Mario Draghi – European Central Bank – President, spoke earlier today. We are posting a transcript below. The conference was considered dull by many reporters, but soem might find some interesting data in what Draghi says. He notes something which I find interesting. The ECB is basically not cutting rates because of high energy prices and higher taxes. This reveals two things; 1. austerity has been a complete failure in the Euro-zone 2. Inflation is real, despite it being subdued. I take a two pronged approach to inflation. While I agree that deflation is a higher risk, prices for consumer necessities like oil and food are a real concern. We could see a second Wahabi Spring in parts of the world due to higher food prices in particular.
RBC called the conference, constructive ambiguity, noting, in an otherwise unremarkable press conference, the Governing Council has managed to introduce an element of ambiguity into its plans – whether intentionally or not is unclear. A strict interpretation of the Governing Council?s statement that “OMTs would not take place while a given programme is under review and would resume after the review period once programme compliance has been assured” would severely curtail the period during which the OMT programme would be active. For example, the existing (regular) troika reviews of Greece, Portugal, Ireland each quarter, by necessity, take several weeks each time; and, so to restrict OMT purchases to the „non-review? periods would mean that for each programme the ECB would be severely restricted in its ability to undertake sustained intervention. In other words, if the ECB is unwilling to utilise the OMT programme during a „standard? review period, then that would dramatically narrow the window of operation. That, in turn, would have a significantly detrimental impact on the sustained efficacy of any OMT purchases. The Governing Council would be aware that such a move would risk undermining the effectiveness of the programme. Consequently, our working assumption is that the intention is for an automatic suspension of purchases should an agreed programme be deemed to be off-track/under „remedial? review, not simply when just under a „regular? check-up/review is underway. But, for now, ambiguity prevails.
The eur/usd hit a two week high of 1.3005, after the conference.
Mario Draghi’s words below:
Ladies and gentlemen, the Vice President and I are very pleased to welcome you to our press conference. I would like to thank Governor Kranjec for his kind, more than kind, fantastic hospitality and express our special gratitude to his staff for the excellent organization of today’s meeting of the Governing Council.
We will now report on the outcome of today’s meeting. Based on our regular economic and monetary analysis, we have decided to keep the key ECB interest rates unchanged. Owing to high energy prices and increases in indirect taxes in some euro area countries, inflation rates are expected to remain above 2% throughout 2012, but then to fall below that level again in the course of next year and to remain in line with price stability over the policy-relevant horizon.
Consistent with this picture, the underlying pace of monetary expansion remains subdued. Inflation expectations for the euro area continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to 2% over the medium term.
Economic growth in the euro area is expected to remain weak with ongoing tensions in some euro area financial markets and high uncertainty still weighing on confidence and sentiment. Our decisions as regards outright monetary transactions, OMTs, have helped to alleviate such tensions over the past few weeks thereby reducing concerns about the materialization of destructive scenarios. It is now essential that governments continue to implement the necessary steps to reduce both fiscal and structural imbalances and proceed with financial sector restructuring measures.
The Governing Council remains firmly committed to preserving the singleness of monetary policy and to ensuring the proper transmission of the policy stance to the real economy throughout the euro area. OMTs will enable us to provide, under appropriate conditions, a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area.
Let me repeat again what I have said in past months. We are strictly within our mandate to maintain price stability over the medium term. We act independently in determining monetary policy and the euro is irreversible. We are ready to undertake OMTs once all the prerequisites are in place.
As we said last month, the Governing Council will consider entering into OMTs to the extent that they are warranted from a monetary policy perspective as long as program conditionality is fully respected. We would exit from OMTs once their objectives have been achieved or when there is a failure to comply with the program. OMTs will not take place while a given program is under review and would resume after the review period once program compliance has been assured.
Let me now explain our assessment in greater detail starting with the economic analysis. Euro area real GDP contracted by 0.2% quarter-on-quarter in the second quarter of 2012 following flat growth in the previous quarter. Economic indicators, in particular survey results, confirmed the continuation of weak economic activity in the third quarter of 2012 in an environment characterized by high uncertainty. We expect the euro area economy to remain weak in the near term and to recover only very gradually thereafter.
The growth momentum is supported by our standard and non-standard monetary policy measures, but is expected to remain dampened by the necessary process of balance sheet adjustment in the financial and non-financial sectors, the existence of high unemployment and an uneven global recovery.
