Emily Cadman Closed ECB interest rate decision

Hello and welcome to our live blog on the European Central Bank’s press conference. The central bank did what markets expected and kept rates on hold. Draghi is due to begin speaking at 13.30 UK time.
By Claire Jones and Emily Cadman

Hello and welcome to the live blog. Here’s our Frankfurt bureau chief Michael Steen’s take on the decision by the governing council to hold rates:

MIchael Steen: The European Central Bank kept its main refinancing rate on hold at 0.50 per cent on Thursday, as expected, and was due to unveil updated forecasts for eurozone growth that are likely to reflect a gradual recovery across the region.

Under a forward guidance policy introduced in July, the central bank has pledged to keep rates at or below current levels for an “extended period” as long as inflation does not pick up. However, the improved economic data and lack of specificity about the length of time that the policy will apply have resulted in financial markets starting to price in an interest rate rise sooner rather than later, undercutting the aims of forward guidance.

One of the signs of improvement in the eurozone economy has come from the pick -up in the manufacturing PMIs, which have recently edged just above the crucial 50 figure that marks an expansion in activity.

Here’s what’s happened to the euro since the last meeting. It’s down against the dollar since the August vote, largely because of events over the past week:

The FT’s capital markets editor Ralph Atkins writes that while plenty has gone right with the economic data, Italian equities are yet to feel the benefit:

Ralph Atkins:The PMIs are watched closely by financial markets, and the turnround explains why European shares have outperformed US shares over the past month.

Tensions over Syria have knocked Europe’s equity rally recently. And the US Federal Reserve’s plan to scale back its asset purchases, or quantitative easing, could become a big problem for the eurozone and the ECB if it results in tighter monetary conditions in Europe. But the strength of equity rallies in countries such as Greece – still up almost 20 per cent year to date – highlight the shift in investor sentiment towards Europe’s monetary union.

The big exception? Italy’s shares are back down to early January levels. That is hard to explain on economic grounds alone. True, Spain has made more progress in improving competitiveness by reducing unit labour costs. But Italy’s PMIs are almost as strong as Spain’s. Both have seen modest improvements in credit conditions recently amid clear signs that the eurozone “fragmentation” story – which resulted in widely diverging borrowing costs across the region – has gone into reverse.

The only explanation is that markets remain spooked by Italian politics – especially threats that Silvio Berlusconi could bring down the administration led by Enrico Letta.

This morning the UK kept its monetary policy on hold for the 14th month in a row. The main bank interest rate remains at 0.5 per cent and its its bond-buying programme at £375bn
Read more: Bank of England holds steady on rates and QE

Mario Draghi is due to begin speaking in minutes. Here’s what BNP Paribas’ ace eurozone economist Ken Wattret is expecting from today’s presser and updates to quarterly forecasts for growth and inflation:

Ken Wattret: It will probably a similar but slightly more upbeat version of the last one. It should be a push back against tighter monetary conditions. [Markets are now pricing in rate hikes to occur earlier than they expected a month ago] But it may not be quite what’s needed. Upward revisions to projections need to be well articulated to prevent more unwelcome tightening.

Mr Draghi is now speaking


From the FT’s Markets Editor Chris Adams

The ECB president delivers his opening remarks. Here are the highlights.

The message on forward guidance is reiterated.

Draghi begins by noting the expansion in output in the second quarter after six quarters of recession, and then the PMIs. They “confirm previous expectations of a gradual recovery.”

Improvements in financial markets are gradually working their way into the real economy. Unemployment, however, remain high and balance sheet adjustments continue to weigh on activity.

The ECB revises up its GDP forecast for this year to -0.4 per cent from -0.6 per cent. It revises down the forecast for 2014 by 0.1 percentage points to 1 per cent.

Risks remain to the downside.

The inflation forecast for 2013 is revised up from 1.4 per cent to 1.5 per cent. The inflation forecast remains at 1.3 per cent in 2014.

Higher commodity prices pose an upside risk.

And we have our first question:
At what point numerically would excess liquidity becomes a concern and what would you do about that?

Draghi says the current situation is “adequate but we stand ready to act”

He cautions that it is all context dependent and depends on the state of fragmentation and says that people shouldn’t extrapolate payment patters too much from the past.

Responding to a second question about possible oil price shocks, says we will have to wait and see

The euro has fallen to a four-month low against sterling:


Draghi confirms there was a discussion of rate cuts. Says that, despite the recent good news, some thought the recovery too green to not discuss a cut to the main refinancing rate.

