FRANKFURT Aug 7 The European Central Bank held borrowing rates on Thursday as it pinned its hopes on lending measures to bolster a struggling euro zone economy facing further damage from the Ukraine conflict.
Following are comments by ECB President Mario Draghi at a post-meeting news conference.
RELATIVE PRICE ADJUSTMENT
"What we define by relative price adjustment often is not a relative price adjustment within certain sectors where simply people just change prices in their catalogues. Often it reflects different reality where entire sectors are going to be annihilated, are going to be destroyed and new productions have to take place, new sectors have to start their activity. And this is a much longer process ... because it takes changes, it takes movements of factors, people from one sector to another. And we may well observe this phenomenon in the so-called deflation countries."
SANCTION-HIT RUSSIAN BANKS IN EURO ZONE
"These banks will be basically moving within the EU regulations. But we will do something slightly more than that, in a sense that these banks will have access to refinancing, but they will be asked to announce their requirements first, and second, approval will be granted if it has been confirmed that the requested liquidity will not be used to circumvent EU restrictive measures. So banks will have to explain why they need the money, and the national central banks' inspectors, supervisors will assess their statements."
STRUCTURAL REFORM LAGGARDS
"We have to distinguish between countries that have done reforms and those that have done nothing or have done very little reforms. You mentioned Germany.
"A completely different story is for countries that haven't done reforms, or have done very little of them, where you've been observing this weakness now for quarter after quarter, and that's where you mentioned public investment. That's what I meant by growth-friendly fiscal consolidation.
"These countries have to do growth-friendly fiscal consolidation, meaning less taxes. We are talking about a part of the world where taxation is the highest and these countries ...
"So lower taxes, lower current expenditure and possibly higher government investment expenditure. But all this is possible only if the better conditions are complemented by structural reforms."
WAGE GROWTH AND INFLATION
Asked about wage growth:
"Anything that would bring these inflation rates towards 2 percent is welcome but it's not for the ECB to determine wages for the euro area, or for single countries."
BES NOT SYSTEMIC INCIDENT
How was the situation at Portuguese bank Banco Espirito Santo (BES) able to happen? Does this not suggest weaknesses in the monitoring system?
"I can't comment directly on individual banks, but what I can say about what the Portuguese authorities have done in this case - they certainly took swift action on that case both them and the European competition arm worked very well together and basically addressed a situation which could be potentially complex.
"The market reaction both in Portugal and out of Portugal basically confirmed this view. This view that the authorities have been swift and effective and what could have been a systemic incident is actually now considered ... an episode which is restricted to this bank and to the owners of this bank."
LOWER GROWTH POSSIBLE
"It is quite clear that if geopolitical risks materialise, it is quite clear that the next two quarters will show lower growth."
EURO/U.S. RATES' DIVERGENCE
"Markets have perceived that the euro, that monetary policies in the euro and in the United States are and are going to stay on a diverging path for a long period of time. Other central banks have been reducing their exposure to the euro. And if you look at how markets are expecting real rates to be for the foreseeable future, meaning until 2017, no, 2019, current expectations are that real rates will remain negative in the euro area for a much longer time than they will be in the United States.
"I think that is one of the major developments that I would see pick up from what happened in the last three, four months."
DECOUPLING FROM U.S.
Asked about use of QE as an 'insurance policy', Draghi said:
"The monetary policy announcements of last June have been successful ... especially so the negative deposit rate ... We have basically decoupled our monetary conditions from those of the United States ... There has been a general compression in liquidity premia."
EURO EXCHANGE RATE
"The fundamentals for a weaker exchange rate are today much better than they were two or three months ago."
MONEY AND CREDIT
"On money and credit, I think there we see that the money and credit dynamics remain weak. But there are better signs, or say, signs that are less bad than we were used to observe in the past. And they come essentially from two sources. From the figures on money and loans to non-financial corporations. As I've mentioned before you see that the deterioration in lending is gradually smaller and smaller. And they also come from the bank lending survey where the standards of tightness are decreasing, even though they remain tight from an historical perspective and the interesting thing for the first time we're observing a pick-up in demand for loans."
"We haven't observed any decline on the medium to long-term (inflation) expectations. Long-term expectations remain anchored at 2 percent, other expectations remained anchored at the previous levels. Short-term expectations indeed have declined."
HEIGHTENED GEOPOLITICAL RISK
"Geopolitical risks are heightened, are higher than they were a few months ago. And some of them, like the situation in Ukraine and Russia will have a greater impact on the euro area than they ... have on other parts of the world.
"Now, it's hard to assess this impact at the beginning of these crises. If one looks at the figures for trade or financial flows, they would by and large reveal a picture of very limited interconnections. Even as we go and look at the main financial institutions, while we count the financial institutions that are especially exposed to Russia (there are fewer) than a handful of names."
MORE ON PURCHASING ASSET-BACKED SECURITIES
"I can only reaffirm that the Governing Council is unanimous in its commitment to also use unconventional measures like ABS purchases, like QE, if our medium-term outlook for inflation were to change...
"We have intensified preparations on the ABS, the various committees of the ECB are now working on that...
"We are proceeding with our work, regardless of what the timing is for possible regulatory changes in this area."
"We do expect a sizeable pick-up ... Market estimates would seem to say that overall ... a pick-up (of) between 450 and 850 billion (euros) should materialise."
"We will closely monitor the repercussions of heightened political risk and exchange rate developments."
PURCHASE OF ASSET-BACKED SECURITIES
"We have intensified preparatory work related to outright purchases in the asset-backed securities market to enhance the functioning of the monetary policy transmission mechanism."
"The targeted long-term refinancing operations (TLTROS) that are to take place over the coming months will enhance our (accommodative) monetary policy stance."
DOWNSIDE ECONOMIC RISKS
"The risks surrounding the economic outlook for the euro area remain on the downside. In particular, heightened geopolitical risk as well as developments in emerging market economies and global financial markets may have the potential to affect economic conditions negatively, including through effects on energy prices and global demand for euro area products."
"The Governing Council is unanimous in its commitment to also use unconventional instruments within its mandate should it become necessary to further address the risks of too prolonged a period of low inflation."
EASING MONETARY POLICY STANCE
"The monetary policy measures decided in early June have led to an easing of the monetary policy stance. This is line with our forward guidance and adequately reflects the outlook for the euro area economy as well as the differences in terms of the monetary policy cycle between major advanced economies."
"ECB interest rates will remain at the current level for an extended period of time."
(EMEA MPG Desk +44 207 542 4441)