Mario Draghi: IMFC Statement
Statement by Mr Mario Draghi, President of the European Central Bank, at the thirty-eighth
meeting of the International Monetary and Financial Committee, Bali, Indonesia, 12 October 2018.
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The euro area economy continues to expand in a broad-based manner, across countries and
sectors, despite some moderation following its strong growth in 2017. The economy grew by
2.1% year-on-year in the second quarter of this year. It continues to exhibit a high level of
capacity utilisation, and labour markets are tightening in several countries and sectors. The
unemployment rate in the euro area has dropped to its lowest level since 2008, and the number
of people in employment has increased by more than nine million since mid-2013. The latest
economic indicators suggest that, overall, this broad-based growth in the euro area will continue.
Our monetary policy measures continue to underpin domestic demand, which remains the
mainstay of the ongoing expansion. Private consumption is being supported by employment
gains and rising wages. Business investment has strengthened amid improvements in corporate
profitability, favourable financing conditions and solid demand. In addition, the expansion in global
activity is expected to continue, benefiting euro area exports.
The latest ECB staff projections put annual real GDP growth at 2.0% in 2018, 1.8% in 2019 and
1.7% in 2020. At the same time, uncertainties relating to rising protectionism, vulnerabilities in
emerging markets and financial market volatility have gained more prominence recently.
Headline inflation in the euro area has lately been hovering around 2.0%, somewhat higher than
the levels observed in the first months of this year, mainly reflecting a higher annual rate of
change in energy prices. While measures of underlying inflation remain generally muted, they
have been increasing from earlier lows. Uncertainty around the inflation outlook is receding.
Looking ahead, underlying inflation is expected to pick up towards the end of the year and then
increase gradually over the medium term, supported by our monetary policy measures, the
continuing economic expansion and rising wage growth. The latest ECB staff projections foresee
annual euro area headline inflation at 1.7% in 2018, 2019 and 2020.
Overall, recent developments vindicate the Governing Council's earlier assessments of the
medium-term inflation outlook. Incoming information continues to support our confidence that the
sustained convergence of inflation to levels below, but close to, 2% will proceed, and will be
maintained even after a gradual winding-down of our net asset purchases. Accordingly, at its last
monetary policy meeting the Governing Council confirmed that it continues to expect the key
ECB interest rates to remain at their present levels at least through the summer 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. The Governing Council also
decided to reduce the monthly pace of the net purchases under the asset purchase programme
(APP) to €15 billion from October until the end of December 2018 and anticipated that, subject to
incoming data confirming our medium-term inflation outlook, net purchases will then end. Finally,
the Governing Council also confirmed its intention to reinvest the principal payments from
maturing securities purchased under the APP for an extended period of time after the end of our
net asset purchases, and in any case for as long as necessary to maintain favourable liquidity
conditions and an ample degree of monetary accommodation.
Significant monetary policy stimulus is still needed to support the further build-up of domestic
price pressures and headline inflation developments over the medium term. This support will
continue to be provided by the net asset purchases until the end of the year, by the sizeable
stock of acquired assets and the associated reinvestments, and by our enhanced forward
guidance on the key ECB interest rates. 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.
The financial health of the euro area banking sector has continued to improve. Although showing
a slight decrease from 14.6% at the end of 2017, the aggregate Common Equity Tier 1 ratio of
euro area significant institutions stood at 14.1% at the end of the first quarter of 2018. Banks
have made progress in reducing their stocks of non-performing loans (NPLs). In the first quarter
of 2018, the NPL ratio for euro area significant institutions dropped further, to 4.8%, compared
with 5.9% a year earlier. However, euro area banks' profitability remains subdued. The average
return on equity of euro area significant institutions declined to 6.6% in the first quarter of 2018,
from 7.1% a year earlier. In this context, EU and national authorities are still following up on a
comprehensive action plan for dealing with legacy asset quality issues, adopted by the Council of
the European Union. We have published guidance to banks on NPLs, including our supervisory
expectations for their prudential provisioning. Furthermore, we continue to devote significant
attention to potential valuation issues, with a focus on banks that have material exposures to
complex financial assets - including but not limited to level 3 assets - through both our off-site
and on-site supervisory processes.
With respect to financial stability more broadly, recent episodes of heightened financial market
volatility have led to only limited contagion across countries and markets. Currently, there is no
indication of excessive credit growth or broad-based asset price misalignments. However, some
sectors of the real estate markets warrant close monitoring in some euro area countries, in
particular following up on warnings issued by the European Systemic Risk Board. Furthermore,
developments in the non-bank financial sector require monitoring as well. We expect the national
authorities to remain vigilant and continue to use the macroprudential policy instruments at their
disposal to counteract any emerging risks when necessary. And on our side, we will contribute
within our macroprudential mandate.
An orderly withdrawal of the United Kingdom from the European Union poses a limited overall risk
to the euro area's financial stability. However, the uncertainty triggered by a cliff-edge Brexit could
have the potential to pose a more significant downside risk to financial stability. We will continue
to monitor developments ahead of UK's exit on 29 March 2019. In view of the prevailing
uncertainty about the outcome of the negotiations and the ensuing legislative and regulatory
decisions, the private sector is primarily responsible for making adequate arrangements to
prepare itself for any scenario.
The positive developments in the euro area are not independent of the global growth momentum.
Open trade, investment and sustainable financial flows play a key role in enhancing productivity,
for example through the cross-border diffusion of new technologies that drive efficiency
improvements. These factors need to be underpinned by effective multilateral cooperation, both
in trade and in financial regulation and supervision, to help avoid major disruptions to global
financial stability. Preserving openness is crucial if the global economy is to thrive and secure its
growth potential.
Encouraging multilateral cooperation is a central theme of the G20 Eminent Persons Group
report. It emphasises the need to firm up global financial resilience and reduce the incidence and
severity of crises in order that countries do not fear openness. We support discussing the
proposals of the G20 Eminent Persons Group with an open mind in the coming months.
The ECB supports further strengthening of the Global Financial Safety Net (GFSN) with a strong,
quota-based, and adequately resourced IMF at its centre. While the first line of defence for
national and international stability is to have sound domestic policies in place, the IMF's role at
the centre of the GFSN strongly supports global financial stability.
The launch of the "Bali Fintech Agenda" developed by the IMF and the World Bank brings
together key considerations posed by member countries with regard to reaping the benefits from
the fintech phenomenon and addressing its associated risks. Given the cross-border nature of
fintech developments, we support international cooperation, coordination and information sharing
also among standard-setting bodies and authorities while avoiding potential duplicative and
overlapping efforts.
In the euro area, in order to reap the full benefits of our monetary policy measures, other policy
areas must contribute more decisively to raising the longer-term growth potential and reducing
vulnerabilities. The implementation of structural reforms needs to be substantially stepped up.
The ongoing broad-based expansion also calls for fiscal buffers to be rebuilt. This is particularly
important in countries where government debt is high and for which full adherence to the Stability
and Growth Pact is critical for safeguarding sound fiscal positions. The transparent and
consistent implementation of the EU's fiscal and economic governance framework, over time
and across countries, remains essential.
In addition, 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 and the role of the
European Stability Mechanism, and deepening the capital markets union. Work needs to
continue on designing a fiscal capacity that provides adequate macroeconomic stabilisation
while containing moral hazard. Fiscal rules need to be made more effective. A more complete
EMU will be a better foundation for a stable and resilient euro area economy that contributes to
global economic growth and financial stability.