Emily Cadman Closed Live blog: Mario Draghi at the ECB

Welcome to our live coverage of ECB president Mario Draghi monthly press conference. Earlier the ECB kept its rates on hold for the fourth month in the row, despite inflation running at less than half its target. Follow the questions and reaction live here with capital markets editor Ralph Atkins and economics reporter Emily Cadman. The ECB will also publish its latest economic forecasts, which will reveal officials’ predictions for inflation in 2016 for the first time.

Mr Draghi’s press conference starts in about 15 minutes. Although the ECB has left interest rates unchanged, its president could announce fresh policy measures in his introductory statement. These could include a decision not to “sterilize” in the future the funds it spent buying government bonds at the height of the eurozone crisis – which would have a moderately stimulative effect on the economy. Analysts will also be watching for any progress towards asset purchase programmes. The ECB is keen to help restore the supply of credit to small businesses in crisis-hit economies, and buying up packages of bank loans could be one option. Full-blown “quantitative easing” seems unlikely, however.

Of course the ECB’s governing council may have decided not to take any further action – but to await improvements in the economy. A lot will depend on what figure the ECB has pencilled in as its inflation forecast for 2016. A figure not too far from 2 per cent would justify inaction.

Here is our Eurozone Economic correspondent Claire Jones’ story from earlier
ECB keeps main refinancing rate at record low of 0.25%

And a reminder of where inflation is at the moment:

Mr Draghi has taken his seat, the press conference is about to begin.

Mr Draghi says the eurozone’s moderate recovery is “proceeding in line with our previous assessment” – the same wording as last month. Forecasts confirm that inflation will remain low for a “prolonged period” and justify keeping monetary policy accommodative “for as long as necessary”.

No policy steps announced in first few, crucial paragraphs of the introductory statement. But Mr Draghi repeats that the ECB is prepared to take “decisive action” if required.

Here is the latest composite PMI. Draghi says survey indicators are suggesting a “moderate recovery”

Revised ECB forecasts expect growth of 1.2 per cent this year, 1.5 per cent in 2015 and 1.8 per cent in 2016. That’s slightly more upbeat than December’s forecasts.

read the ECB forecasts

One of the improving survey indicators Draghi is referring to is Monday’s manufacturing PMI which showed factory activity expanding for the 8th straight month, though the pace slowed.
Eurozone manufacturing continues to fuel recovery

Inflation is expected to be 1.0 per cent this year, 1.3 per cent in 2015 and 1.5 per cent in 2016. That is still a significant undershooting of the ECB’s target of an annual rate “below but close” to 2 per cent. But Mr Draghi says that by the fourth quarter of 2016, inflation will have reached 1.7 per cent. He also stresses that the forecasts are based on a number of assumptions.

Mr Draghi has also repeated the ECB’s view that a “prolonged period” of low inflation will be followed by a “gradual upward movement” back towards 2 per cent.

The ECB’s “forward guidance” also remains unchanged – interest rates will “remain at present or lower levels for an extended period”.

Mr Draghi has finished his introductory statement – with no fresh policy measures announced. That is going to disappoint some in financial markets.

Onto questions: the first is whether we can assume the ECB is “done” with further policy steps, barring some major event? And a follow up on the euro’s strength.

Draghi’s full statement is now up on the web:

Introductory statement to the press conference

Mr Draghi explains today’s decisions (or lack of them) on the grounds that the ECB’s “baseline scenario” for the eurozone economy remains unchanged. Economic data – such as today’s purchasing managers’ indices – have been “on the positive side,” he added . Sentiment indicators have also improved and unemployment data have “stabilised”. Portuguese unemployment has fallen by two percentage points.

Moreover, the “contingencies” he cited last month – a change in the inflation outlook or stress in money markets – that could have triggered fresh action, had not materialised.

Here is how that unemployment rate looks:

Here’s a good question from a Japanese journalist who saw “Japan slipping into deflation”. She asks: what are the key lessons, the ECB can learn?

Mr Draghi says ending “sterilisation” of its government bond purchases had been on the ECB’s list of policy actions, but money market conditions had not justified such action. The effects, he said, would anyway be limited.

On the exchange rate question, Draghi says inflation is 0.4 per cent lower due to the strength of the euro – unusually specific

Sterilisation in effect removes the liquidity that has entered the system via the central bank’s debt purchases.

Background to the question issue from Claire Jones (wayback from 2011)
Does ECB ‘sterilisation’ make sense?

On the lessons learnt from Japan, Mr Draghi explains why the eurozone situation is different. Firstly, inflation expectations are “firmly anchored” in the eurozone. Another difference is that the ECB took “early decisive action on the monetary policy front”. He tells journalists: “We have been anything but inactive.”

The composition of eurozone bank balance sheets is also not the same as in Japan.

Global factors also explain the eurozone’s low inflation rate, Mr Draghi adds. Of the near 1.9 percentage point fall in inflation over the past two years, two-thirds was because of lower energy prices. Moreover, some eurozone countries are going through significant restructuring programmes.

In from our colleagues on the market desks – the ECB’s growth and inflation forecasts are causing ripples.

