Despite inflation remaining extremely low across the eurozone and signs that the recovery is weaking in the single currency bloc, the European Central Bank kept its interest rates unchanged at its monthly meeting. Analysts are now looking for Mario Draghi’s assessment of the extraordinary measures introduced in June and details of any further measures..
By John Aglionby and Sarah O’Connor
Hello and welcome. After last month’s fireworks, the markets are expecting a much less dramatic press conference from Mario Draghi today (famous last words?).
The ECB kept its three main rates on hold, namely the refinancing rate at 0.15 per cent, the deposit rate at -0.1 per cent and the marginal lending rate at 0.4 per cent.
As Claire Jones, the FT’s ECB correspondent writes in her news story on today’s decision:
The rate decision was widely expected after the central bank in June unveiled a package of extraordinary measures to counter the threat of a vicious bout of deflation in the eurozone. At 0.5 per cent, inflation is still just over a quarter of the central bank’s target of below but close to 2 per cent. There are also signs that the bloc’s recovery is weakening, with activity slowing both in the manufacturing and services sectors.
The ECB has signalled that it would resort to mass bond buying, often referred to as quantitative easing, should inflation stay low for a “too prolonged” period of time. But policy makers are keen to judge the success of the June package before acting again.
In June, the ECB last month became the first major central bank to cut its deposit rate below zero. It also announced an offer of up to €400bn in cheap four-year loans, while Mario Draghi, the ECB’s president, pledged to “intensify” preparations for a programme to buy asset-backed securities.
Here are two more charts showing why the pressure is still on Super Mario to help the eurozone’s recovery rediscover its mojo. In short, the bloc’s economy is precarious.
From Michael Hunter on the FT’s markets desk:
Before the press conference began, the euro was down 0.1 per cent at $1.36.45, while the FTSE Eurofirst 300 was up 0.3 per cent at 1,389.76
The eurozone final PMI surveys this morning offered more evidence that the eurozone’s recovery was slowing. The composite index (a combination of data from manufacturing and services) was just 52.8 in June – down from 53.2 in May. That still indicates growth – but barely.
A word of warning: Any market reaction over the next hour will not be just because of what Draghi says because the US non-farm payrolls figures are being released just as he starts speaking. These usually are announced on the first Friday of the month but because tomorrow is Independence Day the Department of Labor is unveiling them today.
Just to break away from Draghi. The US non-farm payrolls have come in at 288,000 – that’s the number of jobs added last month. That’s well above the estimates of about 215,000
Draghi welcomes everyone to the press conference. He kicks off – as always – with an explanation for the decision. Inflation expectations over the medium to long terms are still “firmly anchored”. The combination of monetary policy measures last month was a further easing of the stance – and will support bank lending.
The US unemployment rate dropped to 6.1 per cent
The governing council has decided on some more details on the TLTROs (pronounced teltros). To be published today at 3.30pm
Draghi moves on to a deeper discussion of the situation. Although labour markets have shown some further sign of improvement, unemployment is still high and spare capacity is still “sizeable”. Loans to the private sector still negative in May, deleveraging still dampening the pace of the recovery. Risks are still on the down-side.
Speculation from Robin Wigglesworth on FTFast
Draghi also said the council had intensified preparatory work on ABS purchases.
The ECB are confident their measures are sufficient – for the moment
The current low level of inflation should be followed by a gradual upward increase towards 2 per cent, Draghi says.
Analysts say the US jobs figures have taken the pressure off Draghi. Jamie Costero, Economist at BBVA Research, tweets:
Euro area countries shouldn’t unravel fiscal consolidation progress, Draghi says. But it should be designed in a growth friendly manner.
And regular minutes will be published
Monetary policy meetings to change to a six week cycle in January. Big news.
There will be a press release on those decisions about changing to a six-week meeting cycle, and publishing minutes from January.
The decision to meet every six weeks has set Twitter a-flutter.
Now on to the questions. Draghi says how long rates will stay at their current level will depend on the medium-term inflation prospects
On the TLTROs, 1 trillion euros is available for the banks today. The take up will depend on the inflation rate and the growth rate of the euro area. He says he expects take up to be sufficient to help take the inflation rate up to near but just below 2 per cent.
The main elements: Bank can participate individually or form a group if certain criteria are met
Borrowing allowance is up to 7% of loans to eurozone private sector, excluding loans to housing sector.
