Live replay of EP Committee on Economic and Monetary Affairs: Monetary Dialogue with Mario DRAGHI, President of the European Central Bank

Brussels

meeting

European Central Bank

DRAGHI, Mario (IT)

monetary dialogue with the ECB (T)

Committee on Economic and Monetary Affairs

(02) EP Committee on Economic and Monetary Affairs: Monetary Dialogue with Mario DRAGHI, President of the European Central Bank (15:07 - 15:17)

SOUNDBITE (English), Mario DRAGHI, President of the European Central Bank, Mr Chairman, Honourable Members of the Economic and Monetary Affairs Committee, Ladies and gentlemen, I am glad to be back at the European Parliament for my last hearing of this year. Since we last met, the ECB Governing Council has taken important decisions on the recalibration of its monetary policy instruments beyond the end of the year. Therefore, in my remarks today, I will first discuss the outlook for the euro area economy and the recalibration of our monetary policy measures. Then, at the request of this committee, I will discuss the role of TARGET2 in supporting financial integration and the implementation of our monetary policy, which in turn have implications for interpreting TARGET balances.

SOUNDBITE (English), Mario DRAGHI, President of the European Central Bank, The economic expansion remains solid and broad-based across countries and sectors in the euro area, mainly supported by domestic demand. According to the recent Eurostat flash estimate, real GDP growth has continued in the third quarter at a rate of 2.5% year on year. This amounts to four-and-a-half years of continuous quarterly expansion, and the latest survey data point to unabated growth momentum in the near term. GDP growth is also increasingly broad-based across countries and sectors. The dispersion of GDP growth rates across euro area countries has fallen to its lowest level since 1997, caused by a general upward convergence. T

SOUNDBITE (English), Mario DRAGHI, President of the European Central Bank, The labour market continues to benefit from the recovery and the deep and painful employment losses recorded during the crisis have now been offset, at least in the aggregate. The number of people unemployed in the euro area declined from 18.6 million in the second quarter of 2014 to 14.6 million in the last quarter. Relative to past patterns, employment growth has been broad-based across countries and sectors. 16 of the 19 euro area countries have experienced positive annual employment growth since mid-2014 and employment has been increasing in about 60% of sectors, compared with zero in mid-2014. These employment gains, together with increasing household wealth, are supporting the private consumption outlook. Business investment also remains on an upswing, aided by improvements in corporate profitability.

SOUNDBITE (English), Mario DRAGHI, President of the European Central Bank, Our monetary policy measures have played a key role in supporting both consumption and investment demand by ensuring favourable financing conditions for euro area firms and households. Since end-May 2014, bank lending rates for non-financial corporations, for instance, have fallen by around 120 basis points and those for households by around 100 basis points. Lending rates for very small loans, which can be taken as a proxy for loans to small and medium-sized enterprises (SMEs), have declined by almost 190 basis points. The significant improvement in funding conditions for SMEs is especially encouraging as they provide two-thirds of total private sector employment in the euro area.

SOUNDBITE (English), Mario DRAGHI, President of the European Central Bank, This improvement in financing conditions has been accompanied by reduced heterogeneity across countries in bank lending rates. For example, the difference between rates for firms in euro area countries most severely affected by the crisis versus the other countries has narrowed by around 100 basis points since mid-2014. Despite the firm economic recovery, inflation dynamics have yet to show convincing signs of a self-sustained upward trend. Headline inflation was 1.4% in October and is expected to temporarily decline towards the turn of the year, mainly owing to a weaker energy component as a result of base effects. Underlying inflation pressures are still subdued as labour market slack remains significant. The improvements in labour markets that we have observed still need time to translate into more dynamic wage growth.

SOUNDBITE (English), Mario DRAGHI, President of the European Central Bank, In the light of this economic outlook, at our monetary policy meeting in October, we decided to recalibrate our monetary policy instruments. The re-calibration of our policies for the period beyond the end of this year is meant to preserve the degree of monetary stimulus that is still necessary to secure a sustained return of inflation rates towards levels below, but close to, 2% in the medium term. Let me briefly explain the four main decisions the Governing Council took. First, the improved outlook and our growing confidence in the gradual convergence of inflation rates towards our inflation aim allowed us to adjust the pace of our asset purchase programme (APP). Accordingly, we announced that, starting in January 2018, net asset purchases are intended to continue at a monthly pace of &euro;30 billion until the end of September 2018, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.

SOUNDBITE (English), Mario DRAGHI, President of the European Central Bank, Second, as regards our re-investment policy, we stated that the Eurosystem will reinvest the principal payments from maturing securities purchased under the APP for an extended period of time after the end of the net asset purchases, and in any case for as long as necessary. This will contribute both to favourable liquidity conditions and to an appropriate monetary policy stance. In this context, let me also mention that we provided additional information on the redemption amounts for each component of the APP, as our policy to maintain the stock of our securities holdings and continue to re-invest the proceeds of those securities that come to redemption for an extended period of time has become more important as the size of that portfolio has grown. Our website now reports all the details of the expected monthly redemption amounts for the next 12 months.

SOUNDBITE (English), Mario DRAGHI, President of the European Central Bank, Third, on policy rates, we kept them unchanged and reconfirmed that we expect our key interest rates to remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases. This sequenced ordering of the outlook for our net asset purchases and the policy rate path is a central element of our monetary policy at present. The &ldquo;well past&rdquo; condition that governs the policy rate horizon lays out a critical enabling factor for asset purchases to have their full impact. Finally, we decided that our regular refinancing operations would continue to be conducted as fixed-rate tender procedures with full allotment for as long as necessary, and at least until the end of 2019. This will ensure the continued smooth implementation of monetary policy while also safeguarding favourable conditions in euro area money markets.

SOUNDBITE (English), Mario DRAGHI, President of the European Central Bank, As the Governing Council concluded at the end of its last monetary policy meeting, the monetary policy support that we provide today comes from the combined effect of the additional net asset purchases, the sizeable stock of acquired assets that have been accrued under our asset purchase programme in the past and the forthcoming reinvestments of the maturing securities, and our forward guidance on interest rates. Taken together, these measures will preserve the current financing conditions and ensure the ample degree of monetary stimulus that is still necessary for a sustained return of inflation rates towards levels that are below, but close to, 2%.