Money Supply

Welcome to a live blog of Mario Draghi’s press conference from ECB HQ in Frankfurt. With rates held and Mr Draghi already having worried investors with his remarks on Wednesday about a slowing German economy, attention will be on what more the bank’s president has to say about the main driver of Eurozone growth. Brought to you by Ben Fenton and Ben Hall.

 

14.47: That’s it for this live blog, but….

…the last word goes to the FT’s Frankfurt bureau chief Michael Steen (well it is his city and his newspaper). His view of the most interesting line from the Draghi press conference:

“Pressed on ways ECB might ease Greek funding problems, Draghi said the bank already agreed to send back any profits it made from Greek bond holdings to the central bank in Athens which could then be transferred to government. The ECB was “by and large done” helping Greece within its mandate he said.”

14.45: Here is an instant reaction from Howard Archer, chief UK & European economist at IHS Global Insight:

ECB President Mario Draghi appeared to ease open the door to a cut in interest rates over the coming months and potentially as soon as December. Potentially significantly when asked whether the ECB had discussed an interest rate cut at their November meeting, Mr. Draghi commented that “we always discuss all instruments.” This contrasted to his comments after both the September and the ECB meetings, when Mr. Draghi said that the ECB had not discussed cutting interest rates. Mr. Draghi also commented that the ECB stands ready to act on standard monetary policy as well as on non-standard policy. Interestingly, though Mr. Draghi indicated that the ECB had not discussed negative deposit rates (they were cut to zero in August).

Furthermore, Mr. Draghi acknowledged that the Eurozone growth situation and outlook had weakened recently, and hinted that the ECB’s GDP growth staff projections would be revised down in their December forecasts. The ECB’s statement observed that “most recent survey evidence for the economy as a whole, extending into the fourth quarter, does not signal improvements towards the end of the year.” Furthermore, the ECB considered that “growth momentum is expected to remain weak” in 2013, largely due to the need of balance sheet adjustments in both the financial and non-financial sectors, an uneven global recovery and high uncertainty. Mr. Draghi has also expressed concern recently over very high and rising Eurozone unemployment. Reinforcing this downbeat assessment of Eurozone growth prospects, the ECB statement observed that “the risks surrounding the economic outlook for the euro area remain on the downside.”

Meanwhile, the ECB’s view on inflation does not appear to preclude an interest rate cut in the near term. While the ECB expects Eurozone consumer price inflation to remain above 2.0% and at elevated levels for the remainder of 2012, the bank sees inflation “declining to below 2.0% again in the course of next year”. The ECB regards long-term inflation expectations as “well-anchored” and believes that underlying price pressures should remain moderate, with the result that current levels of inflation should be “transitory”.

 

14.36: A dry summary of today’s events in Frankfurt from Joseph Weisenthal, deputy editor of Business Insider :

 

14.31: So, the general conclusion is that the ECB has put its money where its mouth is when it comes to keeping Greece inside the eurozone. Mr Draghi has said that €5 banknotes will feature an image of Europa, a figure from Greek mythology.

Given that at the peak of the peak of the market fears about “Grexit” some Europeans were spurning bank notes with Greek serial numbers (starting with letter Y), this is a sign of renewed confidence in Frankfurt.

14.30: The new bank notes are causing a bit of a stir. A lot of Tweeters are drawing conclusions from the fact that they feature the figure Europa, from Greek mythology, that a Greek exit from the Euozone is ruled out!

 

Peter Spiegel from the FT Brussels bureau is chasing a different line:

 

 

 

14.26: The press conference is over (apart from a set-piece about new bank notes) and so to summarise: Mr Draghi’s take on national efforts to reform economies and cut deficits is “Substantial progress. A lot more to do.” He said there had been “very fast” progress compared to efforts made over last 5 years. “The faster it is, the sooner financial conditions will return to normal.”

14.24: Peter Spiegel gets in on the Draghi-correcting theme:

14.23: Jobs and growth will come out of the austerity and fiscal measures in place, Mr Draghi insists, as the press conference draws to a close.

14.21: Peter Spiegel, Brussels bureau chief of the FT, observes:

The largest potential debt relief for Greece as part of the overhauled bailout currently being negotiated is expected to come from the ECB, which holds about €55bn in Greek bonds.

Mr Draghi just signalled he is fully on board with using the profits the ECB is expected to get from those bonds – which were purchased for only €40bn – to help relieve Greek debt.

