DRAGHI: It isn’t our fault banks aren’t making money

ECB president Mario Draghi says that European banks should not blame all their problems on the negative interest rates imposed on the eurozone by the central bank, arguing that its NIRP will, in the end, have a positive impact on the balance sheets of banks.

Speaking in Frankfurt after the European Central Bank left monetary policy unchanged on Thursday afternoon, Draghi told reporters that: “Low interest rates should not be used as the justification for everything that goes wrong with banks,” adding that “it would be a mistake to do so.”

“Ultimately we have got to be patient. Interest rates have to stay low for the economic recovery to firm up which in the end will have a positive effect on banks’ balance sheets as well. Interest rates have to be low today to be high tomorrow,” Draghi continued.

European banks, particularly those in Germany, have long criticised negative rates in the single currency area, saying that their practice is having a detrimental impact on the already fragile profitability of the sector. Numerous banks are so against the policy that they are reportedly considering physically storing cash in vaults rather than facing the penalty imposed by keeping money with the central bank. Draghi clearly does not share those concerns, quickly brushing away the question.

In a performance even more measured than usual, Draghi batted away questions from reporters on a wide variety of topics, including the potential for prolonging ECB QE beyond the current horizon of March 2017.

Prior to the press conference, Draghi’s comments on this subject were hotly anticipated, however early in the conference he poured water on the possibility. When asked about whether the ECB had talked about extending quantitative easing at its meeting, he said “we did not discuss” anything in that regard.

“Our assessment was for the time being, the changes [in the state of the eurozone economy] are not substantial as to warrant a decision to act,” he added.

The ECB has not discussed the introduction of helicopter money, the former Bank of Italy governor reaffirmed.

Draghi confirmed during the conference that the ECB trimmed its growth forecasts for the coming two years, cutting 2017 and 2018’s GDP growth numbers from 1.7% to 1.6%. It increased 2016’s forecast to 1.7% from 1.6%, citing the fact that risks to growth in the euro area are still “tilted to the downside.”

“This assessment is broadly reflected in the September 2016 ECB staff macroeconomic projections for the euro area, which foresee annual real GDP increasing by 1.7% in 2016, by 1.6% in 2017 and by 1.6% in 2018. Compared with the June 2016 Eurosystem staff macroeconomic projections, the outlook for real GDP growth has been revised downwards slightly,” he said in a set of prepared remarks at the conference.

No change in policy

Draghi’s comments came after the ECB announced the outcome of the first meeting of its governing council following its near two-month summer break.

The bank left all its main rates unchanged, with its key refinancing rate remaining at 0%, and the key deposit rate left at -0.4%. The bank said that it expects “interest rates to remain at present or lower levels for an extended period of time.”

“Regarding non-standard monetary policy measures, the Governing Council confirms that the monthly asset purchases of €80 billion are intended to run until the end of March 2017, or beyond, if necessary, and in any case until it sees a sustained adjustment in the path of inflation consistent with its inflation aim,” an ECB statement said, hinting once again that the bank may extend its bond-buying programme.

The ECB’s statement was word-for-word — besides the date — identical to the statement released by the bank at its last meeting on July 21.

Europe is continuing to battle unprecedented low growth and inflation, with nothing the ECB does seeming to have much of a material impact on either of these things. Growth remained subdued at 0.3% in the second quarter of 2016, while inflation hovers just above zero, and has done so for a substantial period of time.

Draghi and other ECB governing council members have repeatedly insisted that the bank still has tools remaining to combat stagnant growth and inflation, but after nearly two years of negative interest rates and unprecedented bond buying, it is increasingly appearing as though the ECB is running out of options.

The euro moved higher during the conference when Draghi confirmed that the ECB had not discussed extending QE, peaking against the dollar at $1.1327. It pared those gains marginally, and at 2.30 p.m. BST (9:30 a.m. ET) following the conference, is trading at $1.1318.

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You can read Draghi’s full prepared remarks here, and watch a replay of the conference here.

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