Introductory statement to the press conference (with Q&A)
Central bank: ecb | Type: press_conference | Date: 2014-10-02

INTRODUCTORY STATEMENT

Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. I would like to thank Governor Visco for his kind hospitality and express our special gratitude to his staff for the excellent organisation of today’s meeting of the Governing Council. We will now report on the outcome of our meeting.
Based on our regular economic and monetary analyses, and in line with our forward guidance, we decided to keep the key ECB interest rates unchanged. Following up on the decisions of 4 September 2014, we also decided on the key operational details of both the asset-backed securities purchase programme and the new covered bond purchase programme.
This will allow us to start purchasing covered bonds and asset-backed securities (ABSs) in the fourth quarter of 2014, starting with covered bonds in the second half of October. The programmes will last for at least two years. Together with the series of targeted longer-term refinancing operations to be conducted until June 2016, these purchases will have a sizeable impact on our balance sheet.
The new measures will support specific market segments that play a key role in the financing of the economy. They will thereby further enhance the functioning of the monetary policy transmission mechanism, facilitate credit provision to the broad economy and generate positive spillovers to other markets. Taking into account the overall subdued outlook for inflation, the weakening in the euro area’s growth momentum over the recent past and the continued subdued monetary and credit dynamics, our asset purchases should ease the monetary policy stance more broadly. They should also strengthen our forward guidance on the key ECB interest rates and reinforce the fact that there are significant and increasing differences in the monetary policy cycle between major advanced economies.
Together with the monetary accommodation already in place, the determined implementation of the new measures will underpin the firm anchoring of medium to long-term inflation expectations, in line with our aim of maintaining inflation rates below, but close to, 2%. As all our measures work their way through to the economy they will contribute to a return of inflation rates to levels closer to our aim. Should it become necessary to further address risks of too prolonged a period of low inflation, the Governing Council is unanimous in its commitment to using additional unconventional instruments within its mandate.
A separate press release will provide further information on the modalities of our new purchase programmes for ABSs and covered bonds. It will be released at 3.30 p.m.
Let me now explain our assessment in greater detail, starting with the economic analysis. Following four quarters of moderate expansion, euro area real GDP remained unchanged between the first and second quarter of this year. Survey data available up to September confirm the weakening in the euro area’s growth momentum, while remaining consistent with a modest economic expansion in the second half of the year. Looking ahead to 2015, the outlook for a moderate recovery in the euro area remains in place, but the main factors and assumptions shaping this assessment need to be monitored closely. Domestic demand should be supported by our monetary policy measures, the ongoing improvements in financial conditions, the progress made in fiscal consolidation and structural reforms, and lower energy prices supporting real disposable income. Furthermore, demand for exports should benefit from the global recovery. At the same time, the recovery is likely to continue to be dampened by high unemployment, sizeable unutilised capacity, continued negative bank loan growth to the private sector, and the necessary balance sheet adjustments in the public and private sectors.
The risks surrounding the economic outlook for the euro area remain on the downside. In particular, the recent weakening in the euro area’s growth momentum, alongside heightened geopolitical risks, could dampen confidence and, in particular, private investment. In addition, insufficient progress in structural reforms in euro area countries constitutes a key downward risk to the economic outlook.
According to Eurostat’s flash estimate, euro area annual HICP inflation was 0.3% in September 2014, after 0.4% in August. Compared with the previous month, this reflects a stronger decline in energy prices and somewhat lower price increases in most other components of the HICP. On the basis of current information, annual HICP inflation is expected to remain at low levels over the coming months, before increasing gradually during 2015 and 2016.
The Governing Council will continue to closely monitor the risks to the outlook for price developments over the medium term. In this context, we will focus in particular on the possible repercussions of dampened growth dynamics, geopolitical developments, exchange rate developments and the pass-through of our monetary policy measures.
Turning to the monetary analysis, data for August 2014 continue to point to subdued underlying growth in broad money (M3), with the annual growth rate increasing moderately to 2.0% in August, after 1.8% in July. Annual growth in M3 continues to be supported by its most liquid components, with the narrow monetary aggregate M1 growing at an annual rate of 5.8% in August.
The annual rate of change of loans to non-financial corporations (adjusted for loan sales and securitisation) remained negative at -2.0% in August, after -2.2% in the previous month. On average over recent months, net redemptions have moderated from the historically high levels recorded a year ago. Lending to non-financial corporations continues to reflect the lagged relationship with the business cycle, credit risk, credit supply factors and the ongoing adjustment of financial and non-financial sector balance sheets. The annual growth rate of loans to households (adjusted for loan sales and securitisation) was 0.5% in August, broadly unchanged since the beginning of 2013.
Against the background of weak credit growth, the ECB is now close to finalising the comprehensive assessment of banks’ balance sheets, which is of key importance to overcome credit supply constraints.
To sum up, a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis confirms the recent decisions taken by the Governing Council to provide further monetary policy accommodation and to support lending to the real economy.
