Introductory statement to the press conference (with Q&A)
Central bank: ecb | Type: press_conference | Date: 2019-03-07

INTRODUCTORY STATEMENT

Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. We will now report on the outcome of today’s meeting of the Governing Council, which was also attended by the Commission Vice-President, Mr Dombrovskis.
Based on our regular economic and monetary analyses, we have conducted a thorough assessment of the economic and inflation outlook, also taking into account the latest staff macroeconomic projections for the euro area. As a result, the Governing Council took the following decisions in the pursuit of its price stability objective.
First, we decided to keep thekey ECB interest ratesunchanged. We now expect them to remain at their present levels at least through the end of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.
Second, we intend to continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time past the date when we start raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
Third, we decided to launch a new series of quarterly targeted longer-term refinancing operations (TLTRO-III), starting in September 2019 and ending in March 2021, each with a maturity of two years. These new operations will help to preserve favourable bank lending conditions and the smooth transmission of monetary policy. Under TLTRO-III, counterparties will be entitled to borrow up to 30% of the stock of eligible loans as at 28 February 2019 at a rate indexed to the interest rate on the main refinancing operations over the life of each operation. Like the outstanding TLTRO programme, TLTRO‑III will feature built-in incentives for credit conditions to remain favourable. Further details on the precise terms of TLTRO-III will be communicated in due course.
Fourth, we will continue conducting our lending operations as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the reserve maintenance period starting in March 2021.
Today’s monetary policy decisions were taken to ensure that inflation remains on a sustained path towards levels that are below, but close to, 2% over the medium term. While there are signs that some of the idiosyncratic domestic factors dampening growth are starting to fade, the weakening in economic data points to a sizeable moderation in the pace of the economic expansion that will extend into the current year. The persistence of uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets appears to be leaving marks on economic sentiment. Moreover, underlying inflation continues to be muted. The weaker economic momentum is slowing the adjustment of inflation towards our aim. At the same time, supportive financing conditions, favourable labour market dynamics and rising wage growth continue to underpin the euro area expansion and gradually rising inflation pressures. Today’s decisions will support the further build-up of domestic price pressures and headline inflation developments over the medium term. Significant monetary policy stimulus will continue to be provided by our forward guidance on the key ECB interest rates, reinforced by the reinvestments of the sizeable stock of acquired assets and the new series of TLTROs. In any event, the Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation continues to move towards the Governing Council’s inflation aim in a sustained manner.
Let me now explain our assessment in greater detail, starting with theeconomic analysis. Euro area real GDP increased by 0.2%, quarter on quarter, in the fourth quarter of 2018, following growth of 0.1% in the third quarter. Incoming data have continued to be weak, in particular in the manufacturing sector, reflecting the slowdown in external demand compounded by some country and sector-specific factors. The impact of these factors is turning out to be somewhat longer-lasting, which suggests that the near-term growth outlook will be weaker than previously anticipated. Looking ahead, the effect of these adverse factors is expected to unwind. The euro area expansion will continue to be supported by favourable financing conditions, further employment gains and rising wages, and the ongoing – albeit somewhat slower – expansion in global activity.
This assessment is broadly reflected in the March 2019 ECB staff macroeconomic projections for the euro area. These projections foresee annual real GDP increasing by 1.1% in 2019, 1.6% in 2020 and 1.5% in 2021. Compared with the December 2018 Eurosystem staff macroeconomic projections, the outlook for real GDP growth has been revised down substantially in 2019 and slightly in 2020.
The risks surrounding the euro area growth outlook are still tilted to the downside, on account ofthe persistence of uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets.
According to Eurostat’s flash estimate, euro area annual HICP inflation was 1.5% in February 2019, after 1.4% in January, reflecting somewhat higher energy and food price inflation. On the basis of current futures prices for oil, headline inflation is likely to remain at around current levels before declining towards the end of year. Measures of underlying inflation remain generally muted, but labour cost pressures have strengthened and broadened amid high levels of capacity utilisation and tightening labour markets. Looking ahead, underlying inflation is expected to increase over the medium term, supported by our monetary policy measures, the ongoing economic expansion and rising wage growth.