There are six TLTRO allowances at quarterly intervals, beginning in mid-September.
Banks that have been deleveraging will have a different benchmark rate to those that have increased their lending. The reference for this benchmark will be April 30 2014.
After one year the benchmark that is declining will be horizontal – in other words banks will be treated equally after one year.
Draghi: “If this sounds complicated I think you’re right”
Next question: on the potential ABS programme. Any progress on that “intensifying” effort? And if you’re going to meet every 6 weeks, how will you sync this with the Fed – decide before or after?
Draghi says we have no plan to synchronise with anybody else. We’ll have our new cycle and we’re not going to think about others.
FT investment editor James Mackintosh has summarsied Draghi’s details on the TLTROs:
FT markets editor Chris Adams agrees with Draghi that what he explained was complicated:
More details on the ECB’s new year resolution:
On the ABS programme: They should be “real” ABS, no CDO squares etc, because we want to channel lending to the real economy, especially SMEs. It should be simple and transparent. (He said all this last month too). We do want the intermediaries to retain some risk.
“I’m sorry I was a little too long” in that answer, he concludes.
The Central Banking journal points out Andy Haldane, chief economist at the Bank of England, has also mooted changing the frequency of MPC meetings.
FT’s Claire Jones is up next: She asks about the regular accounts that will be published and about the Bank for International Settlements’ call at the weekend for central banks to tighten rates sooner rather than later.
Draghi says on the accounts that it’s too early to give details. The governing council will work on “dry runs” – for example, should names be included or not – for them “to be a useful source of information”.
On the BIS: We think that monetary policy is perfectly satisfactory for our mandate. However we’re quite sensitive to the creation and presence of potential financial stability risk. We’ve taken initiatievs to address these risks. Even in our TLTRO operations, you’ll see we’ve excluded lending for real estate purposes and to sovereigns. We’ve introduced a treatment for sovereigns that’s quite conservative. The bottom line is that the first line of defence is the macro-prudential tools. I don’t think people would agree with raising interest rates now for the ECB. It would be quite an interesting proposition. The council will also use unconventional measure to cope with too long a period of low inflation
Another TLTRO question. Any provision to stop banks taking the money for two years, use it to buy government bonds, then pay it back to the ECB?
Draghi: there are provisions, yes. If the bank doesn’t produce evidence they have produced some net lending relative to the benchmark, they will have to pay back. Certainly that was a concern of the governing council, and we’ve addressed it through a variety of means.
Draghi also says he couldn’t exclude further “technical” adjustments in interest rates.
A question on the exchange rate. Does he envisage taking measures to weaken the exchange rate. And one on why the council meetings are being changed from monthly to every six weeks.
Draghi says on the second question that the situation for the last couple of years has been “way more complex” than it was a few years ago. The expectation that the ECB should act in monthly meetings is now not appropriate. He says the council does not think its job is unfinished but the issue is whether we should have, each and every month, the expectation for action. The expectation for action injects a certain market behaviour that may have nothing to do with fundamentals.
Our assessment of inflation is medium-to-long term. Decisions are not taken based on short-term considerations.
In short, in the current circumstances, monthly meetings are too frequently.
Also, if you want meeting accounts, it’s hard to do this if the meetings are monthly.
On the exchange rate, it is not a policy target but it’s definitely very important for our outlook of price stability. If you compare it with three years ago you have tow stages, for a year to 18 months it was energy prices that contributed to the fall in inflation rate. Then it was the exchange rate.
So we look at it with great attention.
It seems the ECB has finally taken on board the FT’s leader of last September for it to publish its minutes, or accounts.
The case for more transparency rests on two propositions. First, it would increase the central bank’s accountability, a necessary complement to its independence. The decision by the ECB to start a new bond-buying programme has proved controversial, particularly in Germany. The prompt publication of minutes would enable the ECB to explain to the public more clearly the reasons for such moves.
Greater transparency can also improve the effectiveness of monetary policy. Were the minutes to show strong support for a cut in the interest rate, businesses and households could be encouraged to borrow even more, as they would expect that rates could be cut again in the future.
Question: Will more attention be paid to legal risk that banks in euro area have to bear given recent US decisions?
Draghi says the key thing is that the system is resilient to legal risks.
