Closed Live Blog: Mario Draghi’s December press conference

The European Central Bank, as expected, left its benchmark lending rates unchanged on Thursday. Eyes now turn to the monthly press conference of ECB President Mario Draghi to see how close policy makers are to embarking on a full scale programme of quantitative easing. Mr Drahgi starts at 13.30GMT and usually speaks and takes questions for an hour.

By Ralph Atkins and John Aglionby.

Hello and welcome to our live blog of the first Mario Draghi press conference from the ECB’s new headquarters. Has Frankfurt ever looked more romantic than in this photo?

Anyone wanting more details about the building (it’s the one on the right in the photograph) should view our slideshow.

For all you “Draghi bingo” players out there, the FT’s ECB correspondent Claire Jones has compiled a list of what to look out for at the press conference. The four key things are:

How dovish will Mr Draghi be?
Economic forecasts for 2015 and 2016
TLTRO fine tuning
Structural reforms

And what do the markets really think of the impending press conference? One answer is to study the latest euro rates. Another is to read the Alex cartoon in today’s Daily Telegraph – which provides a neat summary.

Financial markets hope the ECB’s swanky new headquarters building is not the only topic of conversation. Expectations are high that dove-ish comments by Mr Draghi will pave the way for full-blown QE early in 2015. That will require a close scrutiny of his opening statement, as well as his responses to questions.

Claire has filed already on the no-change rate decision.

The ECB governing council kept its main interest rate at its record low of 0.05 per cent, as expected. The interest charged on a portion of banks’ deposits parked at the ECB remained 0.2 per cent.

Or, in more common parlance, the interest rate on banks’ deposits is -0.2 per cent.

A view from the press conference – that has yet to start

Mr Draghi is taking his seat, should be starting very soon

Mr Draghi starts with a little history of the new building, work on which started in 2001. It is based on the reconstruction of Frankfurt’s former vegetable wholesale market in the east of the city, by the river Main.

In his introduction, Mr Draghi repeats that ECB asset purchase programmes already underway “will have a sizeable impact on our balance sheet, which is intended to move towards the dimensions it had at the beginning of 2012.”.

Talking of the ECB’s balance sheet, here’s a chart of the balance sheet, compared with inflation in the eurozone:

From Neil Dennis on the FT markets desk:

As Mario Draghi begins his statement, the yield on the 10-year German Bund is up 1.5 basis points and the euro is up 0.1 per cent at $1.2323. The FTSE Eurofirst 300 stock index is up 0.1 per cent at 1,400.89

But Mr Draghi steps up the dovish tone. In the crucial opening paragraphs of his introduction statement he says that “early next year” the governing council will reassess its stimulus measures, the size of its balance sheet and outlook for inflation, taking into account falling oil prices. If necessary the govenrning council “remain unanimous” in its commitment to using “additional” unconventional instruments within its mandate”. That could mean altering the ” “size, pace and composition” of measures. ECB staff have “stepped up” “technical” preparations for measures, which could be implemented in a timely manner”.

And from FT currencies correspondent Delphine Strauss:

The euro has edged up 0.3 per cent to $1.2347 as Draghi’s opening statement proceeds – investors were expecting a stronger signal than this

Here are the ECB staff’s revised growth forecasts: Annual real GDP is expectd to increased by 0.8% in 2014, 1.0% in 2015 and 1.5% in 2016

Draghi is moving on to the latest forecasts from the ECB staff

For inflation, the ECB expects:

0.5 per cent in 2014
0.7 per cent in 2015
1.3 per cent in 2016.

These have been revised “significantly downwards” Mr Draghi says, because of lower prices and slower growth – but still don’t take account of the latest falls in oil prices. Inflation could fall further, Mr Draghi warns.

Bear in mind that the ECB’s target is an annual inflation rate “below but close” to 2 per cent.

Mr Draghi says the ECB “will be particularly vigilant as regards the broader impact of recent oil price developments on medium-term inflation trends”

The ECB has already published Draghi’s opening statement

We’re now onto questions…

More from Neil Dennis, on the FT’s markets desk:

Periphery bond yields have hit their day highs after Draghi says the ECB will evaluate its measures next year – Spain’s 10-year yield is 4.8 basis points to 1.89 per cent. Earlier it was just 1.3 bps higher. Portugal’s 10-year yield rises 4 bps to 2.82 per cent, while Italy’s is 6.6 bps higher at 2.05 per cent. The benchmark German Bund yield dips from earlier, but remains 0.2 bps higher at 0.75 per cent.

The FTSE Eurofirst 300 is hit after Mr Draghi says the main risks to the eurozone economy are to the downside – down 0.5 per cent to 1,393.7

The first question is on the date of any decision about expanding stimulus measures next year. Mr Draghi says “early” next year does not mean the next meeting in January, in seven weeks.