Draghi is now focusing on specific questions on the Dutch economy. He says he expects a pick up of the economy, though the median term out look remains subdued

Why is the Dutch economy still in recession?

Draghi says it’s demand (or lack thereof) driven. Declining real estate prices are weighing on demand. Deleveraging by banks and households is, he says, “natural”. However he points to recent good news on business investment and exports as signs that there could be a gradual pick-up of the economy.

The medium-term outlook is poor, however. Draghi wants reforms to the housing market, pensions system and the labour market to improve it.

Turning now to the banking system.

Draghi says there will be news “in the coming days” about discussions with European Parliament on the SSM (single supervisory mechanism)

There will be a full communication on assert quality review by mid October

How is Draghi doing so far? Well, according to BNP Paribas’ Ken Wattret:

Ken Wattret: He’s doing an impressive job so far in pushing back against the tightening of monetary conditions. This is appropriate to the circumstances. The Council is split, clearly, but the doves are in the driving seat in the Council’s deliberations it seems.

Now onto Ireland and its plans to exit the bailout at the end of this year – will it need a precautionary credit line?

Mr Draghi clarifies the recent remarks of executive board member Joerg Asmussen on how banks are resolved.

A supervisor can’t resolve or sell banks — that’s up to governments, he says. A supervisor makes an assessment of a bank’s health, it’s then the government that decides what to do next.

Draghi stresses he believes that Ireland is “on track” for a successful conclusion of the current programme

Should there be debt relief on sovereign bonds? Draghi is unequivocal. “The answer is no,” he says, adding it’s pretty clear that the ECB can’t do monetary financing.

Ooh, this is interesting. A tweet from the man who used to head the ECB’s open market operations, Francesco Papadia.


Will any of the journos present be willing to ask the ECB president on Mr Papadia’s behalf?

Mr Draghi is asked about the market impact of the German election. He swerves it.

On to a question about minutes. The president’s answer implies the ECB is unlikely to tell us how each of the members of the governing council voted.

Work on an “account of the discussion” of the governing council is going on. However, he highlights that the ECB’s set up is very different to that of the Fed, or the BoE. Unlike their counterparts elsewhere, governors representing 17 different nations sit on the ECB’s rate-setting board. He implies that revealing how each member of the governing council voted could threaten their independence.

Turning to Spain, does Draghi back additional support for the banking system?

He chooses to stress the progress he thinks Spanish banks have made and says that whilst there are some outstanding issues he believes they can be resolved without impacting liquidity

The president says the ECB is “alert” to the situation in Syria and emerging markets, though he notes these are “two different things”.

“We stand ready to act,” he says, although co-ordinated action with the Federal Reserve or other central banks has not been discussed.

Though he stresses the shoots of recovery “are still very, very green”, Draghi is encouraged that at its root is a pick-up in domestic demand – not exports. “That’s very important,” he says, as the eurozone is more insulated than before from events elsewhere in the world.

Michael Steen, from the FT, asks whether there was any discussion on forward guidance.

Draghi says they have reflected on the nature of the forward guidance and what the objectives are and they are not willing to adopt any more precise formulation of forward guidance. In other words, don’t expect any more detailed information

Why is there no mention of financial stability risks in ECB-style forward guidance? (This is the third condition of the BoE’s guidance).

Draghi says financial stability risks are often addressed by macroprudential tools. “Movements in interest rates are not a realistic way to respond to risks in financial stability that we don’t see,” he says. In the past, there were reasons to react to stability threats with interest rates. Not now though.

To the last question, Draghi also said that forward guidance also showed that the ECB has a downward bias towards further rate cuts.

Draghi is asked whether the ECB has considered releasing inflation forecasts into 2015 to give the markets greater confidence in the forward guidance. He says the forecasts will be published at the year’s end.

The final question. How can OMT have been so successful without the ECB buying a single government bond? “It’s very hard to answer this question without flattering oneself,” he says. That doesn’t stop him though…

“I suspect the design has made it both powerful and credible,” he says. The design was powerful because it addressed redenomination risk, it’s credible because it’s conditional.

He finishes by quipping: “Thanks for asking.” Take a bow Mr Draghi, take a bow.

Here are the highlights.

Reflecting the signs of recovery seen in recent months, the ECB revised up its forecast of GDP for 2013 from -0.6 per cent to -0.4 per cent.

Despite signs of green shoots, a rate cut was still discussed. Draghi noted, however, that for the first time in two years a recovery was being driven by domestic demand. That was enough to send the euro tumbling against the dollar: