Vítor Constâncio, Vice-President of the ECB,
Frankfurt am Main, 2 August 2012
Ladies and gentlemen, the Vice-President and I
are very pleased to welcome you to our press conference. We will now report on
the outcome of today’s meeting of the Governing Council, which was also
attended by the Commission Vice-President, Mr Rehn.
Based on our regular economic and monetary
analyses, we decided to keep the key ECB interest rates unchanged,
following the decrease of 25 basis points in July. As we said a month ago,
inflation should decline further in the course of 2012 and be below 2% again in
2013. Consistent with this picture, the underlying pace of monetary expansion
remains subdued. Inflation expectations for the euro area economy continue to
be firmly anchored in line with our aim of maintaining inflation rates below,
but close to, 2% over the medium term. At the same time, economic growth in the
euro area remains weak, with the ongoing tensions in financial markets and
heightened uncertainty weighing on confidence and sentiment. A further
intensification of financial market tensions has the potential to affect the
balance of risks for both growth and inflation on the downside.
The Governing Council extensively discussed the
policy options to address the severe
malfunctioning in the price formation process in the bond markets of euro area countries.
Exceptionally high risk premia are
observed in government bond prices in several countries and financial
fragmentation hinders the effective working of monetary policy. Risk premia
that are related to fears of the reversibility of the euro are unacceptable,
and they need to be addressed in a fundamental manner. The euro is
irreversible.
In order to create the fundamental conditions
for such risk premia to disappear, policy-makers in the euro area need to push
ahead with fiscal consolidation, structural reform and European
institution-building with great determination. As implementation takes time and
financial markets often only adjust once success becomes clearly visible, governments must stand ready to activate
the EFSF/ESM in the bond market when
exceptional financial market circumstances and risks to financial stability
exist – with strict and effective conditionality in line with the established
guidelines.
The adherence of
governments to their commitments and the fulfilment by the EFSF/ESM of their
role are necessary conditions. The Governing Council, within its mandate to
maintain price stability over the medium term and in observance of its
independence in determining monetary policy, may undertake outright open market
operations of a size adequate to reach its objective. In this context, the concerns of
private investors about seniority will be addressed. Furthermore, the Governing
Council may consider undertaking further non-standard monetary policy measures
according to what is required to repair monetary policy transmission. Over the coming weeks, we will design the
appropriate modalities for such policy measures.
Let me now explain our assessment in greater
detail, starting with the economic analysis. On a quarterly basis, euro
area real GDP growth was flat in the first quarter of 2012, following a decline
of 0.3% in the previous quarter. Economic indicators point to weak economic
activity in the second quarter of 2012 and at the beginning of the third
quarter, in an environment of heightened uncertainty. Looking beyond the short
term, we expect the euro area economy to recover only very gradually, with
growth momentum being further dampened by a number of factors. In particular,
tensions in some euro area sovereign debt markets and their impact on financing
conditions, the process of balance sheet adjustment in the financial and
non-financial sectors and high unemployment are expected to weigh on the
underlying growth momentum, which is also affected by the ongoing global
slowdown.
The risks surrounding the economic outlook for
the euro area continue to be on the downside. They relate, in particular, to
the tensions in several euro area financial markets and their potential
spillover to the euro area real economy. Downside risks also relate to possible
renewed increases in energy prices over the medium term.
Euro area annual HICP inflation was 2.4% in
July 2012, according to Eurostat’s flash estimate, unchanged from the previous
month. On the basis of current futures prices for oil, inflation rates should
decline further in the course of 2012 and be below 2% again in 2013. Over the
policy‑relevant horizon, in an environment of modest growth in the euro area
and well‑anchored long-term inflation expectations, underlying price pressures
should remain moderate.
Risks to the outlook for price developments
continue to be broadly balanced over the medium term. Upside risks pertain to
further increases in indirect taxes, owing to the need for fiscal
consolidation, and higher than expected energy prices over the medium term. The
main downside risks relate to the impact of weaker than expected growth in the
euro area, in particular resulting from a further intensification of financial
market tensions. Such intensification has the potential to affect the balance
of risks on the downside.
Turning to the monetary analysis, the
underlying pace of monetary expansion remained subdued. The annual growth rate
of M3 stood at 3.2% in June 2012, slightly higher than the 3.1% observed in the
previous month and close to the rate observed at the end of the first quarter.
Overall, inflows into broad money in the second quarter were weak. Annual
growth in M1 increased further to 3.5% in June, in line with the increased
preference of investors for liquid instruments in an environment of low
interest rates and high uncertainty.
The annual growth rate of loans to the private
sector (adjusted for loan sales and securitisation) declined to 0.3% in June
(from 0.5% in May). As net redemptions of loans to non-financial corporations
and households (both adjusted for loan sales and securitisation) were observed
in June, the annual growth rates for loans to both non‑financial corporations
and households (adjusted for loan sales and securitisation) decreased further
in June, to -0.3% and 1.1% respectively. To a large extent, subdued loan growth
reflects the current cyclical situation, heightened risk aversion and the
ongoing adjustment in the balance sheets of households and enterprises, all of
which weigh on credit demand. A considerable contribution of demand factors to
weak MFI loan growth is confirmed by the euro area bank lending survey for the
second quarter of 2012. This survey also shows that the net tightening of
banks’ credit standards at the euro area level was broadly stable in the second
quarter of 2012, as compared with the previous quarter, for loans to both
enterprises and households.
Looking ahead, it is essential for banks to
continue to strengthen their resilience where this is needed. The soundness of
banks’ balance sheets will be a key factor in facilitating both an appropriate
provision of credit to the economy and the normalisation of all funding
channels.
To sum up, the economic analysis indicates that
price developments should remain in line with price stability over the medium
term. A cross-check with the signals from the monetary analysis
confirms this picture.
While significant progress has been achieved
with fiscal consolidation over recent years, further decisive and
urgent steps need to be taken to improve competitiveness. From 2009 to 2011,
euro area countries, on average, reduced the deficit-to-GDP ratio by 2.3
percentage points, and the primary deficit improved by about 2½ percentage
points. Fiscal adjustment in the euro area is continuing in 2012, and it is
indeed crucial that efforts are maintained to restore sound fiscal positions.
At the same time, structural reforms are as essential as fiscal
consolidation efforts and the measures to repair the financial sector. Some
progress has also been made in this area. For example, unit labour costs and
current account developments have started to undergo a correction process in
most of the countries strongly affected by the crisis. However, further reform
measures need to be implemented swiftly and decisively. Product market reforms
to foster competitiveness and the creation of efficient and flexible labour
markets are preconditions for the unwinding of existing imbalances and the
achievement of robust, sustainable growth. It is now crucial that Member States
implement their country-specific recommendations with determination.
We are now at your disposal for questions.
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