European Central Bank president Mario Draghi said that financial markets have shown an “encouraging resilience” to the volatility caused by the UK’s vote to leave the European Union in late June, and reiterated the bank’s assurance that it is ready to act to contain any more market stress in the immediate aftermath of the Brexit decision.
“Following the UK referendum on EU membership, our assessment is that euro area financial markets have weathered the spike in uncertainty and volatility with encouraging resilience,” Draghi told reporters gathered in Frankfurt on Thursday afternoon. The bank’s press conference returned to its German headquarters after being conducted in Vienna, Austria in June.
“The announced readiness of central banks to provide liquidity, if needed, and our accommodative monetary policy measures, as well as a robust regulatory and supervisory framework, have all helped to keep market stress contained,” Draghi continued.
Draghi and ECB vice-president Victor Constancio spoke to the press following the bank’s latest monetary policy decisions, announced on Thursday afternoon. The bank left all of its main rates unchanged in a move widely expected by the markets. The current deposit rate in the eurozone is -0.4%.
Prior to the press conference, it had been expected that Draghi may give some hints as to whether or not the ECB is planning any new stimulus measures — either in the form of another rate cut, or extending asset purchases — at its next meeting in September, but Draghi was tight lipped, making a very deliberate effort to avoid giving any hints about new monetary policy measures.
At the conference, Europe’s most powerful central banker took questions on a wide range of topics, spanning from the effect of the Brexit vote on the eurozone, to Italy’s ongoing banking crisis, all the way to the potential for extending the ECB’s asset purchases beyond bonds into equities and other asset classes.
Draghi noted during the conference that the ECB is not entirely confident in its forecasts about the hit to the eurozone economy that will come as a result of Britain voting to leave the EU. The ECB has made an initial forecast of a 0.3-0.5 percentage point drop in eurozone GDP as a result of Brexit, but Draghi noted that those forecasts should be taken with a “grain of caution.”
“Large uncertainties prevail,” he said. “These figures depend in the end on how long will be the stretch of time for these negotiations to be completed.”
Draghi’s lack of confidence in the bank’s forecasts follows on from a similar caveat by Morgan Stanley earlier this week. Morgan Stanley economists noted that “high uncertainty means low confidence in forecast detail” in the aftermath of Brexit.
When asked about the issue of non-performing loans (NPLs), which are a key problem in the ongoing Italian banking crisis, Draghi argued that a “public backstop” — a form of last minute support for banking institutions — may be needed in order to support banks facing “exceptional circumstances.”
A “public backstop is a measure that would be very useful and should be agreed with the Commission according to the existing rules,” Draghi told reporters.
Those comments soothed some fears in the banking sector across Europe, and around 10 minutes after the end of the conference, the STOXX banking index is up by 1.28%, while Italy’s biggest lender, UniCredit, is higher by almost 4% as a result of the president’s comments.
Here is the STOXX: