HIGHLIGHTS-Draghi comments at ECB news conference

FRANKFURT Thu Jan 9, 2014 9:39am EST

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FRANKFURT Jan 9 (Reuters) - The European Central Bank left its main interest rate unchanged at a record low of 0.25 percent on Thursday, holding course despite persistent price weakness in the euro zone that has fed concerns about deflation risk.

ASKED IF EURO ZONE CRISIS WAS OVER

"I'd be very cautious about saying that, be very, very cautious... The recovery is there but it's weak, it's modest and as I said many times, it's fragile meaning that there are several risks from financial to economic to geopolitical to political risks that could undermine easily this recovery."

ON GERMANY

"In a speech I gave in Berlin about a month ago I quoted ... Abraham Lincoln. He famously said, you cannot make the weak stronger by making the strong weaker.

"So, you want to promote growth but you are not doing it (by) weakening the country that is best performing in the euro area. All the euro area members benefit from this performance ...

"I never understood very well the idea that making Germany weaker you would benefit other countries in the euro zone."

ASKED IF ELIGIBLE TOOLS INCLUDE OUTRIGHT ASSET PURCHASES

"I don't want to go into the specifics. I want to be absolutely clear that we have a mandate which is to ensure price stability in both directions and the Governing Council is ready to use all the instruments that are allowed by the treaty."

ASKED IF AQR HAD DELAYED RECOVERY IN LENDING

"One certainly might have some short-term deleveraging by the banking system in order to be prepared for the AQR (asset quality review). However, one has to counterbalance this ... with the fact that as you can see, the capital markets have reopened for banks."

WHICH INSTRUMENTS MIGHT ECB USE?

"All instruments that would be allowed by the treaty would be eligible."

"We have several instruments that we can use and their choice ... will depend on what contingency will actually happen. Some of these instruments would address more easily a development in the short-term money markets. Others ... would be meant to address broader worsening of our medium-term outlook. So I think at this point in time it's pointless to speculate which instrument we would use."

DEC INFLATION RATE DISTORTED

"We were all aware that the decline in the inflation rate in December ... first of all was expected, and it was caused by a technical adjustment in the statistics of the services inflation in Germany, which basically produced a much flatter seasonal adjustment and it meant that the December data came out lower than the 0.9 (percent). But fortunately this was a one-off event, so that the January data will not be distorted by this."

DO WE DETECT A STRONGER TONE IN YOUR COMMENTS TODAY ON FORWARD GUIDANCE?

"Yes, you are right. We used firmer words for indicating the strengthening of our forward guidance which basically means that we reiterate our decisiveness to act if needed. ... We think the present market relevance is okay but we think that there are two contingencies that could lead us to act. One is unwarranted tightening of the short-term money markets and the other one is a worsening of our medium-term outlook for inflation. So that is what basically this firmer language is addressing."

MONEY MARKET RATES

"Let me reiterate once again that it is very, very difficult to draw, to derive, to infer, a stable relationship between the excess liquidity figures and the EONIA rates."

PRICE RISKS BALANCED

"The risk to the outlook for price developments continue to be seen as broadly balanced over the medium-term with upside risk relating to higher commodity prices and stronger than expected increases in administered price and indirect taxes and downside risks stemming from weaker than expected economic activity."

DOWNSIDE RISKS

"The risks surrounding the economic outlook for the euro area continue to be on the downside. Developments in global money and financial market conditions and related uncertainties may have the potential to negatively affect economic conditions."

SLOW RECOVERY

"Looking at 2014 and 2015, output is expected to recover at a slow pace, in particular, owing to some improvement in domestic demand supported by the accommodative monetary policy stance. Euro area economic activity should in addition benefit from a gradual strengthening of demand for exports."

MONITORING MONEY MARKETS

"With regard to money market conditions and their potential impact on our monetary policy stance, we are monitoring developments closely and are ready to consider all available instruments.

TO KEEP POLICY HIGHLY ACCOMMODATIVE

"Overall, we remain determined to maintain a high degree of monetary accommodation and to take further decisive action if required."

PROLONGED LOW INFLATION

"We may experience a prolonged period of low inflation to be followed by a gradual upward movement towards inflation rates below but close to 2 percent later on."

REITERATES FORWARD GUIDANCE

"We firmly reiterate our forward guidance and we continue to expect that key ECB interest rates will remain at present or lower levels for an extended period of time." (London MPG Desk +44 207 542 4441)

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