Today, the ECB elected to leave the euro area’s benchmark refinancing rate unchanged at 0.75 per cent and the deposit rate unchanged at 0.5 per cent.
The biggest questions ECB President Mario Draghi had to face at the press conference following the release came on three fronts: the surging euro exchange rate, Ireland’s plans to liquidate nationalized bank Anglo Irish, and the Monte dei Paschi scandal engulfing Italian politics in the run-up to their national election in a few weeks.
After perhaps unwittingly sparking a big run in the euro at his last press conference, Draghi took the opportunity today to emphasise on multiple occasions that the ECB’s monetary policy stance remained “accommodative.”
Draghi took the opportunity to address the exchange rate directly in his opening statement, saying, “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 stemming from weaker economic activity and, more recently, the appreciation of the euro exchange rate.”
When the Q&A began, the first question was about the ECB’s stance on the euro’s appreciation. Draghi replied that the recent appreciation in the exchange rate is a sign of confidence in the euro, but that the central bank would certainly want to see if the appreciation, if it remains sustained, will alter their forecasts for price stability.
Draghi said the ECB would update their forecasts next month, so they might find out then.
“In the mean time, we will maintain our accommodative stance,” he concluded.
Another important question concerned the repayment of super-cheap loans known as LTROs, offered by the ECB to euro-zone banks during the height of the euro crisis. In recent weeks, the banks have gotten the first opportunity to repay, and these repayments have helped drive the euro and short-term market rates higher in the currency area.
The fear is that excess liquidity would continue to shrink in the euro area as banks repaid the loans, resulting in a de facto tightening of monetary policy.
Draghi said that excess liquidity should remain well above 200 billion euros. He also said he wouldn’t make too much of the increase in EONIA (a market interest rate for bank funding) we’ve seen recently because it may be due to a variety of factors including structural changes as certain banks repay LTROs and return to the market.
All of these comments helped send the euro about a penny lower against the U.S. dollar during the presser.
The other topic that dominated the discussion was the Irish government’s plan – announced yesterday – to liquidate nationalized bank Anglo Irish in order to lessen Ireland’s debt burden to the ECB.
Several speculated that the ECB may have discussed whether they would approve of the deal at this morning’s meeting of the Governing Council.
However, Draghi repeatedly pushed back at questions on the Ireland situation, referring reporters back to the Irish government and Irish central bank, saying it was in their hands at the moment.
“I can only say today that we took note of this,” said Draghi, referring to the Irish government’s plan.
Below is a live blog of the presser.
8:34 AM ET: Mario Draghi is late.
8:38: Draghi is taking the stage.
8:38: Draghi: Inflation has eased in recent months, inflation to fall below 2% in coming months. This allows our monetary stance to remain accommodative.
8:40: Draghi: The euro area is set for a weak economy in the first half of 2013. The euro economy should recover gradually, and monetary policy will support this.
8:43: Draghi: The risks for the euro area continue to be on the downside and include weaker than expected domestic demand and exports, slow implementation of euro area reforms.
8:45: Draghi: Risks to stable prices remain broadly balanced – one downside risk is the recent appreciation of the exchange rate.
8:50: Q&A begins. Full text of opening statement here.
8:51: First question is about the Anglo Irish deal. Can ECB confirm? Second question: what is the ECB’s take on the recent appreciation in the euro?
8:51: Draghi: There wasn’t a decision to take on Anglo Irish. The Governing Council unanimously took note of the Irish operation, and you can check with the Irish government for details. “I can only say today that we took note of this.”
8:51: Draghi: The recent appreciation in the exchange rate is a sign of confidence in the euro. We will certainly want to see if the appreciation, if it remains sustained, will alter our forecasts for price stability. In the mean time, we will maintain our accommodative stance.
8:54: Were last night’s developments over the Anglo Irish deal choreographed with the ECB?
8:54: Draghi: “I wouldn’t speak of choreography.” Reiterates that the Governing Council took note of Ireland’s actions.
8:55: Next question regards LTRO repayments: what is the ECB’s read of it? Also, regarding calls from French President Francois Hollande for a managed exchange rate, what do you say to that?
8:56: Draghi: If you look over the last six months, we’ve certainly had significant improvement “on the financial side of the economy.” Bank financing is up 65 per cent year-over-year. 55 per cent of total sovereign issuance in this month has come from non-core countries. Last year, 93 per cent was only coming from core countries. TARGET2 balances continue to improve. Repayment of LTRO is a sign of confidence which simply says that many banks used LTRO for precautionary reasons. Non-bank and corporate funding is also having a good season. The cost of protecting against inflation and deflation has gone down. The situation remains fragile, as evidenced by weak credit flows. SMEs that have to finance themselves via banks continue to face strained credit conditions. On Hollande, we should always remember that the ECB is independent.
9:02: Next question: Are you ready to counter any increase in market rates with a cut in the main refinancing rate? Also, at what level of excess liquidity would you expect there to be more pressure on market rates?
9:03: Draghi: As I said, our monetary policy stance is accommodative and our overnight rates remain close to zero. On the second question, I said before that excess liquidity should remain well above 200 billion euros. I would make too much of the increase in EONIA we’ve seen recently because it may be due to a variety of factors. Some of it may be structural as certain banks repay LTROs.
9:05: Question on Monte dei Paschi. If the derivatives scandal were revealed in 2011, when it took place, some may say it would have affected your chances for the ECB presidency. How would you respond?
9:06: Draghi: The Bank of Italy has had a detailed account of the Monte dei Paschi story on their website for over a week. The IMF has publicly stated that their preliminary view is that the Bank of Italy took appropriate action.
9:09: Next question: Does the ECB still have to sign off on ELA for Ireland every fortnight, or is there a fundamental change in the way the Irish government is proposing to handle the debt?
9:10: Draghi: One thing I can add on Ireland is that there is no more ELA, so that is a positive step. However, this is entirely in the hands of Ireland and the Irish central bank.
9:19: Next question: Is the Monte dei Paschi scandal a warning sign that the central bank is not the best regulator for euro zone banks? Also, the exchange rate affects the real economy. So, what is wrong with targeting it?
9:20: Draghi: The Governing Council is already convinced that it is taking actions compatible with price stability and job creation. “We are not doing the exact same things as the U.S. Fed in America,” but our stance is accommodative. We remain with the question of why credit growth is so subdued in light of what we’ve done. This fragmentation between financing conditions for large corporates and SMEs will have to be looked at as well. We will do everything within our mandate to get credit flowing again. Regarding the Monti dei Paschi question, I disagree. However, it highlights the importance of separation between supervisory powers and monetary policy.
9:25: Next question: Are there any lessons to already be learned from Monti dei Paschi?
9:26: Draghi: I think removal of bank leaders is an essential power bank supervisors must have. Having more powers would have helped – although, when you have to deal with frauds, you never know.
9:27: Next question for Mario Draghi: Was the interest rate decision unanimous? Also, what is your take on currency wars?
9:28: Draghi: Decision was unanimous; there were “hints and discussions” about how to improve financial conditions. Draghi says FX fluctuations aren’t deliberate, but if they are, it will need to be discussed at the upcoming G20 meeting.
9:32: Final questions. What impact would you expect repayments to have on the Irish bond market? Why did it take so long for an agreement to be reached?
9:34: Draghi: No agreement has been reached; we simply took note.
9:35: Press conference is over.
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