Monetary policy is focused on maintaining price stability over the medium term and its accommodative stance contributes to supporting economic activity. However, in order to strengthen investment activity, job creation and potential growth, other policy areas need to contribute decisively. In particular, the legislation and implementation of structural reforms clearly need to gain momentum in several countries. This applies to product and labour markets as well as to actions to improve the business environment for firms. As regards fiscal policies, euro area countries should not unravel the progress already made and should proceed in line with the rules of the Stability and Growth Pact. This should be reflected in the draft budgetary plans for 2015 that governments will now deliver, in which they will address the relevant country-specific recommendations. The Pact should remain the anchor for confidence in sustainable public finances, and the existing flexibility within the rules should allow governments to address the budgetary costs of major structural reforms, to support demand and to achieve a more growth-friendly composition of fiscal policies. A full and consistent implementation of the euro area’s existing fiscal and macroeconomic surveillance framework is key to bringing down high public debt ratios, to raising potential growth and to increasing the euro area’s resilience to shocks.
My first question would be, if you could give us some more details on the ABS purchase programme. What will be the size? How will it evolve, if the size of the purchase programme will be changing over time? And also what about the rating of the ABS you will buy, thinking specifically about those from Greece and Cyprus?
My second question will be on the exchange rate. The euro has depreciated in recent weeks. How do you evaluate this depreciation, and if you think this is a consequence of the ECB policies?
First of all, all the details, almost all the details of the programme, will come out in the press release at 3.30 p.m. Let me say, it’s hard to assess a figure, to give a figure on this programme as such, because there are several interactions between the ABS programme, the covered bond programme and the TLTRO programme. The overall impact of these three measures on our balance sheet size will be significant. And our balance sheet, as I think I said in the European Parliament, is expected to be steered towards the dimension, the size, it had at the beginning of 2012.
On the ratings, again the details will be in the press communiqué. But basically, we’ve been accepting ABS in our collateral for ten years, so it was quite natural to have as much similarity as possible with our collateral rules when we come to risk assessment. And that’s what’s happened basically, with a few adjustments that are inspired by simple considerations.
First of all, when we talk about an outright purchase, it’s kind of different than just lending against collateral, which is with you on a temporary basis. The second thing is that this programme, like the TLTROs, is oriented to boosting lending to SMEs, and that’s why the ABS that we are focusing on are ABS that are meant to be simple and transparent, namely that the content of these ABS ought to be loans and similar lending that is easy to read and price and interpret. While in our collateral rules, we are accepting also structured ABS, we will not orient our purchase programme towards that sort of ABS because it would not be in synch with our objective to boost lending to the real economy.
The third point is that we want to be as inclusive as possible. But with prudence, so that we have decided to include countries that have a rating below BBB-, like Greece and Cyprus, applying certain derogations, with two caveats. The first is that there is a series of measures that mitigate risk for the specific purchases that are to happen there, so that the assets bought there would be risk-equivalent to assets bought elsewhere, so for example, size-wise, type-wise. Then there is a second, I would say, caveat or prudence which is basically that the countries ought to have an ongoing programme with the EU. I think I gave you the broad lines of what we have decided really. Then the rest will be clearer in the press communiqué.
On the exchange rate I have said several times, it’s not a policy target for us. As far as the exchange rate communication is concerned, we’ll basically comply and adhere to the agreed terms of reference in the G20 communiqué on this issue. It’s however important for price stability and it’s important for growth, and to a great extent the behaviour we’ve seen is the outcome of the different economic situations, the difference in our business cycle between us and the rest, or most of the other jurisdictions, which in turn induces a difference and a diverging path in our monetary policies.
Your inflationary expectations have again gone down below 2% on the five year on five year. Do you regard inflationary expectations still anchored at this stage down below 2%, after briefly going up after your Jackson Hole speech?
The other question is that, given that the measures you’re proposing today, or the details of the measures you’re proposing, can only have an impact over a considerable period of time, if you’re considering measures of more immediate impact, such as the purchase of public sector government bonds? And did any board members propose that or suggest that at today’s meeting?
First of all the inflation expectations. Let me get this clear, because there has been a certain amount of misunderstanding in the last few weeks. We don’t use one single measure of inflationary expectations. We use a broad range of indicators, and our inflation expectations measures have gone down, especially on the short horizons, and are now around eight points below 2% on the five year on five year. So we look at that definitely with great attention.
I would say that the measures we’ve taken have been determined exactly because our medium-term outlook on inflation expectation has worsened and we see that the risks have increased. So we think, and we have said this many times, we think that to have a prolonged period of too low inflation is harmful for the economy and that’s why the actions we’ve taken since June onward are exactly meant to underpin our inflation expectations at 2% in the medium term.
There is no doubt that these measures, like the TLTROs and the ABS and the covered bond programme, will unfold over a certain horizon, and we have done a lot of things since June. We have done a lot of unprecedented things, if you think about it well. We lowered the interest rates and we went negative on the rate of the deposit facility. We launched this ABS programme, which is another unprecedented measure. We launched the third covered bond programme, with ambitions and objectives way higher than the first and the second covered bond programme. We launched the TLTROs, again unprecedented in its shape. So let’s see.
But certainly, having said that, I just said how closely we are watching inflation and inflation expectations in the medium term, and I can only reiterate that the Governing Council is unanimous in its commitment to using other unconventional instruments if it were to judge that the risk of too low inflation for too prolonged a time were to deteriorate.