Mario Draghi: IMFC Statement
Statement by Mr Mario Draghi, President of the European Central Bank, at the fortieth meeting of
the International Monetary and Financial Committee, Washington DC, 18 October 2019.
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Euro area developments and outlook
The euro area economy has expanded at a slower pace since the beginning of last year, marking
a sizeable moderation in the pace of economic expansion. According to the latest Eurostat
release, quarterly GDP growth was 0.2% in the second quarter of 2019. This slowdown in growth
mainly reflects the prevailing weakness of international trade in an environment of prolonged
global uncertainties, which are particularly affecting the euro area manufacturing sector. These
developments are also reflected in economic sentiment indicators that have continued to worsen
over recent months. At the same time, the unemployment rate in the euro area has continued its
downward trend, falling to its lowest level since May 2008. The number of people in employment
has increased by more than 11 million since mid-2013. The services and construction sectors
show ongoing resilience and the euro area expansion is also supported by favourable financing
conditions, further employment gains and rising wages, the mildly expansionary euro area fiscal
stance and the ongoing - albeit somewhat slower - growth in global activity.
Since the IMF Spring Meetings in April 2019, short-term economic projections have been revised
downwards. The latest ECB staff macroeconomic projections for the euro area, published in
September, put annual real GDP growth at 1.1% in 2019, 1.2% in 2020 and 1.4% in 2021. The
risks surrounding the euro area growth outlook remain tilted to the downside and mainly pertain
to the prolonged presence of uncertainties related to geopolitical factors, the rising threat of
protectionism and vulnerabilities in emerging markets. We welcome a deal on an orderly exit of
the United Kingdom from the European Union.
Headline inflation in the euro area has lately been hovering around 1.0% and stood at 0.8% in
September, lower than in the first months of this year, when it was around 1.5%. This largely
reflects the decline in the annual rate of change in energy prices. Measures of underlying inflation
remain generally muted. While labour cost pressures have strengthened and broadened amid
tightening labour markets, their pass-through to inflation is taking longer than previously
anticipated. Looking ahead, underlying inflation is expected to increase over the medium term,
supported by our monetary policy measures, the ongoing economic expansion and robust wage
growth. The latest ECB staff projections foresee annual euro area headline inflation of 1.2% in
2019, 1.0% in 2020 and 1.5% in 2021.
Latest monetary policy decisions
Confronted with a more protracted weakness of the euro area economy, the persistence of
prominent downside risks, and muted inflationary pressures, resulting in a continued shortfall of
medium-term inflation with respect to its aim, the ECB's Governing Council decided in
September on a package of monetary policy measures to support the convergence of inflation
towards its medium-term inflation aim. This package includes the following elements:
The interest rate on the deposit facility was reduced by 10 basis points, to 0.50%. The
Governing Council expects the key ECB interest rates to remain at their present or lower
levels until it has seen the inflation outlook robustly converge to a level sufficiently close
to, but below, 2% within its projection horizon, and such convergence has been
consistently reflected in underlying inflation dynamics.
Net asset purchases will be restarted under the asset purchase programme (APP) at a
monthly pace of €20 billion as from 1 November. The Governing Council expects these
purchases to run for as long as necessary to reinforce the accommodative impact of its
policy rates, and to end shortly before it starts raising the key ECB interest rates.
Reinvestment of the principal payments from maturing securities purchased under the
APP will continue, in full, for an extended period of time past the date when the
Governing Council starts 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.
The modalities of the new series of quarterly targeted longer-term refinancing operations
(TLTRO III) were changed to preserve favourable bank lending conditions, ensure the
smooth transmission of monetary policy and further support the accommodative stance
of monetary policy. The interest rate for TLTRO III can now be as low as the average
interest rate on the deposit facility and the maturity of the operations was extended from
two to three years.
Finally, the Governing Council decided to introduce a two-tier system for reserve
remuneration in which part of banks' holdings of excess liquidity will be exempt from the
negative deposit facility rate, so as to support the bank-based transmission of monetary
policy.
This comprehensive package of monetary policy decisions provides substantial monetary
stimulus to ensure that financial conditions remain very favourable and support the euro area
expansion, the ongoing build-up of domestic price pressures and, thus, the sustained
convergence of inflation to the Governing Council's medium-term inflation aim. The Governing
Council continues to stand ready to adjust all of its instruments, as appropriate, to ensure that
inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry.
The effectiveness of monetary policy can and should be enhanced by other policies. On the
fiscal side, the mildly expansionary euro area fiscal stance is currently providing some support to
economic activity. In view of the weakening economic outlook and the continued prominence of
downside risks, governments with fiscal space that are facing a slowdown should act in an
effective and timely manner. At the same time, governments in countries with high public debt
should pursue prudent policies and deliver on their structural balance targets. This will create the
conditions for automatic stabilisers to operate freely. All countries should reinforce their efforts to
achieve a more growth-friendly composition of public finances. The implementation of structural
policies in euro area countries needs to be substantially stepped up. The transparent and
consistent implementation of the EU's fiscal and economic governance framework, over time
and across countries, also remains essential.