Under the plan, which Draghi said he supports, profits would be passed on to national central banks, who would then pass it onto eurozone governments. Those governments are planning on passing those profits onto Athens, a significant whack at Greece’s burgeoning debt.

14.20: Journalists watching this are not buying some of the Draghi message. Here is Sky economics editor Ed Conway:

 

and here is the FT’s Short View columnist James Mackintosh:

 

14.18: Robin Wigglesworth on the FT’s capital markets desk adds:

Italian, Spanish, Greek and Portuguese bond yields all up today, relatively markedly in the case of the latter three. German yields flat, UK slightly higher (due to no QE announcement at the BofE’s meeting today). The euro has slipped 0.2 per cent against the dollar to a two month low, but that move started well before the ECB meeting.

14.16: Draghi quickly slaps down any idea that there might be unconditional OMTs in the future if the situation worsens. He says he believes there will be a slow, gradual, but solid recovery in the Eurozone economy because of strong fundamentals, stronger than the US, UK or Japan he adds.

14.15: A view from Jennifer McKeown, Senior European Economist at Capital Economics in London:

Following its decision to leave interest rates on hold at 0.75%, the ECB is likely to reiterate at today’s press conference that it is prepared to purchase Spanish bonds only if the Government first accepts fiscal conditions.

While just the prospect of Outright Monetary Transactions (OMT) is still buoying market sentiment for now, we think that the ECB will have to start buying bonds soon if markets’ relief is to be sustained. But President Draghi is unlikely to commit to keeping Spanish yields below a particular level today as Prime Minister Rajoy has requested.

And while the Bank might hint that it could forego some of the profits that it has made from Greek bond purchases, it will maintain its aversion to any debt restructuring. With the euro-zone’s economic outlook deteriorating further, the ECB might have discussed another interest rate cut or unconventional policies aimed at boosting bank lending. But neither of these is likely to make a meaningful difference to the economic outlook while the debt crisis remains unresolved.

14.13: It seems as if the currency markets share Robin’s view, as the Euro is still ticking down.

14.12: Here is a quick take on today’s conference from Robin Wigglesworth on the FT’s capital markets desk:

During the Q&A session, Draghi doesn’t respond directly to questions related to future steps or discussion on rates. However, his answers seem to suggest that a cut has been discussed (he said ECB ALWAYS DISCUSSES INSTRUMENTS OF MONETARY POLICY). Also confirmed that the outlook for growth has deteriorated and the December staff projections will reflect lower activity.
In a nutshell, a rate cut is possible in the coming months, especially if economic scenario doesn’t improve. The timing of a cut is tricky as ECB might be willing to see effects of OMTs (if activated) first.

 

14.11: Michael Steen, the FT’s bureau chief in Frankfurt, asks if it is worrying that some of the banks who have made long term borrowings from the ECB are saying they will give them back because they can’t find anything to invest them in. Draghi says no, not really. It is best response to those who say ECB is flooding the world with liquidity.

14.10: Mr Draghi took on the claim that the ECB had failed to impose the appropriate haircut on Spanish banks using collateral for liquidity at the central bank. Some critics say the case shows that the ECB has failed to apply its own collateral policy for its weakened peripheral members.

He admitted that the ECB had made a mistake. “We take this mistake very seriously.” But he said it had affected €10bn rather than the reported €80bn, and that no bank had received money it should not have done. “All this had no impact on our lending.” He said that an ECB panel led by Finland’s central bank governor Erkki Liikanen would examine what went wrong and provide an “initial assessment” at the next governing council meeting.

14.08: Draghi says that ECB monetary policy is already “very accomodative”.

14.07: The Euro has turned downwards against the Yen, Dollar and Sterling as the press conference goes on.

14.03: Meanwhile, figures out in Washington show that the US trade deficit has narrowed to $41.5bn, its lowest level in about 2 years.

14.01: Markets are reacting pretty calmly to this press conference, but there have been no surprise announcements and Mr Draghi is maintaining his studied calm.

14.00: For those who were unsure about it, he stresses that the ECB is not allowed to (or willing to, judging by his tone of voice) “do monetary financing”.

13.59: Mr Draghi is trying to say, in short, that everything is going swimmingly, considering how badly everything is going. He is tightrope walking between encouraging markets and discouraging recalcitrant governments who would like to drop austerity measures and rigorous fiscal policies as soon as possible.

13.57: A pat on the head from Mr Draghi for the Greek parliament for passing austerity measures yesterday.

