Welcome to our live coverage of ECB president Mario Draghi monthly press conference. Earlier the ECB kept its interest rates at their current record lows for the second month in a row.. Follow the questions and reaction live here with Lindsay Whipp and economics reporter Emily Cadman.
So, as expected the ECB’s governing council kept its main refinancing rate at 0.15 per cent and its deposit rate in negative territory, continuing to charge 0.1 per cent on a portion of banks’ reserves parked in its coffers.
Draghi is now up and speaking…
For some background, here is the FT’s ECB reporter Claire Jones on the tough questions facing Mr Draghi
Perhaps not the biggest surprise…
Draghi opens by saying that inflation expectations remain firmly anchored in line with aim, low but close to 2%, despite the most recent fall in inflation to 0.4% in July
ECB has intensified preparation work for ABS purchases, he says, while he adds that it will maintain a high degree of monetary accommodation with key rates staying existing levels for an extended period of time
He also says that the committee are unanimous in its commitment to use unconventional measures if needed
He says that the current level of inflation is mainly due to the fall in energy prices while other components remain broadly unchanged.
On downside risks to the eurozone’s moderate and uneven recovery, he cites geo-political risk, which could affect energy prices and demand for European exports
Other downside risks include weaker than expected domestic demand, he says
So far, analysts’ expectations that despite the fact the ECB has exhausted almost all of its standard policy tools no action was likely are on the mark:
Here was ING’s prediction:
Although German data have been disappointing (Jun factory orders and IP), others such as EZ PMI increased. We thus think that the ECB will retain its wait-and-see stance to access the impact of its past measures. President Draghi may mention the risk of escalating geopolitical tensions on EZ recovery, yet the ECB is likely to act only when the macroeconomic situation strongly deteriorates
The markets haven’t heard anything that interests them, with the euro remaining essentially flat
First question is on TLTRO. He says it will enhance the monetary policy stance because of significant expansion in credit that it will bring. He says that it isn’t really like LTRO emergency funding, but funding to be used to lend to the real economy. He does expect a sizeable pick up, market estimates would seem to say that overall, a pick up in between 450-850 billion euros should materialise.
He adds that data is showing a gradual pick up in demand for loans, seems to indicate that the TLTROs is going to happen (starts in September) at the right time.
More on geopolitical risks – doesn’t expand too much on his earlier remarks, just saying that they are greater than a few months ago and that eurozone could face more impact than other areas given it is close to Russia and Ukraine. But that looking at trade figures, at the moment it shows limited interconnections in terms of exposure
Asked whether the eurozone could cope if there is a big geopolitical shock, such as an escalation of the situation with Russia, and what policy responses are available, Draghi says:
“We are still assessing what the possible likely impact of sanctions would be on the eurozone economy.”
He mentions energy prices in particular, but said it is too early to say what possible policy responses would be.
He emphasises that the governing council is unanimous in being ready to use unconventional policy measures – and mentions QE in particular – if the medium term inflation forecast changes.
On the ABS: the work they are doing is so the ECB will be ready to use it injecting money into the real economy if that is what is needed. He says that would lead to a reconstruction to a market that disappeared for good reason, so therefore idea is to reconstruct the market for products that are simple, transparent and real.
The ECB is about to hire a consultant to help them design the ABS programme he adds – but won’t say whom.
That doesn’t stop Twitter breaking out in a flurry of speculation.
On the most recent HICP figures: Draghi says that if one excludes food and energy, the figure is 0.8% unchanged from the previous month. That said he admits that inflation remain low but insists that inflation expectations remain firmly anchored for the medium term at 1%. He says it is only the short term expectations that have declined
Draghi is pressed on his view of the macro outlook, saying he believes there has been
“a slowing down in the growth momentum” but is cautious:
“Assessment of the present situation is especially volatile,” Draghi says, pointing to the disconnect between better survey data and worse hard data.
And repeats his view:
“The recovery remains weak, fragile and uneven”
Euro is showing little reaction to Draghi so far. After a brief drop and rise, it is now flat at $1.3383, according to our colleagues at FastFT
Draghi doesn’t give any ground on criticism of the ECB’s inflation forecasts for being over optimistic, stressing that the ECB was not alone in overestimating inflation.
But he adds:
“We are worried and want to take action on this”
If growth is slowing, that’s not good news considering the current low rates:
Draghi doesn’t really give an answer to the FT’s Claire Jones‘ question about how political feasible is that we are going to see structural reforms when the short term gains aren’t going to be big
He digresses with stories of how it can take 8/9 months for someone to open a business, saying this is due to a lack of structural reform and argues some reforms do have an immediate benefit.
Monetary policy in the eurozone and the US “are and are going to stay on a divergent path for a long period of time”, says Draghi, stressing that rates in the Eurozone will remain a lot lower than in the US.
More now being asked on ABS and whether it is QE or not. He says it would be a form of but not the only form of QE.
Finally a question on BES: Draghi says the usual that he won’t comment on individual banks, but goes on to say that the market reaction basically confirmed the view that authorities had been “swift and effective”, and what could have been a systemic incident is considered an episode restricted to this bank
BES – for anyone who has been away on holiday – is the Portuguese lender that has been split into “good” and “bad” banks as part of a €4.9bn rescue that protects taxpayers and senior creditors but leaves shareholders and junior bondholders holding only toxic assets.
You can recap the details here
Draghi is more explicit on what he means by structural reforms: “Lower taxes, lower current expenditure”. He is unusually animated repeating that countries need to cut taxes.
Draghi’s full opening statement is now available online
Now back to inflation:
He says that any development that would bring it back to close to 2% is welcome but that it is not the ECB’s business to determine wages.
For those countries that have deflation, the key question is that this negative growth in prices depends not only on lack of demand but adjustments in the economy. He says the question is whether this going to be a short term affair in which case would not be a source of deflation, or is it going to last a long time.
He says that we are not seeing the type of deflation there that is self fulfilling expectations for falling prices forcing people to delay purchases. we are not seeing this. He says that there is another type as well, reflects “entire sectors being destroyed” and “new sectors have to start their activity”. He says that this takes a long time and has little to do with inflation expectations. He says we may see this in countries with deflation.
On the exchange rate he reiterates that he has listed before why the fundamentals for a weaker exchange rate are better now than a few months ago. He says that the main factor is that monetary policy in the UK US and eurozone are on a diverging path and will remain so for a long time.
And yes, Draghi is off to Italy for his summer holiday, though he says he won’t help with the recovery.
Back onto ABS preparations… Draghi stresses that they don’t want to recreate the market traded before the crisis which has “many imperfections” and stresses determination for a product that is “Simple, transparent and real” saying the ECB wants to be ready for what – and whenever – the regulators decide
So to sum(mer) up: the reaction of the euro says it all. Pretty much flat from before the decision. It felt like a ‘school’s out’ press conference, though it still managed to fill the full hour.
1. Draghi may be worried about the level of inflation, but insists that expectations in the mid- to long- term are firmly anchored, and his view on this also seems firmly anchored.
2. He reiterated that the governing council is unanimous in its commitment to take action if necessary.
3. He thinks that signs of a gradual pick up in demand for loans means the introduction of TLRO is coming at the right time.
4. The ECB has hired a consultant to help them “design” the ABS programme.
5. And finally, he believes that the BES saga has been contained to that bank.
That’s it from us. Thanks for joining us and have a good summer.