ECB president Mario Draghi has reassured investors the current monetary policy is being “fully effective” despite the Bank revising down Eurozone GDP growth for the next two years.
Speaking at a press conference following today’s decision to keep interest rates and quantitative easing as it stands, Draghi said recent weaker economic data has not been significant to enact another move.
He says: “The changes for the time being are not substantial as to warrant a decision to act…We see that our monetary policy is fully effective”.
But he says: “We also see that there have been considerable decreases in all interest rates by around 43 basis points below what they were and these reflect expectations of a continuation of the extraordinary monetary policy support.”
The Eurozone GDP forecast has been revised down “slightly” with annual real GDP set to decrease from 1.7 per cent in 2016, to 1.6 per cent in 2017 and 2018.
Draghi says while the available evidence on the Eurozone suggests a recovery the ECB’s base scenario “remains subject to downside risks” which are mostly attributable to a slowing foreign demand.
However, the president says these risks are not concerning for the time being.
He says: “Equity prices and interest rates have improved dramatically since the last move. While in the previous time we had a fragmentation in credit, now it is over. Credit has been growing; spreads as well have vastly disappeared.
“Also, from any banking lending surveys now credit is reaching the non-financial parts of the economy, so our policy has been very effective.”
“The stimulus of our monetary policy counteracted shocks of other parts of the world. If we had not done that the negative parts of that would be affecting the euro area without any other factors offsetting it.”
Meanwhile, inflation rates are likely to remain low in the next months but will pick up at the end of 2016, Draghi says, but says it should increase and reach 1.6 per cent in 2018.
Draghi says it will take longer to reach the current 2 per cent target but “not that long”.
He says: “The existing projections remain conditional on exceptionally supportive financial conditions which do reflect our monetary policy.
“These expectations are market based and these are subject to volatility: we’ve seen in the past a disconnect with these expectation and the behaviour of oil price, for example. So we are monitoring this very closely and are ready to act.”
Draghi also shrugged off concerns about the side effects of negative interest rates, saying there is no evidence of any unfavourable effect on bank profits or any increase in cash hoarding.
In March, the ECB cut its main interest rate from 0.05 per cent to 0 per cent and cut its bank deposit rate from minus 0.3 per cent to minus 0.4 per cent.
Draghi says: “The ability for banks to make loans has not being affected by negative interest rates.
“So far we have just seen bank profits going down 20 per cent in the first quarter of 2015 and 2016 because of huge capital gains due to QE. We are aware that the current negative interest rates will have consequences and challenges for the banks, however, rates are not a justification of all the problems of banks.
“Interest rates have to stay low for the economic recovery to proceed which in the end will have a positive effect on banks’ balance sheet has well.”