Emily Cadman Closed Live blog: ECB monetary policy

Mario Draghi

Today the ECB cut its benchmark main refinancing rate to 0.25 per cent.

ECB president Mario Draghi is giving his monthly press conference

Follow the questions and reaction live here with capital markets editor Ralph Atkins and Emily Cadman

Here is a first take from our economics reporter Claire Jones ECB cuts rates amid falling inflation

Welcome to our live blog. The ECB has just announced 0.25 per cent cut in its main policy rate. That was a surprise – the expectation had been that the ECB would have remained on hold. But it wasn’t such a big surprise as eurozone inflation has tumbled way below the ECB’s target of a rate “below but close” to 2 per cent. The euro is already falling…

Here’s our story from last week on eurozone inflation

Carsten Brzeski at ING bank writes:

“Deflationary risks and the stronger euro seem to have motivated the ECB’s move. It is obvious that the ECB under president Draghi has become much more pro-active than under any of his predecessors.”

It’s not the first time Mr Draghi has surprised markets. Since he took over as ECB president in November 2011 he’s broken with his predecessor’s tradition of “pre-announcing” interest rate moves a month or two in advance. Mr Draghi thinks, if you’re going to cut, you might as well get on with it.

In the 45 minutes between the ECB announcement and the press conference, journalists have a chance to discuss possible questions and eat a buffet lunch. Usually the latter is taken more seriously.

Here is how the currency markets reacted:

This is from Nick Kounis at ABN Amro

Low rates of inflation leave the single currency area vulnerable to a deflationary episode in the case of a negative demand shock and this is a risk the central bank simply cannot ignore. The ECB may well need to go further.

Euro has fallen to a seven week low, bond yields are sliding and equities are moving higher, says Jamie Chisholm, FT global markets commentator

Obvious questions for the press conference are:
- will the ECB do more – perhaps further cheap liquidity for eurozone banks via another longer term refinancing operation (Ltro)?
- might it consider large-scale asset purchases/quantitative easing?
- will the ECB now consider negative interest rates on its deposit facility?
- was today’s decision unanimous?
- did the Bundesbank object?

Looks like the press conference will be starting soon. Journalists are taking their places, photographers hovering.

Microphones are working….

And we’re off. Draghi is reading his introductory statement.

Decisions also taken on forward guidance and liquidity operations, Draghi says

Cut in interest rates was because of diminishing inflation from currently low rates

Inflation expectations “continue to be anchored” in line with the ECB’s target. But eurozone may experience a “prolonged period of low inflation,” Draghi says

The ECB is”ready to consider” all types of instruments to help money markets. Unlimited liquidity provision will continue until at least July 2015

Elsewhere in economic news, US third-quarter growth is quicker than expected.

The economy expanded at a 2.8 per cent pace in the quarter, up from 2.5 per cent in the second. More on FastFT

Draghi has also reaffirmed the ECB’s forward guidance – that rates will remain at present or lower rates for an extended period of time. So, rates could be cut further.

This five-day look at the euro vs dollar shows how sharp today’s drop is

That looks like it in terms of policy announcements – a 25 basis point cut in interest rates (but not the deposit rate) and an extension of unlimited liquidity provision to eurozone banks.

Mr Draghi giving his usual lecture on fiscal policy before moving on to questions.

First question is about the “prolonged period of inflation”? Just how is that, and might inflation go even lower? And what options are available to fight inflation if it does go lower?

Here is Drahi’s introductory statement to the press

Draghi says wait for December’s economic forecast updates. “It is certainly not going to be a short time.”

Some inflation reflects healthy adjustments, Mr Draghi adds. “By and large we don’t see deflation” (by which he means broad and sustained price falls)

But Mr Draghi has not answered question about possible further steps…

A question now on Ltros…

Here is how the LTRO repayments have been going:

Draghi says “we want to have instruments in our artillery”. There are plenty “we could activate if necessary” but the governing council didn’t discuss a new Ltro today.

So a negative interest rate remains a possibility

Discussion in council today was whether to cut interest rates today or wait, says Draghi.

A question about whether QE is an option – that is buying assets?

Draghi seems to rule out QE for now. “We haven’t reached the lower bound [for interest rates]“, Mr Draghi says. “We have other instruments…We’re not there yet.”

Narrowing the difference between the main interest rate and the deposit rate will lower money market volatility, Mr Draghi says.

Real economy will be supported by lower interest rates, Mr Draghi says.

A quick reminder of the economic background to today’s decision

A question on communication: do you think the markets have become over complacent and doubted the will of the ECB to act (on inflation and a stronger euro)?

Draghi answers: “I will abstain about judging markets…it is usually useless, because they go and do what they want.” Urges people to read last month’s introductory statement, when rates were held on the assumption of an “unchanged” inflation outlook. “It has changed.”

And that inflation chart

Pays tribute to the “credibility” of the ECB’s forward guidance.

Draghi says the surprise to markets was not intentional. “Since the last time I read this statement, there have been changes and these changes have been judged to be of significance.”

Draghi surprisingly confused about when the new interest rate applies. His vice president Vitor Constancio confirms it will be effective with next week’s liquidity operations.

“Traders’ risk appetite has been boosted by the ECB news. The Stoxx 600 index is up 1.3 per cent and US index futures suggest the S&P 500 will gain 5 points to 1,775, in line for a record close”

An update on the wider markets from Jamie Chisholm, FT Global Markets Commentator:

Now we’re onto questions about the ECB’s asset quality review. Mr Draghi is stressing how rigorous it will be.

A question about how much the interest rate cut will help increase credit flows into the periphery – and one about the euro

On the euro, Mr Draghi says “the exchange rate is not a policy target. It didn’t play any role in today’s discusson and as far as I can remember it was not mentioned.”

On eurozone “fragmentation” and credit flows to the periphery, Mr Draghi says was “a little better” than it was a few months ago but not seeing dramatic improvement month by month. “We are observing a static situation”

“We have to say that we are about the same situation we were three months ago.” But cut in interest rates will help “healthy banks in stressed parts” of the eurozone. “It is an instrument for reducing fragmentation.”

Another question about markets misunderstanding the ECB.

Draghi replies: “Our evidence is that our forward guidance has been successful.”

Forward guidance has reduced interest rate volatility, Mr Draghi argues. “Of course it is very difficult to measure all these effects.”

A Japanese journalists asks if eurozone is becoming more like Japan?

Mr Draghi argues eurozone countries had to go through a public and private sector de-leveraging. “We should not forget there were bubbles in the construction sector”.

Combined with changes in risk perceptions about sovereign debt, this was at the root of the recession. “Now we’re coming out of that.”

“If you look from a distance at the eurozone, the fundamentals are probably among the strongest in the world.”

“This does not translate automatically into a galloping recovery” but allows you to pursue the right economic policies.

A question about whether the ECB is considering a change in policy strategy:

Draghi says: “I don’t think we have any discussions on this point.” The ECB is “perfectly happy” with its inflation-focused mandate. It would be up to legislators to change the ECB’s mandate.

From today’s press conference:

(c) Getty Images

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That’s it. The end of a press conference dominated by monetary policy questions.

Mr Draghi warned inflation would remain low for a prolonged period before rising gradually back within the ECB’s target of a rate “below but close” to 2 per cent.

Apart from the cut in interest rates, Mr Draghi also announced an extension until at least mid-2015 in the provision of unlimited liquidity to eurozone banks, for periods of up to three months.

He left open the possibility of using further instruments – including negative interest rates or further offers of very long term liquidity – but ducked a question on whether full-blown quantitative easing could be used.

He said the euro’s strength had not been discussed.