This assessment is also broadly reflected in the March 2019 ECB staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 1.2% in 2019, 1.5% in 2020 and 1.6% in 2021. Compared with the December 2018 Eurosystem staff macroeconomic projections, the outlook for HICP inflation has been revised down across the projection horizon, reflecting in particular the more subdued near-term growth outlook.
Turning to themonetary analysis, broad money (M3) growth decreased to 3.8% in January 2019, from 4.1% in December 2018. M3 growth continues to be backed by bank credit creation, notwithstanding a recent moderation in credit dynamics. The narrow monetary aggregate M1 remained the main contributor to broad money growth.
The annual growth rate of loans to non-financial corporations declined to 3.3% in January 2019, from 3.9% in December 2018, reflecting a base effect but also, in some countries, the typical lagged reaction to the slowdown in economic activity, while the annual growth rate of loans to households remained at 3.2%. Borrowing conditions for firms and households are still favourable, as the monetary policy measures put in place since June 2014 continue to support access to financing, in particular for small and medium-sized enterprises. The policy measures decided today, and in particular the new series of TLTROs, will help to ensure that bank lending conditions remain favourable going forward.
To sum up, across-checkof the outcome of the economic analysis with the signals coming from the monetary analysis confirmed that an ample degree of monetary accommodation is still necessary for the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.
In order to reap the full benefits from our monetary policy measures, other policy areas must contribute more decisively to raising the longer-term growth potential and reducing vulnerabilities. The implementation ofstructural reformsin euro area countries needs to be substantially stepped up to increase resilience, reduce structural unemployment and boost euro area productivity and growth potential. This is particularly important in view of the overall limited implementation of the 2018 country-specific recommendations, as recently communicated by the European Commission. Regardingfiscal policies, the mildly expansionary euro area fiscal stance and the operation of automatic stabilisers are providing support to economic activity. At the same time, countries where government debt is high need to continue rebuilding fiscal buffers. All countries should continue to increase efforts to achieve a more growth-friendly composition of public finances. Likewise, the transparent and consistent implementation of the European Union’s fiscal and economic governance framework over time and across countries remains essential to bolster the resilience of the euro area economy. Improving the functioning of Economic and Monetary Union remains a priority. The Governing Council welcomes the ongoing work and urges further specific and decisive steps to complete the banking union and the capital markets union.
Mr President, could you give us an idea about the reasons why you decided on the specific features of the TLTRO-III programme? For example why are the maturities two years? Why have you indexed it to the MRO, and also why is the start date in September when the funding becomes relevant for banks' Net Stable Funding Ratios in June already.
My second question is what you would like to achieve with this programme, so are you trying to keep the size of the balance sheet stable? Or are you trying to add extra accommodation?
Draghi: The design of the TLTRO responds to a variety of objectives. The key objective derives from how the situation of bank funding looks like over the next few years. In the coming years we will have a congestion for bank funding caused by the coming to maturity of the existing TLTROs, the coming to maturity of sizable amounts of bank bonds, various regulatory compliances. The TLTROs, as has been said in the introductory statement, maintain [and] preserve favourable bank lending conditions and a smooth transition of monetary policy. Now, the precise design, whether it's two instead of four, do reflect the changed conditions we have today. Now, further details especially on the pricing and other details, will get to be known in due time.
Now, the second question really addresses the substance of today's meeting so let me give you a broad account of how this meeting unfolded. In so doing, I think I'm pretty sure I'll respond to some of the questions you intend to ask. First of all, the decisions: It's four sets of decisions. We moved the calendar-based part of our forward guidance from September to December. The second, we confirm the reinvestment in full of the principle payments from maturing securities. Now, you understand the importance of the chained element in our monetary policy. Having moved the calendar-based, so does the expected – well, whatever the horizon is going to be during which the purchases will take place to keep the stock unchanged, so you see this is adding accommodation.
