't discussed that.
To the second question, actually if you are referring to the very last statement by Minister Schäuble, he actually said that there are political problems in explaining the monetary policy stance of the ECB. So that is a very understandable statement. What I would say is basically the same thing I've been saying now for a few months. Low rates are necessary now to get higher rates in the future. The recovery of all of the eurozone is in the interests of everybody, including Germany. The German savers have benefited, not only as savers but also as borrowers, as entrepreneurs, as workers – like all the other citizens of the eurozone. So we have to be patient; as recovery will firm up, real rates will go up. Having said that, since our last decisions in December, however, there is more room to diversify into the medium long-term spectrum of the yield curve gaining actually a better rate and a very short-term one. So that is in a sense, if anything, what you would call the rate of return conditions have improved in the last month and a half. But really an honest answer would be, just be patient; as the recovery will firm up, real rates will go up as well. This will happen for Germany and for other countries as well.
Question: In his interview with the Bild-Zeitung and The Times of London a few days ago, President-elect Trump was asked about the euro. He said, “Keeping it together is not going to be as easy as people think”. I'm just wondering if you want to react to that statement, which doesn't sound like a real ringing endorsement of the euro. Also more generally what would it mean for monetary policy if you have a president who is sceptical about the success of the common currency?
Draghi: I just won't make any comment on that; it's just too early. Let's see what are the real policies following these statements. I'd rather comment on policies and policy actions than just statements.
Question: Last month's decision to extend the purchase programme was met with a level of uncertainty by economists and the markets alike as to whether ECB is actually tapering or not. If we take it as read that this wasn't a tapering exercise, how would you communicate the tapering message? How would you get that message across when the time comes to taper? Was part of the reason for not labelling it tapering to do with the Fed’s experience in the past and the taper tantrum that we saw?
Draghi: No, as I said last time, it wasn’t tapering. We didn't discuss tapering last time. We didn't discuss tapering this time, by the way. Or we didn't even discuss high-class problems of the kind that I was asked before. But it is true that when and if – well, I'm pretty sure that it will come, the time – and then we will have to have a very deep and very careful discussion and analysis of the situation. But we are not there.
Question: Mr Draghi, I have got two questions for you. Number 1, if you say that the Governing Council was unanimous in stating that the policies have been successful, does that mean that those Governing Council members who were not willing to sign up to December's decision, as shown in the minutes, admitted that they were wrong?
My second question is on the banking troubles in Italy right now. What would you say to the assessment that you see somewhere that the process at the moment suggests that bail-in in Europe is dead?
Draghi: Well, we don't have – how do you say it – public admissions of guilt, Mao Chinese style, as a way of working; we simply had a discussion. There was a general satisfaction that the policy is working. I gave you a few signs that it's working, a few data, but there are other data; for instance the increase in the market-based [inflation] expectations, as you've seen. The survey-based expectation measures also increased, although they are stable. It's interesting; they increased in the short term but they are stable in the long term. So the risk of deflation according to any measure has largely disappeared. Financing conditions have improved. The lending rates for households and companies have declined significantly. The other thing, by the way, we pay a lot of attention to exactly because of the question I had before about heterogeneity – diversity in the progress towards our objective. We pay a lot of attention also to the cross-country heterogeneity of loan rates and that has gone down. More generally borrowing conditions for SMEs have improved. Even more interestingly, the balance sheet repair for non-financial companies has actually improved markedly over the last few months. In general, more specifically the non-financial corporation, non-financial companies' leverage has gone down. Also all this says basically that the conditions for the transmission of our monetary policy have improved, but all this doesn't mean that we can relax. The Governing Council is aware that it will have to keep this present extraordinary monetary policy support as necessary to achieve our objective. Even though inflation has increased markedly, we know it's mostly driven by energy. At this point in time, the Governing Council decided to look through it.
Now, your question was the bail-in? I frankly don't want to comment on that explicitly. But I can ask the Vice-President, who is responsible for financial stability, if he has comments on that statement – or whether it's true, actually.
Constâncio: No, I don't think so because the present legislation that is in place is being applied in all its details; that's the straight and true answer. As you know, in the BRRD there are in Article 32 number 4 item D conditions safeguarding questions of financial stability that can be used. They are in the law so they are in accordance with the rules that have been defined.
Question: Since your last press conference, when you said that you were confident that the Italian government will do the right thing to support the banking sector, the Italian government has actually approved a decree to support the banking sector with a package of about 20 billion euros. There was also a comment in the meantime from [Finance] Minister Padoan saying that ECB supervision is too rigid. I wonder if you could give us an assessment of both the measures and the minister's comment.
Draghi: Unfortunately on neither; I cannot comment on either of the two questions. As you know, we have a strict separation principle. I wouldn't ask my colleague, Danièle Nouy, to comment on our monetary policy stance.
Question: Mr President, my first question is on the inflation outlook. How would you describe the balance of risks surrounding this outlook? You cited before that the signs in underlying inflation of a pick-up are still very weak. You cited wages and so on. Just to cite a figure, in Germany unions are going into this year with demands of increases of 4.5% to 6%. Do you think this is a positive factor? Is it compatible with what you would describe as sustained inflation?
