European Central Bank President Mario Draghi said on Thursday that the euro area faces economic uncertainty despite signs of stabilization in the first quarter.
For now, the ECB will continue with its wait-and-see approach, even as Spain and other troubled nations on the periphery of the euro zone slide back into recession.
"The economic outlook continues to be subject to downside risks," Draghi said while speaking at the post-meeting press conference in Barcelona, Spain.
He explained that these risks relate to an intensification of tensions in Eurozone debt markets and their potential spillover to the real economy. Further increases in commodity prices also pose a risk.
Following the meeting that was held under tight security in the austerity-hit Spain, the Governing Council decided to maintain the key interest rate unchanged at a record low 1 percent for the fifth month in a row.
Draghi said there was no discussion of any kind of interest rate move today. He noted that the Governing Council discussed the policy stance extensively and found it accommodative.
"Any exit strategy now remains premature," he stressed.
The ECB expects inflation to stay above 2 percent this year largely due to higher energy prices and indirect tax hikes. Downside risks include weaker-than-expected economic developments. Overall, risks to inflation are broadly balanced, the central banker said.
The bank will pay particular attention to any signs of pass-through from higher energy prices to wages, profits and general price-setting, Draghi added.
"Over the policy-relevant horizon, we expect price developments to remain in line with price stability," Draghi said in his introductory statement.
"The underlying pace of monetary expansion remains subdued."
Inflation expectations remain firmly anchored in line with the ECB's target of maintaining inflation rates below, but close to 2 percent, he said. Underlying price pressures are expected to remain limited going forward partly due to modest growth in the euro area economy.
"Further developments will be closely monitored, keeping in mind that all our non-standard monetary policy measures are temporary in nature and that we maintain our full capacity to ensure medium-term price stability by acting in a firm and timely manner," Draghi added.
Some economists had expected Draghi to hint at restarting the ECB's bond purchases program, known as the Securities Market Program. He said the program is neither eternal nor infinitive.
Indicators available in April was not sufficient to change the ECB's baseline scenario which sees a gradual recovery in the second half of the year, Draghi said in response to a question from the press.
"However, remaining tensions in some euro area sovereign debt markets and their impact on credit conditions, as well as the process of balance sheet adjustment in the financial and non-financial sectors and high unemployment, are expected to continue to dampen the underlying growth momentum," he noted.
In another sign of weak economic activity, demand for credit remained subdued in the first quarter, which was also due to balance sheet adjustment of non-financial sectors. It will take time for the full supportive impact of the ECB's non-standard measures to unfold and to have a positive impact on loan growth when demand recovers, Draghi said.
He reiterated that it was essential for banks to strengthen their resilience further by measures including retaining earnings.
On the fiscal front, most euro area countries have made good progress in 2011, the ECB chief noted. He stressed that growth and growth potential must be enhanced by decisive structural reforms.
Asserting the ECB's role, Draghi said the bank remains focused on the euro area and its primary objective is to maintain price stability despite considerable imbalances among several eurozone members, which are now being corrected.
"Addressing divergences among individual euro area countries is the task of national governments," he said.
"Progress is being made in many countries, but several governments need to be more ambitious."
Regarding the ECB's two long term refinancing operations or LTROs, Draghi said they were successful in avoiding a major credit crunch. It was too early to say whether the effect of these measures were vanishing, he added.
He also noted that liquidity in the euro area was abundant. Further, he said the degree of tightness in credit supply eased after LTROs and several banks strengthened their deposit base.
Eurozone's permanent rescue fund the European Stability Mechanism or ESM must work better than the temporary European Financial Stability Facility, Draghi said. "It must be made sure that ESM can be used, if need be," he said.
Spain and Italy have made considerable progress on fiscal front, the ECB boss said. He also added that Italy was on a 'good path'.
Defending the idea of growth compact, Draghi said it comprises of a variety of ideas and there was no contradiction between it and the fiscal compact. Growth must be put back at the center of the agenda and there is a need for continuation of structural reforms among euro countries, he said.
According to him, there is a need for a common European Discipline for reforms and clarity about a European future would be an important element for growth.
by RTT Staff Writer
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