Interestingly, Mr Draghi is using his answer to the first question to stress that oil price falls are good for eurozone growth. (He wasn’t asked about this)

ECB calculations show lower oil prices knocking 0.4 points of eurozone inflation in 2015 and 0.1 points in 2015. Those include direct and indirect effects. Indirect effects could also lower “core” inflation rates, which exclude energy. The danger would be of “second round effects” in which oil price drive down core inflation.

A second question picks on on tweak in the introducitory statement which says the ECB “intends” to expand its balance sheet back to early 2012 levels. Previously, Mr Draghi simply said such an expansion was “expected”.

More from Delphine Strauss:

Euro now up 0.7% at $1.2396, as Draghi avoids being pinned down on the date when ECB will reassess need for further stimulus

Emoticon Mr Draghi confirms that “intended” is indeed different from “expected”. But the “intended” balance sheet expansion is still not a target, he says. The change of language was not agreed unanimously, he reveals. (The assumption must be that the Bundesbank is still opposed)

A question on the expected take-up of next week’s “targeted longer term refinancing operation” or TLTROs. These are the instruments the ECB is using to pump cheap, long term loans in the eurozone banking system. Mr Draghi says it is “very difficult to say” but says what is important is the “net” take up, because banks will also have the opportunity to repay over loans.

Mr Draghi quashes rumours that the ECB might improve the conditions of next week’s TLTROs. The conditions of next week’s offer would be “exactly the same” as for the first round (when take up disappointed).

Here’s a chart on the euro’s move since Draghi started talking

Mr Draghi has confirmed that various forms of QE were discussed today by the ECB’s governing council. But that does not seem to have been enough for markets – as reflected in the euro’s rise.

Even so, there is still a more dovish hue to Mr Draghi’s comments. He stresses that falling inflation expectations would result in an unwanted tightening in ECB monetary policy because real interest rates would rise. He stresses that is why the introductory statement talks about reviewing the stimulus provided “early next year”.

He stresses, too, that the ECB will not tolerate “prolonged” deviations from its inflation target.

People are starting to pick apart the subtler meanings of what Draghi has said today:

Here’s the verdict, so far, of James Mackintosh, the FT’s investment editor:

Mr Draghi says that measures taken by the ECB earlier this year have “not yet fully developed” – so their effectiveness is not yet clear. But the ECB would take more action is needed. “That is the basic strategic stance” presented by today’s meeting.

Mr Draghi says QE involving sovereign bond buying – as discussed by Vítor Constâncio, ECB vice president – was just one option discussed today. Mr Constâncio, who is sitting next to Mr Draghi, says his comments “didn’t allude to any decision”.

From Robin Wigglesworth on FastFT about the need for unanimity on the governing council for QE

A question from the FT’s Claire Jones on whether Mr Draghi needs unanimity on the governing council for QE. Mr Draghi says bluntly: “We do not need unanimity”. He stresses the ECB’s inflation mandate . The ECB will not ” tolerate a prolonged deviation from our mandate that would cause an unwanted tightening of our monetary policy.

Would QE stimulate economic growth? People in the eurozone would like it to – here are the latest growth stats from the eurozone:

These are the ECB staff’s projections for growth:

0.8% in 2014
1.0% in 2015
1.5% in 2016

Next year’s figure had been 1.6 per cent

How effective has QE been elsewhere?

Mr Draghi is asked whether be believes QE would work in the eurozone. He replies that QE worked in the US and UK. It Japan it was “harder to assess” because other things were going on at the same time. For the eurozone, QE would signal the central bank’s determination to fulfil its mandate, as well as have an effect in stimulating the economy by pushing investors into riskier assets – so called “porftolio rebalancing” effects. There was a “well documented relationship between the size of a central bank balance sheet and inflation expectations”. But “initial conditions” – the starting point – matter a lot.

On what assets might the ECB consider buying? Everything except gold it seems

Asked what assets the ECB council has discussed as part of a possible QE programme, Mr Draghi replies. “All assets but gold”. (That is blow for the FT’s James Mackintosh, who proposed the idea)

The euro has lost some of its gains in the last few minutes – it’s only up 0.3 per cent now. Here’s what it’s done this year

Here’s a good question: if the ECB has discussed all buying all assets except gold, might it buy foreign assets? Mr Draghi says such ideas (which could include buying US Treasuries) have been discussed in the past – but were not today. “I think it is kind of difficult because that would be tantamount to [foreign exchange] intervention.”

Who are the dissenters on the board with regard to balance sheet language?

