ECB Leaves Rates Unchanged, Issues Significant Downgrades To Growth And Inflation Forecasts

ECB President Mario Draghi took the stage at the ECB press conference after the Governing Council voted to leave rates unchanged earlier this morning. The main focus was on the ECB's new staff projections for growth and inflation in the eurozone over the coming years.

The ECB downgraded its 2012 GDP forecast to a range of -0.6% to -0.4% from -0.6% to -0.2% previously, its 2013 GDP forecast to a range of -0.9% to 0.3% from -0.4% to 1.4% previously, and said its 2014 GDP forecast was for a range of 0.2% to 2.2% growth in the euro area.

On inflation, the ECB forecasts 2.5% inflation in 2012 versus a range of 2.4% to 2.6% previously. 2013 inflation forecasts were lowered to a range of 1.1% to 2.1% from 1.3% to 2.5% previously. In 2014, the ECB sees inflation in a range of 0.6% to 2.2%.

The considerable downgrades to both growth and inflation forecasts perhaps pave the way for more easing measures down the road.

During the Q&A that followed the ECB statement, Mario Draghi fielded questions from reporters on the banking union, the Greek debt buyback, a Spanish bailout request, today's bout of financial market turmoil in Italy, the Irish budget, and soaring euro-area unemployment, among other things.

Below is a full transcript of the introductory statement made by Mario Draghi at the press conference. Following that is a summary of the Q&A session.

Mario Draghi, President of the ECB,
Vítor Constâncio, Vice-President of the ECB,
Frankfurt am Main, 6 December 2012

Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. We will now report on the outcome of today’s meeting of the Governing Council, which was also attended by the Commission Vice-President, Mr Rehn.

Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. Owing to high energy prices and increases in indirect taxes in some euro area countries, HICP inflation rates have been elevated for some time. More recently they have declined, as anticipated, and are expected to fall below 2% in 2013. Over the policy-relevant horizon, inflation rates should remain in line with price stability. The underlying pace of monetary expansion continues to be subdued. Inflation expectations for the euro area remain firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term. The economic weakness in the euro area is expected to extend into next year. In particular, necessary balance sheet adjustments in financial and non-financial sectors and persistent uncertainty will continue to weigh on economic activity. Later in 2013 economic activity should gradually recover, as global demand strengthens and our accommodative monetary policy stance and significantly improved financial market confidence work their way through to the economy. In order to sustain confidence, it is essential for governments to reduce further both fiscal and structural imbalances and to proceed with financial sector restructuring.

Today, we have also decided to continue conducting our main refinancing operations (MROs) as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the sixth maintenance period of 2013 on 9 July 2013. This procedure will also remain in use for the Eurosystem’s special-term refinancing operations with a maturity of one maintenance period, which will continue to be conducted for as long as needed, and at least until the end of the second quarter of 2013. The fixed rate in these special-term refinancing operations will be the same as the MRO rate prevailing at the time. The rates in the three-month longer-term refinancing operations, to be allotted until June 2013, will be fixed at the average rate of the MROs over the life of the respective longer-term refinancing operation.

Let me now explain our assessment in greater detail, starting with the economic analysis. Following a contraction of 0.2%, quarter on quarter, in the second quarter of 2012, euro area real GDP declined by 0.1% in the third quarter. Available statistics and survey indicators continue to signal further weakness in activity in the last quarter of the year, although more recently some indicators have stabilised at low levels and financial market confidence has improved further. Over the shorter term, weak activity is expected to extend into next year, reflecting the adverse impact on domestic expenditure of weak consumer and investor sentiment and subdued foreign demand. A gradual recovery should start later in 2013 as our accommodative monetary policy stance and significant improvement in financial market confidence work their way through to private domestic expenditure, and a strengthening of foreign demand should support export growth.

This assessment is reflected in the December 2012 Eurosystem staff macroeconomic projections for the euro area, which foresee annual real GDP growth in a range between -0.6% and -0.4% for 2012, between -0.9% and 0.3% for 2013 and between 0.2% and 2.2% for 2014. Compared with the September 2012 ECB staff macroeconomic projections, the ranges for 2012 and 2013 have been revised downwards.

The Governing Council continues to see downside risks to the economic outlook for the euro area. These are mainly related to uncertainties about the resolution of sovereign debt and governance issues in the euro area, geopolitical issues and fiscal policy decisions in the United States possibly dampening sentiment for longer than currently assumed and delaying further the recovery of private investment, employment and consumption.

According to Eurostat’s flash estimate, euro area annual HICP inflation fell to 2.2% in November 2012, down from 2.5% in October and from 2.6% in the two previous months. On the basis of current futures prices for oil, inflation rates are expected to decline further to below 2% next year. Over the policy-relevant horizon, in an environment of weak economic activity in the euro area and well-anchored long-term inflation expectations, underlying price pressures should remain moderate.

