Emily Cadman Closed Live blog: Draghi on ECB monetary policy

Mario Draghi

By Emily Cadman and Claire Jones

Hello and welcome to the FT’s live blog on Mario Draghi European Central Bank’s press conference.

Earlier the ECB kept its main refinancing rate on hold at 0.50 per cent as it tries to support the eurozone’s fledgling recovery. Mr Draghi will discuss the rate decision at a press conference in Paris at 1:30pm BST, when he is also expected to address the central bank’s stance on providing more liquidity to commercial banks as the maturity of two previous sets of cheap loans looms.

Background reading on the questions Draghi is likely to face from the FT’s Frankfurt bureau chief Michael Steen

ECB considers further liquidity boost for European banks

ECB-watchers will be on the lookout for any talk from Draghi of another longer term refinancing operation later this year. As the chart below shows, eurozone banks have been repaying the funds borrowed from previous LTROs ahead of schedule:

Draghi has started to deliver his opening remarks following today’s rate decision. Highlights to follow.

The ECB president reiterates the governing council’s forward guidance that it will keep rates low until the bloc’s recovery is well entrenched, so long as inflation expectations remain well anchored.

His remarks on the economic outlook are unchanged. Risks continue to be on the downside. Inflation remains subdued, while medium term expectations are well anchored.

Draghi says it’s essential that financial fragmentation declines further (chart below)

Now to the questions.

The first question goes to Reuters and the euro dollar exchange rate.

Draghi says the exchange rate is not a policy target, however he recognises it is important for growth and price stability and they are attentive to developments.

And this is how the rate looks over the last year:

Our Michael Steen asks about Draghi’s commitment to use “all available tools” and whether the governing council will consider narrowing the rate corridor — the difference between the deposit rate, the main refinancing rate and the marginal lending rate.

Draghi says there was a discussion about this at today’s meeting, signalling that some members of the governing council wanted to talk about cutting rates. He also mentions the possibility of another LTRO.

On national backstops for the single supervisory mechanism, he says there is an explicit reassurance about this.

Now we turn to inflation. Is the ECB at risk of under delivering on its target?

Draghi says that the inflation path is developing as expected, and believes it will remain subdued on the low side of two per cent into the medium term.

The ECB will be monitoring closely and will look through the medium term to decide on any action on interest rates or the use of any other instruments, he says.

A question regarding Buba president Jens Weidmann’s article in the FT on why banks shouldn’t be encouraged to buy sovereign debt. Will the ECB take into account the differing risk profiles of eurozone sovereigns’ bonds in its stress tests later this year?

Draghi swerves the question, saying they’ll only decide on the risk weights later this month. Assessments on the differing riskiness of government bonds are, he says, “personal opinions” and have never been discussed by the governing council.

Here’s a link to Weidmann’s article: http://www.ft.com/…-00144feab7de.html

Draghi rejects the suggestion that harmonising the definition and provisions for non-performing loans will increase fragmentation. “It is fear, it is uncertainty that have produced fragmentation” he says

Emoticon From Italy, the Letta government has won its vote of confidence, securing 235 of 305 votes cast.

How concerned is Draghi about the US debt shutdown? He says it’s only a risk if protracted. The impression one has, he says, it that it will not be so.

On excess liquidity, is EUR200bn the magic number that will trigger another LTRO? Nope, he replies. “There is no relation between this figure and the behaviour of short-term money market rates,” he says. “You can expect a lower figure without any reaction, if financial fragmentation decreases.” Only claims that this was a figure that the ECB was looking at, the ECB president claims he was misquoted.

Don’t put the relationship between excess liquidity and short-term money market rates down to a single number is the message. He also cautions against reading too much into the pace of repayment of the earlier LTRO funds.

Asked for more specific guidance on whether there will be another LTRO, Draghi simply repeats the ECB is ready to act if needed. “The intention of he governing council is to provide liquidity assurance” he says adding: “No one wants to have a liquidity accident standing between us and the recovery”

Draghi bats back another question on details of another LTRO and refuses to be drawn on whether there is a bottom level of inflation which would prompt action

Periods of instability may be hampering individual member states but they no longer hurt the foundations of the eurozone as they did a few years ago, Draghi claims.

Substantial progress by governments on structural reforms and the ECB’s response with the OMT have helped.

Relatively simple asset backed securities will still be accepted in exchange for ECB funds. And the eurozone’s collateral policy changes with market conditions, the ECB president says.

Back onto credit, Draghi says that credit flows are still very weak due to both demand and supply and there has only been a marginal improvement in the fragmentation in lending rates.

However, he says that he expect the recovery to gradually improve and says the funding side will play less and less of a role. ECB will continue providing the liquidity as needed, he repeats.

A question on Merkel’s reelection and what it does for the timetable for SSM. Draghi swerves it, saying that he hopes everything will keep to schedule.

On low inflation, he says that they are observing these developments very closely. You’d hope so given that they’re the central bank.

They’re also not unexpected.

Asked about the political situation in Italy, Draghi won’t address the subject directly, but says: “The message the markets are sending… is very simple – stability and reforms”

He adds: “Reforms should be made for their own sake, they don’t need to be pressed by markets”

A lot of questions on Italy today. Is Draghi worried about the pace (or lack thereof) of reforms in his home country? The ECB president flags government’s efforts on reform, saying a lot has been done, but suggests Rome’s intransigence partly explains the persistence of financial fragmentation.

He rebuffs suggestions that the crisis has switched away from smaller to bigger countries, and adds: “I see a recovery that is weak, that is uneven, that is fragile and it really starts from very low levels already.

“We’ve seen unemployment stabilising but at very high levels”

Looks like markets were expecting more on the LTRO. Or that they are particularly excited by Letta’s Senate victory. The euro’s now at its highest level since January. Here’s FastFT’s take: http://www.ft.com/fastft?post=47212

The euro has just broken through $1.360.

Detailed communications about the asset review are coming in the second half of October, Draghi says

The unanimous stance is to be transparent and rigorous he says. “In order to be useful they have to be credible”

The final question. Is he worried about anti-euro sentiment? Draghi thinks the right reaction to this is to move forward with creating jobs through economic reforms, price stability and better economic governance.

Key takeaways to follow.