Draghi: Let me say about the inflation outlook: headline inflation in December increased markedly because of base effects and also because of higher oil prices, higher than expected. So the outlook for headline inflation over the next quarter or two quarters maybe is higher than it was foreseen in the previous macroeconomic projections. The key question now is what is the extent of second-round effects coming from this higher inflation? We'll certainly look at that with great attention. By the way, in so doing, we do exactly what we've done in the past when inflation was going down. We'll ask ourselves the questions whether the four features of our convergence process towards our objective are actually satisfied, the ones I mentioned before. I don't want to enter into the issue whether higher nominal wages certainly are positive from our viewpoint. But as you know, wages are being negotiated by the parts, by the social partners. So the central bank doesn't have a say in this, other than saying that a higher rate of growth of nominal wages certainly would move towards our objective of an inflation rate close but below 2%. However we should also look at productivity, how productivity performs. Performance in recent times has not been sustained.
Question: A quick follow-up on previous questions about inflation and critics in Germany. I'm just wondering, how concerned are you about increasing discrepancies between inflation rates across the eurozone? How large a gap can the ECB tolerate? I know that the ECB is focused on the euro area as a whole. But what if the German inflation continues to rise strongly far beyond 2% while other areas remain very subdued? Do you see a point where the ECB would feel bound to act and does the ECB have instruments to tackle such an issue?
Draghi: Well, the answer to the question is no because our objective is the inflation rate below, but close, to 2% for the whole of the eurozone. How likely – and that is in a sense the same answer I gave to the previous question – is it going to be that these divergences will be unmanageable? We judge it not so likely; we think that these divergences will be managed. We've seen if anything all these divergences narrowing down over the last two, three years and they will continue doing so.
Question: My first one is a follow-up on the previous question in some respects. Do you think that there is a need to explain better to the German public and to the authorities that there is simply a need for inflation rates above 2% in Germany if the inflation rate for the euro area as a whole should return to the below but close to 2% target?
The second question is on your forward guidance. It says that the interest rates will stay at the current or lower level well past the horizon of your net asset purchases. Does that mean that you definitely exclude an interest rate hike before the asset purchases are terminated? Or is there an option to increase these rates, for example the deposit rate, while QE is still going on?
Draghi: I think the important thing to explain is that the recovery of the whole of eurozone is in the interests of the German citizens as well as in the interests, of course, of all the agencies of the eurozone. The present situation of very low or negative real rates will disappear as the recovery will come and will disappear faster as the recovery will come faster. So that I think is important. Second, it's also important to explain that benefits have accrued to all citizens of the eurozone. Benefits coming from our monetary policy have accrued to all citizens of the eurozone, including the German citizens. You can see this no matter where you look; savers, borrowers, entrepreneurs, employees, workforce and so on.
On the second point, it's not been discussed.
Question: The expression “too early” is often used by you today and that applies certainly for tapering; you outline that there was no discussion about this. When you have to make a decision which is irreversible, you said before, to what extent could the analysis of the overall situation of the eurozone be overshadowed by some critical questions over, for example, the sustainability of the Italian debt in a world without QE or other south European countries on the one side, or maybe, on the other side, by the pressure from Germany's citizens to act rather sooner than later.
Draghi: We don't see any country's debt as being unsustainable, so that's one answer. Of course in the case of Greece there is a programme, there is a negotiation between member states, the IMF and the Greek government – and you know everything about that.
Now, I will answer to the second question just pointing out to the experience you saw in the last five years and even before. We've given plenty of evidence of being able to act in an independent fashion, bound only by our mandate, which is to have price stability, to pursue price stability as defined as an objective of inflation rate below, but close, to 2% in the medium term. I think we've given plenty of evidence of being able to act independently. But basically, some of these questions have to impinge exactly on this point and I think the evidence is strongly in our favour.
Question: Mr Draghi, did I understand you correctly a few minutes ago? You mentioned that 4.5 million jobs were created in the last years. Then you mentioned this in the context of monetary policy. So do you attribute this job creation, the number 4.5 million, to your monetary policy?
Draghi: Well, if you go back three, four years ago and you ask yourself which policies were in place that could actually create jobs and expand economic activity, then you see that the recovery gradually firmed up driven by consumption and investment thanks to the extraordinary financing conditions that the monetary policy of the ECB has created. Would this be the only factor? Probably not; probably there are other things if we look around. But first of all understand we are biased, of course, in saying that. But even if we were unbiased, it's basically the most evident outcome of our policy that by itself pursues price stability. It's exactly in achieving that objective that these jobs were created.
Question: Mr Draghi, inflation in December was higher than expected and it seems that there could be some more positive surprises. In this context is forward guidance still the right approach because it somehow limits also the room to manoeuvre of the ECB? My second question is on the difference between recalibration and tapering. You've already said the reduction in April is not tapering but recalibration. But will there be at one point a classical tapering like in the US? Or could there also be continuous recalibration until bond purchases are at zero?
Draghi: Answering firstly your second question, I spoke about recalibration because before I think it was March last year, the monthly flow of purchases was 60 billion euros because the conditions were such that would justify that amount. Then the outlook worsened considerably and so we upsized. Then again we assessed the outlook in December and we downsized, so we recalibrated that. So there was no tapering and what we're going to do in the future was not discussed today.
On your first question, forward guidance has been one of the important parts of our monetary policy stance. We think it was highly effective. It gave a sign of a transparent reaction function by the central bank. It's been very important in anchoring inflation expectations at the time especially when there was a danger they could become de-anchored. What we have to judge in the oncoming inflation developments is essentially the underlying inflation pressures. In other words: whether the higher headline inflation, driven mostly by energy prices, translates its pass-through in an underlying inflation so that the overall inflation rate leads to a process that is durably and self-sustainingly converging to our objective. I think that's the assessment that the Governing Council will have to make in the coming months.