This assessment is also reflected in the December 2012 Eurosystem staff macroeconomic projections for the euro area, which foresee annual HICP inflation of 2.5% for 2012, between 1.1% and 2.1% for 2013 and between 0.6% and 2.2% for 2014. Compared with the September 2012 ECB staff macroeconomic projections, the projection range for 2013 has been revised downwards.

In the Governing Council’s assessment, risks to the outlook for price developments are seen as broadly balanced, with downside risks stemming from weaker economic activity and upside risks relating to higher administered prices and indirect taxes, as well as higher oil prices.

Turning to the monetary analysis, the underlying pace of monetary expansion continues to be subdued, taking into account developments over several months. Most recently, the annual growth rate of M3 increased to 3.9% in October, from 2.6% in September, while M1 growth accelerated to 6.4% from 5.0% over the same period. These developments are partly due to a specific transaction leading to an increase in overnight deposits belonging to the non-monetary financial sector. At the same time, deposits from households and non-financial corporations also rose in October. Overall, more observations are needed to distinguish between shorter-term volatility and more lasting factors.

Unlike in the case of monetary developments, there has been little change in credit growth. The annual growth rate of loans to the private sector (adjusted for loan sales and securitisation) remained at -0.4% in October, unchanged from September. But this development reflects further net redemptions in loans to non-financial corporations, which led to an annual rate of decline in these loans of -1.5%, down from ‑1.2% in September. The annual growth in MFI lending to households remained unchanged at 0.8% in October. To a large extent, subdued loan dynamics reflect the weak outlook for GDP, heightened risk aversion and the ongoing adjustment in the balance sheets of households and enterprises, all of which weigh on credit demand. Furthermore, in a number of euro area countries, capital constraints, risk perception and the segmentation of financial markets restrict credit supply.

In order to ensure an adequate transmission of monetary policy to the financing conditions in euro area countries, it is essential to continue strengthening the resilience of banks where needed. The soundness of banks’ balance sheets will be a key factor in facilitating both an appropriate provision of credit to the economy and the normalisation of all funding channels. Decisive steps for establishing an integrated financial framework will help to accomplish this objective. A single supervisory mechanism (SSM) is one of the main building blocks. It is a crucial move towards re-integrating the banking system.

To sum up, the economic analysis indicates that price developments should remain in line with price stability over the medium term. A cross-check with the signals from the monetary analysis confirms this picture.

Further economic policy measures and progress in the reform of European governance should help to support financial market sentiment and improve the outlook for economic growth. In this context, the Governing Council looks forward to the roadmap towards genuine Economic and Monetary Union to be decided at the European Council meeting on 13-14 December 2012. Initiatives to accelerate structural reforms that help restore competitiveness are particularly important to revive the growth potential of euro area countries and to increase employment. More generally, all euro area countries must ensure that their product and labour markets possess the adjustment capacity required for their smooth and effective functioning within a monetary union. Finally, continued fiscal consolidation is expected to restore sound fiscal positions, in line with the commitments under the Stability and Growth Pact and the 2012 European Semester recommendations. Significant progress has already been made in reducing domestic and external imbalances and in improving competitiveness. Continued policy actions on the European, structural and fiscal reform fronts should be mutually reinforcing and send a strong signal to markets.

We are now at your disposal for questions.

The first question in the Q&A is about Italy, and whether it's falling into an abyss.

Draghi refused to comment on the Italian situation.

The next question pertains to higher credit costs in the periphery and whether the ECB can address this problem more directly. Also, did the ECB discuss rate cuts today, and what are the risks of a negative deposit rate?

Draghi says higher credit costs aren't necessarily unjustified. However, there is a range beyond which differences between the core and periphery are unacceptable. Furthermore, Draghi states the obvious that the mere announcement of the OMT has already served to bring down borrowing costs.

Draghi said there was a discussion on rate cuts, but the prevailing discussion was to leave rates unchanged. Furthermore, the discussion only briefly touched on the complexities and unintended consequences of a negative deposit rate but was not elaborated upon.

The next question is about national central banks rolling over Greek debt held in their investment portfolios.

Draghi says the Governing Council didn't really have a deep discussion, but certainly discussed, and there's been no conclusion reached yet on the matter.

The next question is about treaty change and the single supervisory mechanism.

Draghi says we all have to understand that the ECB is not a legislator. Frankly, he is not in a good position to dispute the conclusions reached by the EU. However, the ECB it's essential that the ECB has a legal basis in place to move forward with SSM if they are tasked with such responsibilities.

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The next question is about the weak economic outlook and whether there are tools other than interest rate cuts that the ECB could use if the economy weakens further. Also, given the latest Greek debt buyback deal, is the eurozone going to the private sector too much for help?

Draghi is running through the latest economic statistics. There are conflicting signs–some point upward, others point downward.

Also, Draghi says much more has been asked of the public sector than the private sector in the Greek debt restructuring. In other words, his perception is the opposite of the reporter's question.

