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ECB's Draghi Calls Exit Strategy Talks Premature

ECB's Draghi Calls Exit Strategy Talks Premature
4/4/2012 10:42 AM ET

Any talk of an exit strategy regarding monetary policy in the euro area is "premature" despite upside risks to inflation, European Central Bank President Mario Draghi said on Wednesday.

Speaking at his regular post-decision press conference in Frankfurt, Draghi said the central bank is yet to assess the full impact of its three-year long term refinancing operations (LTROs), which he described as "powerful and complex" measures.

Inflation rates are likely to stay above 2 percent in 2012, with upside risks prevailing, Draghi said in the introductory statement. Higher energy prices and indirect tax hikes are expected to keep inflation above target. In 2013, inflation is expected to fall below 2 percent.

"We will pay particular attention to any signs of pass-through from higher energy prices to wages, profits and general price-setting," Draghi said. "Underlying price pressures should remain limited."

Responding to a question, he said the central bank is not stepping up the rhetoric on inflation. He also refused to comment on the German wage settlements.

Policymakers led by the German Bundesbank have raised concerns recently over ECB liquidity injections stoking inflation. Draghi said today's decision to leave rates unchanged at record low was unanimous and the Governing Council did not discuss any interest rate changes. He said the ECB is not doing quantitative easing and the bank would wait to see the impact of the LTROs before considering any policy change.

The central bank expects a moderate recovery in activity in the course of the year, but warned against downside risks to the economic outlook. The economic outlook is expected to be supported by foreign demand, the very low short-term interest rates, and the steps taken to aid the proper functioning of the economy.

Downside risks to the outlook include renewed intensification of the debt market tensions and their potential spillover as well as further increase in commodity prices.

The underlying pace of monetary expansion remains subdued, Draghi said. Money and credit data up to February confirm a broad stabilization of financial conditions, he pointed out. This has avoided an abrupt and disorderly adjustment in the balance sheets of credit institutions, he added.

Funding conditions for banks have generally improved, Draghi noted. However, demand for credit remains weak due to subdued economic activity and the ongoing balance sheet adjustment in the financial sector.

ECB's non-standard monetary policy measures are temporary in nature, Draghi reiterated. He said all the necessary tools are available to address upside risks to medium-term price stability in a firm and timely manner.

The central banker also noted that financial system improved considerably after the LTROs and the small and medium enterprises are now 'closer' to the central bank money.

Draghi stressed that it is essential for banks to strengthen their resilience further, including by retaining earnings. He also said that the soundness of bank balance sheets is crucial. The full supportive impact of the non-standard measures will need time to unfold and to have a positive effect on the growth of loans when demand recovers, he said.

The central banker said there are no signs of banks getting addicted to ECB money. Saying that LTROs were a window of opportunity for government and gave banks room to deleverage in a timely fashion, Draghi asked banks to repair their balance sheets.

On the fiscal front, Draghi urged governments to fully meet their commitments under the Stability and Growth Pact. He asked countries, which have suffered losses in cost competitiveness, to ensure sufficient wage adjustment and foster productivity growth. He also said markets expects governments to implement reforms and deliver.

Regarding Greece, the ECB chief said Greek banks' capital was basically wiped out by the private sector involvement (PSI) deal. He also mentioned that EUR 25 billion would be made available soon for recapitalization of viable Greek banks.

ECB Vice President Vitor Constancio, who was also present during the press conference, said Greek plans would be implemented without surprises in order to avoid any market turbulence.

by RTT Staff Writer

For comments and feedback: editorial@rttnews.com

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