FRANKFURT, Feb 7 (Reuters) - The European Central Bank left interest rates unchanged on Thursday and President Mario Draghi faced a grilling at a press conference over the ECB’s sensitivity to a sharp rise in the euro and his connection to an Italian banking scandal.
Following are comments by Draghi at the news conference after the bank’s policy meeting.
”You have had, for about a week and a half, a Banca d‘Italia detailed account on the website of the whole story where you could see that Banca d‘Italia has done everything it should and appropriately and in time.
“(Also) the IMF has publicly stated that their preliminary view is that the Bank of Italy took timely and appropriate action within the limits of legal framework to address problems at MPS. Oversight was close and supervisory action escalated appropriately as MPS’s problems became acute ...”
“Don’t forget that it was me who signed both inspections. It was Banca d‘Italia that gave most of the papers and documentation to the judiciary. The point is that if you have a fraud, normally supervisors don’t have police powers or judiciary powers. So they look for supervision.”
”We never ... pre-commit, but, as I said, our monetary policy stance is accommodative, our overnight interest rates are close to zero ... we are in the full allotment mode, ready to offer liquidity to the banking system as needed.
”According to our estimates even after the second repayment of the LTRO, the excess liquidity should remain well above 200 billion (euros).
“I wouldn’t make too much of the increase in Eonia which we have seen recently because it may be due to a variety of factors, some of which are actually structural, depending on which banks have actually repaid the LTRO. So changing the composition of the banks in Eonia you would have an effect on the levels of Eonia itself and also you have other factors like volatility. But ... I think I have said many times that our monetary stance remains accommodative.”
”This situation remains fragile, remains fragile and we see that this fragility is signalled by the credit flows, which ... remained weak.
“Also, if you look at the bond issuance, you clearly see that, while large corporates that can issue bonds can do so and finance themselves via capital markets, the SMEs that have to finance themselves via the banking market, the banks, are actually constrained. For them, credit is and remains tight.”
”We see cross-border activity increasing by other euro area countries into the non-core countries, but also outside the euro area into both core and non-core countries ...
“This gives a picture of certainly less tight financial markets than there were a year ago. Let me also add that corporate, corporate funding, non-banking corporate funding is also having a good season. Corporate issuance has actually been very significant.”
Asked how long full allotment mode will continue. Beyond mid-year?
“There are plenty of signs that we are in full allotment mode and ready to offer liquidity to the banking system as needed.”
”The appreciation is, in a sense, a sign of return of confidence in the euro. But net of the confidence, the return of confidence, exchange rates should reflect fundamentals and by and large, both the nominal and the real effect of exchange rates are on their - or about their long-term averages.
”However, as I said last time, the exchange rate is not a policy target, but it is important for growth and price stability and we certainly want to see whether the appreciation is sustained will alter our risk assessment as far as price stability is concerned.
“In the meantime, we will maintain our accommodative monetary policy stance and we will closely monitor money market developments.”
“On Ireland, let me say this. There wasn’t a decision to take. We, I mean the Governing Council, unanimously took note of the Irish operation and I am going to refer you to the Irish government and the Irish Central Bank for the details of this operation, which was designed and undertaken by the Irish government and the Irish central bank. I can only say today that we took note of this.”
“Risks to the outlook for price developments continue to be seen as broadly balanced over the medium term with upside risks relating to higher administered prices and indirect taxes, as well as higher oil prices and downside risks from weaker economic activity and more recently, the appreciation of the exchange rate.”
“The risks surrounding the economic outlook for the euro area continue to be on the downside. They relate to the possibility of weaker-than-expected domestic demand in exports, slow implementation of structural reforms in the euro area, as well as geopolitical issues and imbalances in major industrialized countries, which could both have an impact on developments in global commodities and financial markets.”
Monetary policy “will remain accommodative with the full allotment mode of liquidity provision.”
”This reflects the improvement in financial market confidence. Repayments ... are at the discretion of the counterparties who must appropriately assess their funding situation, their ability to provide new loans to the economy and their resilience to shocks.
“We will closely monitor conditions in the money market and their potential impact on the stance of our monetary policy, which will remain accommodative with the full allotment mode of liquidity provision.”
”The economic weakness in the euro area is expected to prevail in the early part of 2013.
“Later, in 2013, economic activity should gradually recover supported by our accommodative monetary policy stance, the improvement in financial market confidence and reduced fragmentation, as well as a strengthening of global demand.”
“HICP inflation rates have declined further, as anticipated and are expected to fall below 2 percent in the coming months. Over the policy-relevant horizon, inflationary pressures should remain contained. The underlying pace of monetary expansion continues to be subdued.”
London MPG Desk, +44 207 542 4441