13.56: He also makes it clear that ECB bond-buying is not the only key to improving the transmission of monetary policy, while insisting that the central bank is “not at all satisfied with financing conditions”.

13.55: The priority for the ECB is to repair the “monetary transmission mechanism”, Draghi says.

He has used this press conference to expand on the way the boost to market confidence brought by its bond-buying proposal has been “equivalent to further expansion of monetary policy”.

He cited a return of US money market funds, the shift from secured to unsecured lending and limited dollar bond issuance by euro area institutions. Spain and Italy had almost completed their bond issuance programmes for 2012 and Ireland and Portugal had made limited issues.

13.52: The ECB is ready to act, Draghi says, but he adds that he doesn’t think it is necessary yet, because the very fact that it will intervene if necessary means the situation hasn’t deteriorated enough for them to have to intervene. (a nice circular argument).

Pressed twice, he declines to talk about when and whether Spain might seek a bail-out.

13.49: The FT’s Joseph Cotterill observes on Twitter:

 

13.48: For those who missed Mr Draghi’s golden words, here is the transcript of his statement, from the ECB wesbite.

13.47: Draghi, answering questions now, says the council has not discussed what it is going to do next year in terms of monetary policy. (sounds as though they have enough to think about in the next few months, and things are changing fast).

13.46: Worth repeating that Draghi urged governments, in his bankerly way, to stick to their austerity homework and make sure their fiscal policy is as “sound” possible.

13.45: A shorter than usual introductory statement from Draghi – perhaps he feels he said enough to the German bankers yesterday.

13.43: Labour mobility and flexibility are so important that more measures to increase them are warranted. Fiscal policies implemented across Europe are working and must be kept up, he says.

13.42: It is essential that the resilience of banks is strengthened, Draghi says. Structural reforms are crucial to improve growth potential and secure employment.

13.41: The main points Draghi is making is that”growth momentum continues to be weak… the risk surrounding the economic outlook for the euro area remain on the downside” and he claims that financial market confidence has visibly improved” thanks to the ECB’s promise of OMTs.

 

13.39: He sees no sign of positive change before the end of 2012, but says the ECB believes any inflationary pressures will be transitory. Main downside risks relate to weaker than expected GDP growth in Eurozone area.

13.37: Looking ahead, growth momentum remains weak, Draghi says. There will be an uneven global recovery which will continue to dampen growth. Risks for the Euro area remain on the downside.

13.36: Uncertainty continues to weigh on the outlook and governments need to do their bit, Draghi says. The council is committed to ensuring that its policies are transmitted to the Euro area. They will make the OMT purchases if needed, he says. Euro area GDP contracted by 0.2 per cent in Q2, he says.

13.34: Draghi starts by summarising the governing council meeting, starting with the decision on rates. He says inflation is likely to remain above 2 per cent for 2012, mostly because of energy price rises.

13.32: Mr Draghi is in the room. About to start.

13.25: If you want a quick catch-up on some analyst comment before the show begins, here is some Barclays research from last night:

In highlighting today, before an audience of German bankers, that “unemployment is deplorably high” and that “the risks of inflation are currently very low over the medium term”, ECB President Draghi appears to have set the stage for the Governing Council to adjust its communication concerning price stability risks, potentially as early as tomorrow’s press conference.

That said, in our view, his remarks were probably mainly intended to be a stout defence of the prospective OMT programme to this particular audience. We continue to believe that the main means by which the ECB would wish to provide additional monetary stimulus at this point would be through instigating its OMT facility (which, of course, can happen only following a request by Madrid and/or Rome for an ESM precautionary programme).

Given that the brand new OMT programme is primed to go, and that the ECB is still likely to act in significant size over time once it were triggered, in our view, it seems relatively doubtful that today’s remarks suggest that the ECB would be willing to contemplate a further new programme of monetary stimulus, such as unsterilised purchases (QE). At the same time, we continue to expect, on balance, a 25bp cut in the main policy rate at the 6 December Governing Council meeting, and it is also possible that Mr Draghi may prepare the ground for this tomorrow, given the ongoing disappointments concerning economic activity and unemployment.

13.20 Chris Giles, the FT’s economics editor, has a coruscating post elsewhere on the Money Supply blog taking the Bank of England to task for its lack of transparency.

 

And here is Michael Steen, our ECB expert and Frankfurt bureau chief, on the decision taken at 12.45pm GMT to hold rates at 0.75 per cent.