To answer your question, as a matter of fact you asked me is this adding accommodation? The financing conditions have been – well, monetary policy has been very accommodative, but also financing conditions as a matter of fact have even eased since our last meeting. This is also partly due to the structure of our forward guidance so that expected interest rates have gone down since the last meeting and especially at the end of last year as well. Then the third element is the targeted longer-term refinancing operations that we've just discussed. Then we have the fixed-rate tender procedures with full allotment for as long as necessary, at least until the end of the reserve maintenance period starting in March 2021.
Now, what are the features of all these measures? First of all, they are data-driven. These are decisions that have been taken following a significant downward revision of the forecasts by our staff. Second, you've seen and you've just heard me say that optionality is reiterated in all instances, which means that the Governing Council is both willing and committed to act when if needed, amplifying the use of these instruments based on the data. Third is what I just said; all this takes place in an environment where monetary policy accommodation is already very substantial.
Second point is, how did we get to take these decisions? The answer here is that they were unanimous. There was unanimity and I think given the complexity of the package, I think it's a very, very positive sign for the cohesiveness of the Governing Council and of our deliberations. Third, what is the general context in which these decisions have taken place? Well, we're coming – and maybe we still are – in a period of continued weakness and pervasive uncertainty. That's why the forecast has been revised downwards quite significantly. Now, I will come and comment in a moment about the pervasive uncertainty but the factors that have originally caused this weakness, which are mostly of external source, are still there. The uncertainty is partly related to how long these factors will continue affecting the world economy, the eurozone economy and confidence more generally.
There are two observations to make about the assessment of the outlook. First, the Governing Council expressed confidence, all members expressed confidence in the baseline, which means that we assess the probabilities of a recession as being very low, as well as the probabilities of a de-anchoring of inflation expectations are indeed very low in our assessment. What are the reasons? Well, the reasons are the same that underpinned the strength of our economy in our previous meetings; namely nominal wage growth continues, labour market, though at a kind of slower rate but continues to improve, consumption remains by and large in good shape. Monetary policy remains accommodative and now is even more accommodative, and financing conditions, as I said, have eased up. They were already very easy and they eased up further.
There is a second factor that we've taken into account in maintaining this confidence. It's that it's true that these external factors continued to be hanging on, continue to be weighing on the eurozone economy. But it's also true that governments are responding in their respective jurisdictions with policies that are addressing these problems in the US, in China. The second point to be kept in mind is that you've seen that the revision of the inflation path basically says one thing; we have confidence that [inflation] will converge but we also, at this point in time, think that it's going to take longer to get there. Why is it going to take longer? Well, the weaker growth probably will further slow down the pass-through from higher nominal wages to higher prices, higher inflation and possibly also slow down the closure of the output gap. In other words, theoutwardoutput gap now is closing. These two reasons are important to be kept in mind.
Now, the other important part of today's decision is that we maintained the risk assessment as tilted to the downside. This is infrequent because we usually say when we take some policy actions, the risks get back into balance, but it's happened on other occasions in the past, but not frequently. Why is that? Well, because we are aware that our decisions certainly increase the resilience of the eurozone economy but actually can they address these factors that are weighing on the eurozone economy in the rest of the world? They cannot, so the threat of protection is one factor. Geopolitical considerations also related to whatever happens about the United Kingdom Brexit or United Kingdom exiting, or not exiting, or in the forms in which they will exit from the European Union. The emerging market vulnerabilities, what's happening in China, we know that the Chinese government has reacted, the US government has – the US monetary policy has changed. For example in the US, we have to take into account that there is going to be a waning effect of the fiscal package so a slowdown is projected there all over.
Basically, our actions increase the resilience of the eurozone economy and so make us confident, keep us confident that convergence to a sustainable rate of inflation – our objective – will happen.
Can I ask you about what you said a little bit earlier, that you are standing ready to adjust all of your instruments available? Does that also include the net asset purchase programme? Could you revive it in case the economy is not going any way better, the inflation outlook is going to worsen?