On the single supervisory mechanism, Draghi stresses it’s complex but it’s really worth doing it.
Draghi offered a stony face and no reply to a request for forward guidance on the France v Germany World Cup football match
Question on the exchange rate again – it hasn’t lost value against the dollar, so to what extent is he worried that the ECB is in the shadow of the US Federal Reserve. Secondly how much pressure did he feel about having monthly meetings.
He said no, he didn’t feel pressure but it is more a case of managing expectations.
On being in the shadow of the Fed, he says that since May when he first mentioned that he might change interest rates, there’s not much relationship between what happens here and there (in the US).
“The euro area has been capable of producing a certain amount of difference in the consequences of monetary policy from the Federal Reserve.”
On the exchange rate, he accepts that it si a problem because it affects price stability.
Draghi cracks a joke about whther the ECB is still offering the markets too much guidance: “Maybe we should move to a six month meeting schedule, not a six week schedule”
Draghi says they’re coordinating the TLTRO allowance dates with the new meeting cycle.
He says he agrees that monetary policy is less effective when you’re “lower bound”. But he doesn’t agree that low rates do more harm than good.
Here’s a link to Draghi’s initial statement
Draghi: Credit constraints remain higher than they used to be but the funding costs now are by and large the same across the eurozone – there’s been a narrowing of fragmentation on the borrowing side. Large corporates also pay lower rates than SMEs to borrow money.
“So there are certain very timid signs of improvement but we’re still witnessing low credit flows.”
But the decline in bank lending has been compensated for by an increase in the use of the capital markets to raise money..
Draghi: We will continue to have the same number of internal meetings as adapted to the new schedule.
He’s also asked about whether Europe is overbanked. He says it’s hard to say whther he agrees or disagrees. Banks are the result of history of institutions. Would it help if there were mergers and acquisitions? One cannot rule out the need for this. Whether the ECB or the supervisors of the SRB are the right authorities to produce such a change is a different matter.
And that’s it from Draghi. It’s now time for a technical briefing on the rules and regulations on the TLTROS.
Here’s the press release – just released on the new ECB meeting cycle and records of meetings.
“The revised meeting schedule will be finalised at the 16 July Governing Council meeting and posted on the ECB website immediately thereafter.”
The Dow Jones Industrial Index has broken 17,000 for the first time on the strong US jobs numbers.
Here’s the press release with new details on the TLTROs.
Here are the key points from the TLTRO press release:
The Governing Council decided today that:
For banks  that exhibited positive eligible net lending in the twelve-month period to 30 April 2014, the benchmarks are always set at zero.
For banks that exhibited negative eligible net lending in the year to 30 April 2014, different benchmarks apply. These are set as follows: the average monthly net lending of each bank in the year to 30 April 2014 is extrapolated for 12 months until 30 April 2015. For the year from 30 April 2015 to 30 April 2016, the benchmark monthly net lending is set at zero.
Banks that borrow in the TLTROs and fail to achieve their benchmarks as at 30 April 2016 will be required to pay back their borrowings in full in September 2016.
Banks participating in a TLTRO will be subject to specific reporting obligations.
The TLTROs will start on September 18th:
The initial operations will be conducted on 18 September and 11 December 2014, with the additional operations carried out in March, June, September and December 2015 and in March and June 2016.
The TLTRO details are causing a few furrowed eyebrows.
So here’s a summary:
The ECB kept its interest rates unchanged and will do so for the foreseeable future
From January it is going to move from monthly meetings to meeting every six weeks.
From next year it will also publish accounts of its meetings.
The governing council remains committed to using unconventional measures if necessary.
The exchange rate is a very serious issue – ie the euro hasn’t weakened.
Banks availing themselves of the TLTROs will be charged different benchmark interest rates, depending on whether they increased or decreased their lending in the 12 months to the end of April 2014. These different rates will last for a year.
If the banks don’t do the net lending they’re supposed to do under the terms of the TLTROs they will have to repay the money.
On the Bank of International Settlements’ call for central banks to start raising rates, Draghi said it would be inappropriate to raise rates at the moment.
And as a parting shot, here’s the view from yesterday’s Camp Alphaville on Draghi’s performance as head of the ECB
So thanks for following – it turned out to be more interesting than we thought. Until next month (yes, the meetings are still monthly for the rest of the year), goodbye.