Emily Cadman Closed Live blog: Draghi’s ECB press conference

Welcome to our live coverage of ECB president Mario Draghi monthly press conference. Earlier, to the surprise of some, the ECB kept its rates on hold. Follow the questions and reaction live here with capital markets editor Ralph Atkins and Emily Cadman

The ECB’s decision to keep interest rates unchanged is likely to disappoint markets, which had seen a significant chance of a cut. Eurozone inflation is far below the ECB’s target of an annual rate “below but close” to 2 per cent, raising fears that the region could slump into a a dangerous deflationary phase.

However, Mario Draghi, ECB president, could announce other measures during the press conference. ECB watchers are not expecting – just yet – an asset purchase programme comparable with the US Federal Reserve’s “quantitative easing”. So any announcement along those lines would be a big surprise. Another option would be an announcement that the ECB will provide extra liquidity to the eurozone financial system by no longer “sterlising” the Euro 176bn it spent during the eurozone crisis buying government bonds.

The main refinancing operations and the interest rates on the marginal lending facility and the deposit facility still stand at 0.25%, 0.75% and 0.00% respectively.

Here is that familiar inflation chart:

Here is our woman in Frankfurt Claire Jones’s analysis of the options open to the ECB
ECB faces dilemma with inflation drop

Earlier, the Bank of England also held its interest rates at record lows
Bank of England holds fire on forward guidance

Here’s a view from Ken Wattret, European economist at BNP Paribas:

“The inaction is somewhat disappointing in that it suggests that the ECB is perhaps less sensitive to downward surprises on inflation than appeared to be the case with the rate cut in November last year.

However, whether this is merely a postponement until March’s meeting, which we suspect it will be, should become clearer in the upcoming press conference.”

Mr Draghi’s press conference should start in seven minutes…

Mr Draghi is about to start his press conference…Here we go

Mr Draghi sees the “moderate recovery” continuing, but inflation remaining weak. Inflation expectations remain “firmly anchored” within the ECB’s target of an annual rate “below but close” to 2 per cent. But the eurozone is experiencing a “prolonged period” of low inflation.

Mr Draghi points out that more information will be available in March – when the ECB updates its forecasts. (That could be an opportunity for action?)

The ECB reiterates its forward guidance on interest rates remaining low

The ECB is monitoring developments in money markets “very closely” and the ECB is ready “ready to take decisive action if required,” Mr Draghi says.

No policy action announced in the crucial first paragraphs of Mr Draghi’s introductory statement. Instead he’s stressed the ECB’s readiness to take “decisive action if required”.

Here is Sebastien Galy from Soc Gen’s take on the decision to keep rates on hold:

“The ECB still doesn’t want to pull the trigger on more easing hoping past easing will be enough, but flagging March as the key month. A short covering is on the way in EURUSD.

“Underlying price pressure weak, credit subdued, prolonged period of inflation, further analysis on inflation in March”

Mr Draghi’s summary of the economic analysis is almost word for word the same as last month. He expects “a prolonged period of low inflation to be followed by a gradual upward movement towards inflation rates below, but close, to 2 per cent later on.”

His introduction statement has ended without any policy announcements

Questions have started. The first is on his explanation for the current emerging market volatility and what possible threats it poses for eurozone exports?

Mr Draghi says the ECB’s discussion today focused “on contingencies that may suggest policy action for the ECB”. The problems in emerging markets, however, were complex and outside the ECB’s control. But he notes the “resilience” of eurozone markets

A question on what the ECB will do if inflation remains at January’s levels. Would that be enough to justify cut interest rates? And will the ECB stop sterilizing its government bond purchases?

Mr Draghi says ending the sterlisation of its bond purchases was one of many instruments looked at but was “has not been discussed” today. Instead the governing council looked at possible contingency plans if risks to its outlook are realised.

For those not accustomed to central bank speak, sterilisation is if the ECB stoped absorbing the liquidity created by its earlier purchases of government bonds, made through one of its crisis-fighting measures, the Securities Markets Programme

The ECB president is going deeper into what the inflation numbers are signalling. Are they showing deflation, he asks. “The answer is, No”. Inflation expectations remain anchored and “we don’t see much of a similarity with what happened in Japan”.

He also pointed out that the ECB had cut interest rates – in November.

Eurozone inflation rates, Mr Draghi goes on, are not much lower than in the US where the economic recovery is “way more advanced” than in the US. There were also similar inflation rates after the 1997 Asian crisis and after the collapse of Lehman Brothers in 2008.

Here is the text of Draghi’s introductory statement

Low inflation in the eurozone was primarily the result of food and energy prices, Mr Draghi adds. Another cause may be weak demand. But we are seeing “a modest recovery which shows more encouraging signs” so the “demand side is getting stronger, not weaker”. The ECB had to be “extremely cautious” with this recovery, which started from low levels of activity “but it is proceeding”.

The ECB had also looked to see whether consumers were postponing spending – which would be a sign of deflation. “We have not got evidence of this”. Consumer confidence was actually rising and savings rates have been stable.