Draghi says it's too early to see how the Greek buyback is going.

The next question is about the G-30 and the multiple Goldman Sachs alumni, of which Draghi is one, and possible conflicts of interest.

Draghi says that the ECB president's membership in the Group of 30 does not constitute a conflict of interest. Furthermore, he says he has no idea whether the G-30 is financed by Goldman Sachs.

CNBC's Silvia Wadhwa asks whether the ECB is more satisfied now with how the ECB's liquidity provisions are working their way into the real economy. Also, has the ECB received any further clues that an uptick in M1 leads to an uptick in consumer demand?

Draghi says the LTROs didn't really reach the economy to a large extent. Instead, it helped avoid major disasters in bank funding markets.

Draghi says credit growth is subdued because of weak demand factors.

Draghi says the ECB's accommodative policy stance will find its way to the economy sometime next year.

Draghi says the uptick in monetary aggregates is due to the ESM repaying its tranche.

Another question about the single supervisory mechanism and the ECB's role. Germany says the SSM should only cover big banks and not all banks. What says Draghi?

Draghi says from a legal/jurisdictional standpoint, the SSM should cover all banks. However, in practice, there isn't much difference between this position and Germany's position. After all, the ECB won't be able to supervise 6000 banks. Instead, it will regulate different banks with varying "intensity" given their importance in the crisis.

The next question is when the ECB will recognize that it's "killer medicines" to Greece aren't working.

Draghi pushes back, saying that the ECB is Greece's largest creditor, and says there has been significant progress made in Greece.

The next question is regarding Spain. When does the ECB expect the Spanish application, and what if Spain remains hesitant to do so? Also, is the ECB ready to activate the OMT on Italy as well if necessary?

Draghi says the ECB will not tell governments what to do. They know the conditions for OMT support. This holds for Spain and any other country, including Italy.

Draghi says support doesn't come automatically.

The next question is about record high unemployment in the eurozone and whether it's a price worth paying for the structural adjustments necessary for the euro to work.

Draghi says this question should be directed at policymakers who created the situation the euro is in to begin with.

The next question is about "fairly dramatic" downward revisions to the ECB's staff projections. Why is the ECB ignoring the projections and not considering a rate cut more seriously?

Draghi says he already responded when he said the outlook for medium-term price stability hasn't changed substantially. Also, there are reasons for optimism noted in the improvement in financial markets.

Furthermore, the drop in sovereign bond yields since July has already outweighed the effect of further rate cuts. "To some extent, we have already done much that is needed."

The next question is about Draghi's response to the Irish budget. Also, is it reasonable to expect that there will be an agreement to re-cast the Irish-Anglo promissory note scheme before the first payment falls due in March.

Draghi says the ECB welcomes the Irish budget announced yesterday. On the second question, Draghi says the ECB cannot undertake any agreement that is being viewed as monetary financing.

The next question is about whether the ECB is willing to negotiate with Spain to promise that spreads there will fall significantly to reassure them.

Draghi says he has made the conditions for OMT clear many times, and the Spanish government has not spoken publicly about specific reassurance on spread levels. Also, the OMT would be activated in a "size adequate to achieve its objective."

Draghi comments on eurobonds, per a reporter's question. He says originally, there was a breach of trust in the euro area between countries that mostly complied with fiscal soundness and countries that did not do so. For the past two years, the issue was to rebuild trust, hence new fiscal rules and compacts.

Draghi says these are a lot of actions that will essentially amount to national sharing of sovereignty. On the other end of the spectrum, you have eurobonds, which represent a mutualization of risk. "I issue, you spend" is not realistic right now, but perhaps could be when trust is restored among euro area member nations.

That concludes the Q&A.

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7:45 AM: The ECB's interest rate decision is out. The Governing Council voted to leave rates unchanged, as was largely expected.

Click here for live updates >

Full release below:

6 December 2012 - Monetary policy decisions

At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.75%, 1.50% and 0.00% respectively.

The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 2.30 p.m. CET today.

Next up is the press conference and Q&A at 8:30 AM ET. Click here to follow the presser LIVE >

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ORIGINAL: Minutes away from the European Central Bank's December policy meeting.

The ECB will announce its interest rate decision at 7:45 AM ET, followed by a press conference and subsequent Q&A session beginning at 8:30.

55 of the 61 economists polled by Bloomberg expect no change to the benchmark refinancing rate nor the deposit rate from today's interest rate decision, which currently stand at 0.75 percent and 0.00 percent, respectively.

However, the ECB will also release updated macroeconomic forecasts at today's meeting, and given a continued string of weak eurozone economic data, the central bank's staff projections are subject to significant downgrades.

The issue of the recently announced Greek debt buyback is also likely to be in focus during the press conference and Q&A.

Click here for an in-depth preview >

We will cover both the release and the press conference LIVE on Money Game. Click here for updates >



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