The euro jumped as high as $1.3817 as fresh inflation and growth forecasts suggested that the ECB may not be a hurry to further loosen monetary policy soon.
Euro jumps as ECB eyes inflation rebound (FastFT)

Here’s an important first for the ECB: Mr Draghi is now talking about “slack” in the economy, or the “output gap.”

Mr Draghi says the “stock of slack” in the eurozone economy will mean its monetary policy will remain accommodative “even after” the economy has picked up. This is an extension of his “forward guidance” on interest rate policy.

“Slack” is a favourite topic at the Bank of England and the US Federal Reserve. But the ECB has in the past doubted whether such concepts are measurable in real time – and therefore questions whether they can be used in decision making.

The degree of slack in the economy was subject to much discussion in today’s governing council meeting, Mr Draghi said.

Here is that Dollar/Euro chart

The Bank of England also held rates today
BoE holds rates and policy steady

Mr Draghi turns to the effect of emerging market turmoil. He says it has been “muted” – in fact flows into the eurozone have boosted bond markets in some crisis hit eurozone countries. He argues emerging market problems have been the result of local policy mistakes. ECB policies can have “spillover effects.” he acknowledges, but the best insurance for other countries is “good policies”. The IMF should, however, provide safety nets against these spillovers.

On Ukraine, Mr Draghi says the economic links with the eurozone are “not as important as to suggest strong contagion” but warns that the geo-political risks in the region are significant.

Earlier, the US authorised sanctions over the Ukraine crisis.

Mr Draghi is asked about reviving the market for European “asset backed securities” – packages of loans which are sold to investors. The ECB president says such initiatives will take time. One issue is to ensure capital charges for holding ABS are set according to European – not US – default rates.

ABS backed by US subprime mortgages were a cause of the 2008 financial crisis – but the ECB believes re-launching such products could improve credit flows to small and medium sized enterprises. ABS backed by SME loans are rare in Europe, however.

There had been speculation that the ECB could buy ABS to boost the economy – but it still seems some way from that.


More details on the ECB’s calculations about the impact of a stronger exchange rate. Mr Draghi says the euro has risen by about 8 per cent since its trough in 2012 on a trade weighted basis. Given that a 10 per cent rise is believed to knock about 40 or 50 basis points off inflation, that suggests that euozone inflation has been reduced by about 0.4 or 0-5 percentage points as a result of exchange rate moves.

Here is a reminder of the FX landscape against the dollar over the past five years

Mr Draghi points out that the ECB’s interest rate policy will become “more and more accommodative” as the economy picks up – because real interest rates will fall. So even doing nothing will boost the economy.

The ECB president is asked why he gave a forecast for inflation in the fourth quarter of 2016 – which at 1.7 per cent suggested it was in line to reach its target. (Usually, the ECB just give figures for the year). Mr Draghi says the purpose was to show there is a “dynamic” that would eventually see inflation rates rise. But he warns that the further you look out, the greater was the uncertainty over forecasts.

Credit flows in the eurozone are “stabilising,” Mr Draghi says. That applies to the periphery as well as the eurozone core countries. He points out particular improvements in some sectors in Italy. Bank funding conditions are also improving “especially in the periphery”. From this perspective, the eurozone’s fragmentation “is over”.

Here is a piece from Ralph Atkins in January looking at the divergence in interest rates paid by businesses in the eurozone
ECB modestly successful in tempering eurozone rates divergence

Mr Draghi agrees with the FT’s Claire Jones that monetary policy decisions take time to have an effect (she was accusing him of complacency by not acting today). But he argues the recent pick-up in the eurozone economy reflects earlier ECB, decisive actions.

Another question about Ukraine: Mr Draghi said the growth impact on the Russian economy could be “severe” but it is hard to see what the impact would be over two or three years, if the crisis continued and affected energy supplies across Europe. “We poor central bankers don’t have the information,” he says.

The topic turns to the ECB’s comprehensive health checks for European banks – being conducted this year. Mr Draghi says it was important to recognise where there are problems. “Zombie banks don’t lend.” Trust had to be restored in banks’ balance sheets, and problems should be treated “surgically,” if needed.

The final question: on the German constitutional court’s ruling last month on the ECB’s “outright monetary transactions” programme.

OMTs were how Mr Draghi saved the eurozone from break up in 2012. It would have allowed the ECB to intervene in eurozone bond markets. The German judges cast doubt on its legality – but referred the case to the European Court of Justice.

Mr Draghi reaffirms that the OMT programme remains “ready to be activated if and when needed.”

Here is a background Q&A on the German constitutional court and bond buying

That’s it. The press conference is over. The ECB kept interest rates unchanged and announced no fresh policy actions to boost eurozone growth. Mr Draghi revealed the ECB’s forecasts saw inflation at just 1.5 per cent in 2016 – still below its target of an annual rate “below but close” to 2 per cent. But the ECB expected a pick up to 1.7 per cent by the fourth quarter of 2016. The ECB president attributed much of the recent fall in inflation to lower energy prices and a stronger exchange rate, as well as the increased competitiveness of some crisis-hit eurozone countries. He dismissed comparisons with deflation in Japan but repeated that the ECB was prepared to take “decisive action” if necessary. That wasn’t the case today.