The risks surrounding the economic outlook for the euro area continue to be on the downside. They relate in particular to ongoing tensions in several euro area financial markets and the potential spillover to the euro area real economy. These risks should be contained by effective action by all policymakers in the euro area.
Euro area annual HICP inflation was 2.7% in September 2012 according to Eurostat’s flash estimate compared with 2.6% in the previous month. This is higher than expected and mainly reflects past increases in indirect taxes and euro-denominated energy prices. On the basis of current futures prices for oil, inflation rates could remain at elevated levels before declining to below 2% again in the course of next year.
Over the policy-relevant horizon, in an environment of modest growth in the euro area and well-anchored long-term inflation expectations, underlying price pressures should remain moderate. Current levels of inflation should thus remain transitory and not give rise to second round effects. We will continue to monitor closely further developments in costs, wages and prices.
Risks to the outlook for price developments continue to be broadly balanced over the medium term. Upside risks pertain to further increases in indirect taxes owing to the need for fiscal consolidation. The main downside risks relate to the impact of weaker-than-expected growth in the euro area in the event of a renewed intensification of financial market tensions and its effects on the domestic components of inflation. If not contained by effective action by all policymakers in the euro area, such intensification has the potential to affect the balance of risks on the downside.
Turning to the monetary analysis, recent data confirm the subdued underlying pace of monetary expansion. In August, the annual growth rate of M3 decreased to 2.9% from 3.6% in July. While this decline was mainly due to a base effect, monthly inflows were also relatively contained. Conversely, strong monthly inflows into overnight deposits contributed to a further increase in the annual rate of growth of M1 to 5.1% in August compared with 4.5% in July. This increase reflects a continuing high preference for liquidity in an environment of low interest rates and high uncertainty.
The annual growth rate of loans to the private sector declined in August to minus 0.2% from 0.1% in July, reflecting a decrease in the annual rate of growth of loans to non-financial corporations to minus 0.5% from minus 0.2% in July. By contrast, the annual growth of loans to households remained unchanged at 1.0% in August.
To a large extent, subdued loan dynamics reflect the weak outlook for GDP, heightened risk aversion and the ongoing adjustment in the balance sheets of households and enterprises, all of which weigh on credit demand. At the same time, in a number of euro area countries, the segmentation of financial markets and capital constraints for banks restrict credit supply.
The soundness of banks’ balance sheets will be a key factor in facilitating both an appropriate provision of credit to the economy and the normalization of all funding channels thereby contributing to an adequate transmission of monetary policy to the financing conditions of the non-financial sector in different countries of the euro area. It is thus essential that the resilience of banks continues to be strengthened where needed.
To sum up, the economic analysis indicates that price developments should remain in line with price stability over the medium term. A cross-check with the signals from the monetary analysis confirms this picture. Other economic policy areas need to make substantial contributions to ensure a further stabilization of financial markets and an improvement in the outlook for growth.
As regards fiscal policies, euro area countries are progressing with consolidation. It is crucial that efforts are maintained to restore sound fiscal positions in line with the commitments under the Stability and Growth Pact and the 2012 European semester recommendations.
A rapid implementation of the fiscal compact will also play a major role in strengthening confidence in the soundness of public finances. At the same time, structural reforms are as essential as fiscal consolidation efforts and measures to improve the functioning of the financial sector. In the countries most strongly affected by the crisis, noticeable progress is being made in the correction of unit labor cost and current account developments. The size of product and labor market reforms will further improve the competitiveness of these countries and their capacity to adjust.
Finally, it is essential to push ahead with the European institution building. The ECB welcomes the Commission’s proposal of September 12, 2012 for a single supervisory mechanism, SSM, involving the ECB to be established through a Council regulation on the basis of Article 127(6) of the treaty. The Governing Council considers an SSM to be one of the fundamental pillars of a financial union and one of the main building blocks vtowards a genuine economic and monetary union. We will formally issue a legal opinion in which we will in particular take into account the following principles — a clear and robust separation between supervisory decision-making and monetary policy, appropriate accountability channels, a decentralization of tasks within the Eurosystem, an effective supervisory framework ensuring coherent oversight of the euro area banking system, and full compatibility with a single market framework, including the role and prerogatives of the European Banking Authority.
As the Commission proposal sets out an ambitious transition schedule towards the SSM, the ECB has started preparatory work so as to be able to implement the provisions of the Council regulation as soon as it enters into force. We are now at your disposal for questions.