Emily Cadman Closed Live blog: Mario Draghi at the ECB

ECB president Mario Draghi started his monthly press conference shortly after 1.30 GMT. Earlier, as expected, the ECB left rates on hold. Follow the questions and reaction live here with capital markets editor Ralph Atkins and Emily Cadman

The ECB has left its main interest rate unchanged at the historic low of 0.25 per cent. The press conference by Mario Draghi, president, which is about to start in Frankfurt, will be watched closely for any hints that the ECB has changed its economic assessment – or is any near further policy action. While some economic indicators have pointed to a pick up in eurozone fortunes, inflation at just 0.8 per cent is far below the ECB’s target of an annual rate “below but close” to 2 per cent.

Here is further detail on the context of the rate hold from FT reporter Claire Jones in Frankfurt
ECB keeps rates on hold despite falling inflation

A bit of good news for the bank earlier this week was a rise in retail sales – the fastest rise in four years
Eurozone retail sales provide welcome boost

Market expectations are for no further policy response today but Mr Draghi has taken investors by surprise a number of times since he took over as president in November 2011. Last month, interest rates were cut unexpectedly.

The other positive news from Monday was a rebound in activity, according to the latest composite PMI

Eurozone business activity rebounds in December

Mario Draghi is taking his seat…

Mr Draghi welcomes Latvia as the eurozone’s 18th member

It joined the euro on Jan 1 in case anyone has forgotten
Latvia sees joining euro as extra protection against Russia

The first, crucial, paragraphs of his introductory statement are largely unchanged from December. Mr Draghi warns inflation is expected to remain subdued. He “strongly emphasizes” that monetary policy will remain accommodative for as long as needed. He also reiterates the ECB’s forward guidance that the key official interest rates will “remain at present or lower levels for an extended period of time”.

Mr Draghi repeats his December statement that the ECB stands ready to consider all available policy instruments

There is little new in the introductory statement, which suggests Mr Draghi does not have any great surprises up his sleeve. We’re now onto questions.

The first question is on whether his phrasing about “strongly emphasising” the guidance on monetary policy reflects anything? That was one innovation from December.

Elsewhere in the global economy, in the US the number of new weekly claims for jobless benefits dropped 15,000 to 330,000 last week, according to the Labor Department: Dip in claims adds to US job market hopes

Mr Draghi says, yes, we used “firmer” words on forward guidance. “We think that markets are currently ok but there are contingencies that could cause us to act.” One, Mr Draghi says, would be a tightening of conditions in money markets. Another would be a change in inflation expectations.

Mr Draghi says the governing council discussed “all possible instruments” which could be used in the two contingencies he outlined.

A question from the WSJ on what those policy instruments might be….

…Mr Draghi says “we have several instruments that we can use and the choice will depend on what contingency will actually happens”. Some would address short term difficulties in money markets, others would be used to address the broader economy.

This just in from our global markets commentator Jamie Chisholm:

“The euro has lost about 40 pips from its session high since Mr Draghi started talking, now changing hands at $1.3595. Some traders think sellers moved in after the ECB president noted he was monitoring monetary market conditions closely and will take action if needed. But that’s an obvious comment. It is more likely it’s his resolutely dovish tone that is causing the (mild) damage.”

Mr Draghi wants to emphasise that the ECB is mandated to tackle inflation when it falls below its target as well as when it is higher. He is trying to make clear that the ECB would act if needed…without giving any clues about how.

Here is Euro against the dollar so far today:

Now, a question about whether the ECB’s asset quality review is delaying the recovery – because banks must first clean up their balance sheets. …

The full text of Draghi’s introductory statement is now online here

…Mr Draghi replies “once certainly might have some short term de-leveraging in order to be prepared for the AQR but one has to counter balance this with two other considerations. One is the longer term health of the banking system…We’re talking about the end of this year when the AQR will be finished….The second point is that one has to counter balance the short term implications with the fact that capital markets have reopened for banks.”

AQR = asset quality review for anyone who was wondering

Mr Draghi adds that it is important to address concerns about the weaknesses of the eurozone banking system.

A question from the FT’s Claire Jones on December’s fall in core inflation, which prompted calls from analysts for immediate ECB action. Did any governing council members agree, she asks.

Mr Draghi says December’s data were distorted by a one-time “technical adjustment of services inflation in Germany”. He does not answer the question about whether there were calls by governing council members for immediate action. On possible policy tools he adds: “I don’t want to go into specifics”

For background on the core inflation numbers: Core eurozone inflation falls to low, stoking fears of deflation

Mr Draghi is now talking about the improvements in eurozone periphery bond markets, which he says reflect progress made by governments on fiscal consolidation and improvements in eurozone governance. There has been an “extraordinary, very significant step forward” in the way the eurozone is run.