Mr Draghi sums up the inflation figures as showing “relative price adjustment rather than any deflation taking place”.

A question on why the ECB did not act today: Mr Draghi says the decision reflected the “complexity of the situation” and the need for further information. March’s forecasts will include forecasts for 2016, he announces. That will extend the ECB’s horizon.

This from the FT market’s editor who is keeping an eye on the reaction


Another piece of information the ECB is waiting for is the fourth quarter figure for eurozone gross domestic product, Mr Draghi adds.

Mr Draghi is referring to his comments in Davos about possible asset purchase programmes (reported by the FT), which suggested the ECB might buy small business loans. (He seems to be downplaying the idea)

He points out the need to look at bank lending channels. Corporate bond issuance, however, is compensating for lower bank lending. Perceptions of risk are also having less of a tightening effect on credit, he adds. “There is greater confidence in the lending process… this confidence is translating itself into sort of better lending conditions.”

The ECB would also look at the impact its “asset quality review” was having on bank lending. The short term consequences would be that the banks had to clean up their balance sheets, which would hit credit. But in the medium and long term “which is now” the AQR “will be positive for lending because it will increase the confidence in the banking system.”

But Mr Draghi adds that he is keen on a “revitalisation” of the European market for asset backed securities, which would improve credit flows.

Here is a recent FT piece on the AQR – and the ECB’s strong defense of the progress

ECB vice-president defends strength of its health check on banks

A question about whether any governing council member argued for an interest rate cut today: Mr Draghi says there was a broad discussion in which all policy instruments “were talked about”. But “most, if not all of the discussion”, was about the need for additional information and about the prevailing uncertainty.

Colleagues over at FastFT are reporting on what might have been a fat finger trade on the Dax future market after the ECB left its rates on hold. The index dropped 180 points suddenly, from 9,190 to 9,010, before quickly recovering.

Deutsche Börse said the FDAX drop was currently under investigation by market supervisors.

More on FastFT: Dax futures plunge briefly – fat finger fingered

More reaction coming in from analysts on the decision to hold rates amidst deflation concerns.

Luke Bartholomew of Aberdeen Asset Management writes:

“With each data release, it seems like deflation edges closer but we get no closer to a solution. Draghi’s problem is that the market is starting to expect some extraordinary measure but is being left to second guess what that measure might be or if it will come. The longer this lack of information continues, the more expectations grow and the risk increases that all Draghi achieves is to disappoint the market by failing to meet their expectations.”

Here is that chart showing the earlier spike in the Euro

Here’s a good question: Would Mr Draghi support coordinated G20 action to calm financial markets?

In reply, the ECB president notes the debate about the impact the Fed’s tapering has had on other economies. But he points out that “each central bank has their own specific institutional set up, the mandate” and so coordinated action might require steps that do not fit with mandates. But the “exchange of information, discussions are extremely useful” and there are plenty of forums for such discussion.

On the ECB”s own position, he adds: “We want to see clearly through the present uncertainty.” It was important to analysis information before taking action. “Changes in interest rates take time to affect the economy,” he adds.

Mr Draghi is asked whether he would be as “cool” on policy actions if inflation was 3 per cent – that is, far above its target rather than far below? He retorts: “I don’t have a cool attitude at all…These levels of low inflation for a protracted length of time… are a risk for a variety of reasons. We are alert to these risks and we stand ready and willing to act.”

A question (or three) from the FT’s Claire Jones: she wants to know (1) more about disinflationary dynamics within the eurozone. Also, she points out (2) that central bank mandates were set in a different era, was it not just a “cop out” to blame them? And she wants (3) clarification on whether the ECB can buy government bonds under European treaties?

On the last (3) question, Mr Draghi confirms it is possible for the ECB to buy government debt in secondary markets.

On (1) disinflation processes in the eurozone, Mr Draghi says some are part of a price adjustment process that is “welcome,” another are due to lack of demand. “There is not one clear cut cause”.

On (2) central banks mandates, the ECB president agrees mandates were crafted in different times but the problem of overlapping effects has been around since the second world war.

A simple question: did the ECB discuss buying European equities? And a simple answer: No, says Mr Draghi. “We have not reached that point yet.” He then laughs, suggesting he is not taking the idea very seriously.

Overall the euro strengthen by the most in two weeks during the press conference.

More at FastFT: Euro strengthens on ECB inaction

That’s it, the press conference is over. The ECB has created waves by NOT taking any policy action, against the expectations (and hopes) of many in financial markets. The euro rose strongly as Mr Draghi spent much of the press conference explaining why current extremely low inflation rates do not necessarily spell deflation dangers for the eurozone.

ECB governing council members, he said, would want more information before acting – pointing out that March would see the publication of updated ECB forecasts, including for 2016 (which will push out the ECB’s forecasting horizon by a year). That left the door open for possible interest rate cuts or other policy loosening measures next month. As Mr Draghi also emphasised, the ECB stands ready to act “decisively” if needed.