Euro area banking sector developments
The resilience of the euro area banking sector remained solid and was supported by both
microprudential and macroprudential actions, such as the increase of countercyclical capital
buffers by national authorities in a number of countries. The aggregate Common Equity Tier 1
ratio of significant institutions at the end of the second quarter of 2019 stood at 14.3%,
unchanged from the end of 2018. At the same time, vulnerabilities related to liquidity and funding
risks, including those related to US dollar activities, have abated amid lower funding costs and
broader access to bank bond markets. Non-performing loan ratios improved further to 3.6% over
the first half of 2019, from 3.8% at the end of 2018. However, banks' profitability in the euro area
remains low due to both structural and cyclical factors, with some weakening since the beginning
of the year on account of slower economic growth.
The financial stability environment remains challenging, as the global economic outlook has
deteriorated. There are mild signs of overstretched valuations in the euro area in some riskier
segments of the financial markets, as well as in real estate markets, with marked differences
across regions. In addition, the non-bank financial sector has continued to take on risk.
In this environment, it is particularly important to ensure that the financial sector maintains its
resilience and has sufficient buffers in place that can be used in times of stress. These buffers
would mitigate procyclicality and avoid excessive deleveraging if risks were to materialise.
Deepening the Economic and Monetary Union
While the euro area is now more robust than before the crisis, Economic and Monetary Union
(EMU) needs to be strengthened, first and foremost by implementing what has already been
agreed and finishing the common projects we have started: completing the banking union,
strengthening the operational capacity of the European Stability Mechanism in full compliance
with EU law, and making true the ambitious design of the capital markets union. We should also
rekindle trust in our economic and fiscal framework by making it more effective in ensuring sound
policymaking at the national level. At the European level, these actions are further supported by
the envisaged budgetary instrument for convergence and competitiveness. However, like existing
federations, the euro area will also need a central fiscal instrument to act countercyclically over
time. A stable and resilient euro area economy that contributes to global economic growth and
financial stability needs a more complete EMU.
The global policy agenda
The international environment continues to pose considerable risks, with the further escalation of
trade tensions and rising geopolitical risks. Multilateral cooperation is needed to reduce trade
frictions and mitigate risks of major disruptions to global economic activity and financial stability.
Preserving openness is crucial if the global economy is to thrive and secure its growth potential.
We must remain committed to implementing the agreed post-crisis regulatory reforms and
evaluating their effects to ensure they are working as intended. It will be essential that we do not
backtrack on the progress made during the crisis in strengthening the regulatory and supervisory
framework, and that a level playing field is preserved.
While progress has been made towards more resilient market-based finance worldwide, it is
important to continue monitoring emerging risks and vulnerabilities in the financial system and to
address them if necessary. In view of the potentially systemic nature of these risks,
macroprudential frameworks also need to be extended beyond banking to ensure that authorities
have the appropriate tools to act in a timely manner when needed.
While the first line of defence for national and international stability is to have sound domestic
policies in place, the Global Financial Safety Net (GFSN) strongly supports global financial
stability. The ECB sees a need for the GFSN to be further strengthened with a strong,
quotabased and adequately resourced IMF at its centre, particularly in the face of escalating risks and
high uncertainty. Recognising that an increase in IMF quotas is not possible at this time, the ECB
would strongly welcome a substantial increase in the New Arrangements to Borrow as a
secondbest outcome towards ensuring that the Fund has adequate resources.
The IMF's surveillance is a very valuable external check on national as well as regional policies.
As regards financial surveillance and the forthcoming Financial Sector Assessment Program
Review, the ECB would welcome an agreement for holding a regular euro area review at the
same frequency as for jurisdictions with systemically important financial systems in the future.
An important institutional factor for monetary and financial stability worldwide is central bank
independence, combined with full accountability vis-à-vis the people and their elected
representatives. Currently, central bank independence is being challenged in a number of large
advanced and emerging market economies. It is therefore important to recall that a central
bank's credibility and, ultimately, the successful fulfilment of its mandate hinge on its ability to
choose the appropriate policies independently.
Innovations in payment systems
Finally, as regards innovations in payment systems, depending on their design, stablecoins may
help overcome current shortcomings, especially in cross-border payments. At the same time,
stablecoins can affect the conduct and transmission of monetary policy and may have
implications for the functioning of the international monetary system. Global stablecoin
arrangements now under discussion could impact the safety and efficiency of market
infrastructures and payments or pose risks to financial stability. Stablecoin arrangements also
raise challenges related to anti-money laundering and terrorist financing, consumer protection,
data privacy and other issues. They must therefore be appropriately designed and operated in
accordance with public policy objectives and they must comply with the relevant regulatory,
oversight and prudential standards under the "same business, same risk, same rules" principle
before they go live. Central banks should scale up ongoing efforts to foster the efficiency and
inclusiveness of payment and financial services, in particular by improving cross-border
payments and reviewing and updating the international call for action on financial inclusion, as
well as by strengthening cooperation. Furthermore, they should continue to assess the pros and
cons of issuing central bank digital currencies.