European Central Bank President Mario Draghi said on Thursday that growth in the euro area is likely to remain weak, while inflation would hold above the 2 percent target for the rest of the year.
With little clarity on the dire situation in Spain, the ECB's hands are tied and decided not to pursue further support measures at today's policy meeting in Slovenia.
In the meantime, he wants governments to press ahead with fiscal consolidation and reforms.
"Economic growth in the euro area is expected to remain weak, with ongoing tensions in some euro area financial markets and high uncertainty still weighing on confidence and sentiment," Draghi said in his introductory remarks at the post-meeting press conference held in Ljubljana.
"Our decisions as regards Outright Monetary Transactions (OMTs) have helped to alleviate such tensions over the past few weeks, thereby reducing concerns about the materialisation of destructive scenarios."
However, volatility remains relatively high, he said later in the event. Hence, governments must persevere in their reform efforts on all fronts, he said.
The ECB is ready to undertake OMTs "once all the prerequisites are in place", Draghi said. The bank will consider entering into OMTs to the extent that they are warranted from a monetary policy perspective as long as programme conditionality is fully respected, he reiterated.
The bank would stop OMTs once its objectives are achieved or a beneficiary country fails to comply with a programme. Further, OMTs would not be applicable for countries who are already receiving support under a programme, Draghi clarified.
"OMTs will enable us to provide, under appropriate conditions, a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area," the central bank chief said.
"We act strictly within our mandate to maintain price stability over the medium term; we act independently in determining monetary policy; and the euro is irreversible," he repeated.
Conditionality is essential to trigger OMTs, but such conditions need not be "punitive", Draghi said. Further, conditions would help protect ECB's independence and would serve as a form of "credit enhancement" for beneficiary countries, he added.
OMTs would create an environment conducive to reforms, the ECB chief said. He stressed that the programme was not a replacement for lack of primary market access for a country. The ECB cannot replace government action, he added. Moreover, OMT is not meant to allow a country to boost its short-term debt issuances, he pointed out.
The central bank, which left interest rates unchanged today, expects the euro area economy to remain weak in the near term and to recover only very gradually thereafter. The risks surrounding the economic outlook for the euro area are still seen to be on the downside.
Inflation is expected to fall below 2 percent during next year, after remaining elevated in the short-term due to higher energy prices. Underlying pace of monetary expansion remains subdued, the bank said. Inflation expectations remain firmly anchored and underlying price pressures would stay moderate, it added.
Current levels of inflation should thus remain transitory and not give rise to second-round effects, Draghi said. The central bank sees the risks to the inflation outlook as broadly balanced. Upside risks are seen linked to further increases in indirect taxes owing to the need for fiscal consolidation.
Turning to fiscal and structural reforms, Draghi noted that a rapid implementation of the fiscal compact could play a major role in strengthening confidence in the soundness of public finances.
Responding to questions from reporters, Draghi said the Governing Council's decision to leave interest rates unchanged today was unanimous. There was no discussion regarding cutting interest rates, he added.
Many Governing Council members including himself were having an 'open mind' regarding the publication of minutes of ECB's monetary policy meetings. He stressed that the ECB was already transparent.
He refused to comment on the current level of Spanish bond yields, which started rising last week due to the lingering uncertainty over the a bailout request by the country.
Draghi also said it is up to the Spanish government to decide whether it has done enough with regard to reforms and meeting fiscal targets. Spain has made remarkable progress on fiscal consolidation, reforms and banking sector fronts, yet the country faces significant challenges, he noted.
A rescheduling of Greek government bonds would be monetary financing, Draghi reiterated. Portugal's reform agenda is firmly in place and the news of its 5-year bond sale yesterday was encouraging, he said.
The ECB agrees with IMF's assessment of Slovenia, Draghi said. ECB Governing Council member and Slovenian central bank chief Marko Kranjec, who was present at the press conference, said it was too early to say anything regarding a bailout for his country. He noted that bailout is basically a political decision.
by RTT Staff Writer
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