Here’s James Mackintosh’s take on whether the ECB should buy gold. And in video form:

In response to subsequent questions, Mr Draghi is taking care to keep open the option of a QE programme which involves assets other than government bonds – without giving any more details.

Marc Chandler, strategist at Brown Brothers Harriman, comments:

The sense of urgency that Draghi had appeared to express in recent speeches does not seem to be reflected in the press conference. This helped spur a short-covering bounce in the euro that took the single currency back to yesterday’s highs… Many participants had expected something more, including a commitment on sovereign bonds.

If QE did not require unanimity on the ECB council, would Mr Draghi be happy taking such a decision despite the opposition of several countries, asks a (German ) journalist? “It is pointless speculating” what kind of majority would be in place “if we were to decide such measures,” Mr Draghi replies. He points out that in the past “major policy decisions” have been taken without unanimity on the council.

More reaction, from Aberdeen Asset Management Investment Manager Luke Bartholomew:

“Draghi sent the clear message today that markets should expect more from the ECB early next year without actually announcing anything particularly new. Growth and inflation forecasts were revised down and he gave an even stronger signal of his desire to significantly increase the size of the ECB’s balance sheet.

“This is him effectively lining up his cannons ready to fire a large barrage of sovereign quantitative easing early next year.

“While the ultimate decision to do QE is very unlikely to be unanimous he seems to have built sufficient support in the governing council and the Bundesbank is looking more and more isolated.

Markets are already acting on the expectation that sovereign QE is coming next year so the big wobble will come if we see a shift in tone in coming months. If Draghi has indeed won the battle to launch QE it will highlight his political skills yet again. However he’s having less luck getting European politicians to play their part and pursue policies which will make Europe more integrated and their economies ultimately more competitive. The positive effects of QE will be short lived if European politicians don’t step up to the plate.”

More from Neil Dennis on the FT’s markets desk:

As the presser comes to an end, Mr Draghi’s “wait and see” message has subdued the markets, which were hoping for a more decisive outcome.

Periphery bonds have come under selling pressure, pushing yields up to their day’s high marks. Spain’s 10-year yield is 5.5 basis points higher at 1.9 per cent. Earlier it was just 1.3 bps higher. Portugal’s 10-year yield rises 4.7 bps to 2.824 per cent, while Italy’s is 7.5 bps higher at 2.054 per cent. The benchmark German Bund yield is 3.2 bps higher at 0.78 per cent. The FTSE Eurofirst 300 is hit after Mr Draghi says the main risks to the eurozone economy are to the downside – down 0.7 per cent to 1,391.05, while the euro falls 0.5 per cent to $1.2365

Mr Draghi argues a weaker euro would boost exports, but world demand is softer – so the ECB has cut its forecasts for export growth.

Just in case anyone was in any doubt:

Here are the ECB staff’s macroeconomic projections for the eurozone.

A question about the low volumes in the ECB’s current programme of buying asset backed securities. Mr Draghi says volumes had been low but that was because the programme had just started and the ECB did not want to crowd out private sector buyers.

A final question: on whether Mr Draghi is convinced QE would be legal. “Do you think we would discuss something which is illegal”? he asks the journalist. “Would that be the best use of our time.”

That’s the end of the press conference. We’ll post a summary in a couple of minutes.

Here’s a quick summary:

Mr Draghi did not unveil a QE programme, which may have disappointed some in financial markets.
Nor was he specific about when a programme might be launched or what it would involve the ECB buying.
Mr Draghi said the ECB’s governing council had discussed buying “all assets except gold” but then later ruled out buying foreign assets. That still leaves open the possibility of the ECB buying assets such as corporate bonds or equities, rather than government bonds.

The ECB president said unanimity would not be required to press ahead with a QE programme – which would clear the way for him over-riding Bundesbank opposition.
Some of his comments were more dovish than before. The plans to expand the ECB’s balance sheet back to early 2012 levels is now an “intention” – previously it was just “expected” – but it is not yet a target. Mr Draghi stressed that lower inflation expectations had the “unwanted” effect of increasing real interest rates, thus tightening policy.
This was why the ECB would be reviewing its stimulus programmes “early next year”.

The ECB has also revised down substantially its forecasts for eurozone growth. Its revised inflation projections, meanwhile, showed an annual rate of just 1.3 per cent in 2016 – still way below the ECB’s target. Mr Draghi blamed the fall in inflation forecasts on lower energy costs – and warned they still did not take account of latest oil price falls.

Here are the macro projections from the ECB staff forecasts:

Here’s a good Reuters chart on the challenge facing the ECB as it seeks to rebuild its balance sheet

That’s it from us. Thanks very much for following. Until next time – seven weeks away under the ECB’s new meeting schedule.