Notes from ECB Press Conference

• Held in Vienna with Governor Nowotny
• Keep key ECB interest rates unchanged
• Will be kept at present or lower for an extended period of time, exceeding asset purchase program (80bn per month) which will end March 2017
• sector program will start June 8
• TLTRO start in June
• New measures will strengthen growth in euro area through credit expansion
• Very low inflation must not become entrenched in second round effects through effects on wages and prices.
• ECB will use all available instruments to avoid lower inflation.
• Economic analysis. Real GDP increased 0.5 per cent Q1, from 0.3 per cent in Q4. Supported by domestic demand and dampened by exports. Growth will be lower in Q2. Looking ahead, ECB expect moderate but steady pace of growth. Financial conditions and corp profitability help recovery. Past structural reforms help drive steady employment gains. Fiscal stance slightly expansionary. However, subdued growth prospects in EM, balance sheet adjustment and sluggish pace of structural reforms hold down euro area prospects.
  • 6 growth in 2016 (used to be 1.5), unchanged in 2017 and 2018
  • Risk tilted to downside, but balance have improved
  • BREXIT keep a lid on confidence
  • HCIP -0.1 per cent, reflecting higher energy and services inflation.
    • Inflation rates to remain low or negative next few months before picking up in H2 due to base effects from energy prices.
    • Inflation rate should recover further in 2017 and 2018. Staff projections suggest annual HCIP 0.2 in 2016, 1.3 in 2017 and 1.6 in 2018 (up for 2016 due to energy, unchanged for 17 and 18)
  • M3 continue to grow robust, mainly supported by M1 growing at 9.7 in April.
    • Loan dynamics improve. Non fin corp 1.2 in April compared to 1.1 in march
    • Households at 1.5 after 1.6 in march
  • Monetary policy have improved credit flows across euro area and credit conditions.
  • Summary; economic and monetary crosscheck confirm need for accommodative monetary policy to get inflation up to target without undue delay.
  • Structural policies are essential in Europe to increase potential growth rates and raise productivity and business environment. Public infrastructure investments must be increased. Juncker plan and progress on capital market union will contribute positively to this. Swift implementation of European commission proposal will make euro area more resilient to external shocks.
  • Fiscal policy must stay within euro area rules, but be flexible.

Q; Risk to inflation balanced? April meeting, no conclusive evidence of second round effects, are they now?

A; Additional stimulus beyond CSPP and TLTRO2 not necessary as we expect higher inflation. We do not see evidence of second round deflationary effects, with the possible exception of in Germany. We stand ready to act with more if needed.

Q; Inflation forecast unchanged, but growth lowered. Are you prepared to keep maintain stimulus? Is monetary policy ineffective? That is why you keep talking about structural reforms. Will you reinstate waiver for Greece?

A; No, our policy is very effective. Even with slow implementation of structural reforms. March package has been instrumental in helping euro recovery. Must wait to see full impact of new measures before concluding. No decision on Greece, but we acknowledge significant progress in Greece.

Q; what is ECB doing to prepare for eventual Brexit? How long is medium term?

A; No precise timeline for medium term. Length dependent on size and duration of shocks. Given the severity of shocks, medium term is longer than normal. ECB is ready for any outcome of potential Brexit. ECB has a view whereby the UK should remain in the EU as both would benefit from this. ECB ready for all contingencies.

Q; How soon can council take action on Greece? Q1 produced lot of enthusiasm among economists, what does staff forecast say about core rate of inflation.

A; on Greece, we need another policy meeting and contingent on ESM board decision. Q1 was good; we still expect continued growth while core rate was weak. Germany may experience second round effects, but in rest of Europe, we do not see this. Cannot make statement that is more firm before we see full effect on ongoing and upcoming measures.

Q; base effects in energy prices acknowledged and incorporated, but we still have a gap versus forecast and target; must more stimulus be added? What about NPL in Europe?

A; We have to focus on implementation and on measures taken. Then we can answer your question. SSM has been assessing quantitative and qualitative terms of NPL in Europe and then implement best practice in Europe to prepare write-down of NPL then SSM will establish plans to supervise individual banks to speed up their NPL plans. It will take some time.

Q; What decision-making process behind CSPP program. Do you see any need for national central banks still?

A; Yes, national central banks have many regional responsibilities like payment system, supervision, execution of policy. We are 200 years old, and we expect at least another 100 years.

Q; are you worried ZIRP creates imbalances in the economy?

A; Yes, it is a concern, especially for savers just as it is in the US, UK and Japan. Lower interest is a symptom of a weak economy with excessive savings over investments so ZIRP, even NIRP, is the right measure to restore growth and at that point, in time interest rates will raise. For interest rate to be higher tomorrow, they will have to be low today. Also, ECB has a mandate and has to use all instrument to deliver on this mandate.

Q; Why is not the euro not weakening anymore despite Feds intent on tightening. Is there an agreement among policymakers to keep the dollar low? Has political conditions changed

A; We do not comment on exchange rates. It is not a policy target, but important for our mandate. Exchange rate is an outcome from our policy and other factors. We must keep in mind that exchange rates may diverge; geopolitical events here and other places, price of oil, monetary policy etc.

Q; Discussion in Germany about abolishing of cash (500 euro note banknote)? What do you think about this? Cash is freedom statement.

A; I will not comment on statement on freedom. Removal of 500 note has nothing to do with abolishing of cash. We will create more 200 notes to compensate.

Q; Inflation expected to stay below target that will be six years of below target. How comfortable are you with ending QE in 9 – 10 months. Are there enough bonds. Will it be problematic to extend beyond March 2017?

A; We will focus on implementation of December and March packages. May change things going forward. Will not hesitate to act if necessary. Purchase program has proceeded smoothly. Potential limits have not been seen. No difficulty, ample liquidity. In case we face limits, the design of the program contain enough flexibility to change course. We are willing, able and ready to do so.

Q; Will any country join the euro again?

A; Convergence report will show that no country has yet to reach convergence. We have to give ourselves time. Majority of citizens are still in favor of joining the euro.

Q; Very low rates for a long time and will remain very low. What happens if depositors start to withdraw money? Contingency plans from ECB? What about revising target to, say, 1 per cent?

A; no evidence of deposit withdrawal. We have opposing evidence from other countries. Some say we should revise it down and other say we should revise it upwards to elicit expectations. ECB position is to not revise target either way. Changing target will reduce central credibility, raise risk premiums and real rates and thus go against our objective.

Q; It seem more and more difficult to get inflation back to target with monetary policy alone. Political side has not implemented structural reforms. How should structural reform process be better implemented?

A; we must focus on correct monetary policy as inflation is a monetary phenomenon. It is outside our competencies to comment on structural reform. Monetary policy does not disincentives structural reform implementation, but we see them as complementary to each other.

Q; which reforms must be implemented in Austria?

A; it is the countries that have the best knowledge. So Nowotny will answer. We must be very careful to stick to the field of monetary policy. Labour and product markets should be reformed.