Earlier today, the UK’s five-year bond yields have edged above those of Ireland, for example. Spain’s 10-year bond yield fell 8 basis points to 3.7 per cent, the lowest since 2005, after a positive debt auction. Portugal’s benchmark yield edged down 2.5 bp to 5.31 per cent as investors were buoyed by the warm reception offered to its debt sale today. Greek bond yields edged up, but only after a strong week so far.

Eurozone periphery party

Ireland’s sovereign borrowing costs fall below the UK’s

Mr Draghi argues the ECB’s forward guidance has meant that money markets are better refecting eurozone developments. So it is better “insulated” from outside developements. That suggests he his less worried about spill over effects of rising US Treasury yields.

A question now on whether the eurozone is over, especially given the strong rally this week in eurozone periphery bond markets…

More on the market reaction to Draghi from Jamie Chisholm:

“The euro getting hurt more now after Draghi’s downbeat assessment. The single currency has dropped to a 1-year low versus the pound of 82.33 pence and is now off 0.1 per cent to $1.3560 after earlier hitting a session high of $1.3633. Two-year German Bund yields are down 2 basis points to 0.20 per cent and 10-year Bunds are off 2bp to 1.89 per cent.”

Mr Draghi answers: “I would be very cautious about saying that”. He points out that eurozone unemployment is still more than 12 per cent. “The recovery is there but it is weak, it is modest, it is fragile.” There remain financial, economic, political and geo-political risks, “that could undermine easily this recovery”. It would be “premature to declare any victory”. That is why the ECB was using “firmer” language on its forward guidance.

But on a more positive note, Mr Draghi says confidence is returning to financial markets, and observes that the effects of fiscal consolidation on eurozone economic growth are diminishing.

A question on SEPA! That is long-delayed plans for a “single European payments areas”…

Mr Draghi ducks the Sepa question. It is an issue for the European Commission, he says. Still, its delay means Europe’s monetary union is not working as well as it could. That IS an ECB concern.

Mr Draghi says the ECB is still “reflecting” on plans to publish governing council minutes. “It is not an easy issue,” he says. The ECB wants to provide richer information “but we have to bear in mind that we are not a one country environment”. The independence of our governing council members has to be guarded.

Mr Draghi is asked about the US’s call for more expansionary German economic policy. He refers back to a recent speech in which he quoted Abraham Lincoln on not weakening the strongest. He said he “never understands” the argument that undermining Germany’s strengths would help others.

Mr Draghi says the ECB does not see deflation “in the Japanese sense in the 1990s” in the eurozone. But he admits that when inflation is low for a prolonged period, “we have to be aware of the potential downside risks”. He points out the ECB took decisive action at an early stage of the crisis. Eurozone banks are also not as weak as Japan’s were. Japanese inflation expectations had also become un-anchored, whereas they have not in the eurozone.

Here is a take on Germany’s push back against the US criticism from the FT’s man in Berlin Stefan Wagstyl Germany defends economic policies after US criticism

Here’s a good question from a Swedish journalist: “Can the ECB ever run out of money?” Mr Draghi replies: “Technically no…we have ample resources for dealing with all our emergencies.”

Mr Draghi is asked about his remarks in a recent interview about Germans’ “perverse angst” about the ECB’s actions, which many fear will simply fuel inflation. In slightly bizarre comments, he points out that “perverse” is not the same as “perverted”. An official provides him with a dictionary definition: perverse means simply “persistent in error, different from what is reasonable”. He reassures that as the economic recovery picks-up, Germans will get better returns on their savings.

And we are now onto the last question of today.

Another attempt by a journalist to ask if anyone on the ECB council wanted further action today? Mr Draghi says the discussion was more about the possible risks to its main economic scenario, which might warrant action.

The press conference is now over.
The main message was the “firmer” emphasis Mr Draghi put on the ECB’s “forward guidance,” which is meant to reassure markets that interest rates will remain low for a long time. Its governing council “strongly emphasises” that the ECB’s monetary policy will remain accommodative for as long as needed. It was “premature” to argue the eurozone crisis was over, he said, and the region’s economic recovery remains weak, which was why there was tougher language on forward guidance. The ECB has a range of policy instruments available to use if conditions deteriorate, he said, without giving details.