HIGHLIGHTS-Draghi comments at ECB news conference

FRANKFURT Thu Jan 10, 2013 9:51am EST

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FRANKFURT Jan 10 (Reuters) - The European Central Bank held interest rates at a record low of 0.75 percent on Thursday, refraining from a cut following fledgling signs of life in the euro zone economy and with inflation still above target.

Following are comments by ECB President Mario Draghi at a news conference after the meeting.

EURO ZONE ECONOMY

"The economic weakness in the euro area is expected to extend into 2013. In particular, necessary balance sheet adjustments in financial and non-financial sectors and persistent uncertainty will continue to weigh on economic activity. Later in 2013, economic activity should gradually recover."

RISKS TO OUTLOOK

"The risks surrounding the economic outlook for the euro area remain on the downside. They are mainly related to slow implementation of structural reforms in the euro area, geopolitical issues and imbalances in major industrialized countries. These factors have the potential to dampen sentiment for longer than currently assumed and delay further the recovery of private investment, employment and consumption."

RATE DECISION UNANIMOUS

"The real economy continues to be what it was diagnosed in our projections a month ago. So there wasn't any reason really to change the medium-term outlook for price stability, and that is the main reason why our discussion has been unanimous."

"If the decision was unanimous it implies there was no request to have a rate cut."

IS TOO MUCH FISCAL CONSOLIDATION NEGATIVE? SHOULD SOME COUNTRIES MAKE A U-TURN?

Draghi said there were "many comments" of this type. But "so much progress accompanied by so big sacrifices have already taken place that to revert to a situation that has been found to be untenable would not be right."

Consolidation is "unavoidable".

ON RECENT BASEL LIQUIDITY RULE CHANGE

"We welcome these rules. We think the approach taken is realistic."

UNEMPLOYMENT

"Unemployment is "a very important factor in our assessment of price stability." The ECB must analyse "how much of this is structural and how much is cyclical".

"There is very little mobility in this unemployment"

"Monetary policy cannot do much about that."

BIGGEST DOWNSIDE RISKS TO ECB'S OUTLOOK

"We are now back in a normal situation from a financial viewpoint" (but there is no strong recovery). There might be "exuberance in specific local parts of the financial system" that the ECB is keeping an eye on. (Draghi mentioned unspecified leveraged buyouts as an example).

NON-STANDARD MEASURES

"We are not thinking about an exit now, but we see that the system, the economy will exit when it is ready. We are seeing it - the balance sheet is shrinking, TARGET2 balances are going down - but we still see signs of significant fragmentation in the euro area. So to define a turning point, you need a lot of things besides financial market stabilization. You also need to see some signs of recovery, which we have foreseen, but later in this year."

IMPROVEMENT IN FINANCIAL MARKETS

"Bond yields and country CDS are much lower, significantly lower. Stockmarkets have increased. Volatility is at a historical minimum. Loan redemptions, as I just said ... are much lower than they were in September, one-fifth of what they were in September. We have seen strong capital inflows in the euro area."

MARKET REFORMS

"Market reforms to increase competition and competitiveness are essential, accompanied by measures to improve the functioning of labour markets. Such reforms will boost the euro area's growth potential and employment and improve the adjustment capacities of the euro area countries."

BANKS

"In order to ensure adequate transmission of monetary policy to the financing conditions in euro area countries, it is essential to continue strengthening the resilience of banks where needed. 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."

BANKING SUPERVISION

"Decisive steps for establishing an integrated financial framework will help to accomplish this objective. The future single supervisory mechanism is one of the main building blocks. It is a crucial move towards reintegrating the banking system."

MARKET SENTIMENT

"More recently, several conjunctural indicators have broadly stabilized, albeit at low levels and financial market confidence has improved significantly."

INFLATION

"HICP inflation rates have declined over recent months as anticipated and are expected to fall below 2 percent this year. Over the policy-relevant horizon, inflationary pressures should remain contained. The underlying pace of monetary expansion continues to be subdued."

(London MPG Desk +44 (0)207 542 4441)

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