Bloomberg News

Draghi Says Euro Area Growth Risks Remain ‘On the Downside’

November 08, 2012

European Central Bank President Mario Draghi comments on inflation, the economic outlook for the euro- area, the ECB’s bond-purchase program and the region’s sovereign debt crisis.

He made the remarks at a press conference in Frankfurt today after policy makers kept interest rates unchanged at a record low of 0.75 percent.

On growth projections:

“Certainly we’ll clearly monitor the developments in the economy and we’ll take the developments into account in our December projections. Certainly the outlook is being revised and there’s a picture of weaker economy. So all this is bound to influence our projections in December.”

On monetary policy:

“The governing council decided to keep interest rates unchanged. We have not discussed what we’re going to do next year in terms of monetary policy.”

“We see that the price behavior is in line with our medium-term objectives. We see price stability over the medium term. Consider our monetary policy is already very accommodative. Consider not only the already very low level of interest rates, real interest rates are negative in a large part of the euro area, consider we’ve taken several measures” over the past year.

“We stand ready with the OMT, we also stand ready with our normal monetary policy instruments.”

On rate-cut expectations:

“I can’t comment.”

On ECB bond-buying:

“We’re ready to undertake outright monetary transactions, which will help to avoid extreme scenarios.”

“It’s entirely in the hands of governments. The conditions of OMT are clear. We stand ready to act. The OMT is a fully effective backstop.”

“The way the OMT has been designed foresees that as a necessary condition a country should sign with an ESM program. But it’s the necessary condition, it’s not also the sufficient condition. The governing council will take the decision in total independence. We have to make our monetary policy assessment, we have to make an assessment of the actual state of fragmentation.”

On OMT use:

“Are you asking me could there be an OMT without conditionality? The answer is no.”

On effect of OMT announcement on capital markets:

“Since the OMT announcement there have been a series of improvements. There has been a return of flows from the rest of the world, in particular U.S. money-market funds.”

“Even though overall it continues to be a small exposure with respect to euro-area banks as to what it was at the beginning of last year, it has gone up. This form of lending has shifted considerably from secured to unsecured lending. This is a positive sign.”

“Another positive sign is that there has been some limited bond placement by euro-area institutions. There have been a few issuances by Ireland and Portugal. The share of foreign holdings of these bonds, by Spain and Italy, has gone up, which is something we haven’t seen for a while.”

“All of this is a good sign.”

On bank lending:

“To a large extent, this subdued loan dynamic reflects the weak outlook for GDP, heightened risk aversion and the ongoing adjustment in the balance sheets of households and enterprises.”

On financial conditions:

“One should look at the fragmentation of the euro area. Are we satisfied with the financial conditions? No we’re not at all satisfied. Our priority now is to repair the monetary transmission channels so” it “will be able to deliver price stability.”

On LTRO funding:

“Whether banks return LTRO because they don’t lend, because of risk aversion or because credit demand is weak, I’m not in a position to say.”

“The important thing with the LTROs was we removed again tailrisks coming from the lack of funding that would have taken place in the first quarter of this year. The objective has been achieved.”

On the risk of deflation:

“I never mentioned deflation. Deflation is a generalized fall in price level across sectors. And it’s self-sustaining. So far, we have not seen signs of deflation, not only on a euro- area level but also on a country level.”

On inflation risks:

“I think I always said that risks are broadly balanced. On one hand you have the downside risks that come from high unemployment and weak economic activity, on the other hand you have upside risks that come from oil prices and the widespread use of indirect taxation by countries that need to consolidate their budgets.”

On a possible Spanish request for aid:

“It’s entirely up to the Spanish government. The ECB has produced the OMT, it’s a fully effective backstop mechanism. It has removed tailrisk. The conditions are also very, very clear.”

On Greece:

“The ECB and the governing council certainly welcome the outcome of the vote yesterday. It’s an important step” and “represents progress.”

“Another vote is expected on Saturday on the budget. The ECB assures price stability and pursues the restoration of monetary-policy transmission channels but can’t do monetary financing.”

On Cyprus:

“We consider this financing to be temporary. We don’t consider ELA monetary financing. We look with certainly great attention to developments in Cyprus. Again, however, the ultimate response to these situations is in the government’s actions, it’s not with the ECB.”

On government reforms:

“Both the euro area as a whole and the individual forming the euro area, both of them have a fundamental position which is way more balanced than the U.S. but also other countries, Japan or the U.K. The euro area has a current account balance which is basically in balance, zero.”

“Unit labor costs are on their way down. The fiscal consolidation that has taken place is amazing. And looking at other parts of the world, it’s not so amazing at all. All of this poised the euro area for a recovery, which is probably going to be slow and gradual but also solid.”

“What we have to overcome is the sort of fragmentation. Collectively we made significant progress on that route.”

On the euro-area economy:

“Economic activity in the euro area is expected to remain weak. The necessary process of balance sheet adjustment and high uncertainty continue to weigh on the economic outlook.”

“Euro-area real GDP contracted 0.5 percent quarter on quarter in the second quarter of 2012, following flat growth in previous quarter. As regards second half, available indicators continue to signal weak activity.”

“Looking ahead to the next year, the growth momentum is expected to remain weak. It continues to be supported by our standard and non-standard policy measures.”

“The risks surrounding the economic outlook remain on the downside.”

On inflation:

“Owing to high energy prices, and increases in indirect taxes, inflation rates are likely to remain above 2 percent for the remainder of 2012. They’re expected to fall below that level over the course of next year. The underlying pace of monetary expansion continues to remain subdued.”

“On the basis for current future prices of oil, inflation rates could remain at elevated levels before declining below 2 percent in the course of next year. Underlying price pressures should remain moderate. The current level of inflation should thus remain transitory.”

“We’ll continue to monitor closely increases in wages and costs.”

On unit-labor costs:

“There has been an improvement in several countries. This may be partly the consequence of an increase in productivity, which is cyclical, due to the fall in economic activity in these countries. We also observe an improvement in current-account balances in these countries.”

On rising gold prices:

“We are constantly looking at inflationary expectations over several horizons and no matter what time span we look at, wee see that they’re solidly anchored.”

To contact the reporters on this story: Stefan Riecher in Frankfurt at sriecher@bloomberg.net; Simone Meier in Zurich at smeier@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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