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Draghi Says Economic Outlook Uncertain; But No Words On More Support

Draghi Says Economic Outlook Uncertain; But No Words On More Support

European Central Bank President Mario Draghi on Wednesday appeared less optimistic on the economy than in the beginning of the month as he noted that the latest survey data highlighted "prevailing uncertainty" in the economy. Nonetheless, he chose to remain tight-lipped on more measures to support the struggling economy.

During a hearing at the Committee on Economic and Monetary Affairs of the European Parliament, the ECB President said that all available indicators for the first quarter of 2012 broadly confirm a stabilisation in economic activity at a low level.

"Latest developments in survey data are mixed, highlighting prevailing uncertainty," Draghi said. This statement was slightly downbeat compared to an earlier remark that euro area economy may "recover gradually in the course of the year" made after this month's monetary policy meeting.

Tensions in the euro area has re-emerged with Spain facing higher borrowing costs amid concerns that it may miss this year's deficit target. The most recent causality of the sovereign debt crisis was the Dutch government, which collapsed after talks on austerity failed.

Economists say that the ECB's three-year loans to banks was only buying time, and its soothing effect on markets is slowly fading.

Draghi said today that the ECB expects the banks to use its liquidity injection of around EUR 520 billion to refinance the real economy.

"We trust that they will use it to refinance the real economy because that is the role of a banking system," he said

"We are confident that central bank liquidity has come very close to the real economy."

However, the ECB chief clarified that this does not mean the three-year long-term refinancing operations (LTROs) will by itself boost lending to firms and households.

This is partly because the central bank cannot interfere with banks' use of the liquidity and also because the future evolution of credit growth will largely depend on demand.

Draghi this time softened his tone on inflation by omitting the phrase "upside risks prevailing" from Wednesday's statement. He said "risks to the outlook for price developments are broadly balanced" and that inflation is likely to stay above 2 percent in the course of this year.

Earlier this month, he said "inflation rates are likely to stay above 2 percent in 2012, with upside risks prevailing."

Allaying concerns over the possible inflationary risks arising from these non-standard measures, Draghi said these measures are not a constraint on setting interest rates in line with what is required to ensure price stability in the medium term.

"You can rest assured that the Governing Council will use all the instruments at its disposal to counter possible upside risks to price stability should they materialise," he added.

He reiterated that liquidity support cannot substitute for capital or for sound fiscal and structural policies that bring about sustainable growth and stability in the European economy. It is not the responsibility of ECB to address the macroeconomic imbalances.

The monetary policy stance of the ECB has to be focused on the entire euro area and it cannot address divergences among individual euro area countries, Draghi said.

by RTT Staff Writer

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