Draghi Warns of Growth Risks
Posted by hkarner - 5. April 2012
Source: The Wall Street Journal
FRANKFURT—European Central Bank President Mario Draghi on Wednesday warned that risks to growth remained and any discussion of how and when the ECB will unwind its unconventional measures to fight the crisis was premature.
Striking a cautious balance between taming stubbornly-high inflation amid rising commodity prices and supporting the still-weak euro-zone economy, the ECB left its main interest rate unchanged at a 1% record low for the fourth-straight month earlier Wednesday.
“Downside risks to the economic outlook prevail” while broad stabilization is expected at a low level, Mr. Draghi told a news conference after the ECB rate decision. He added, however, that the euro zone is expected to recover “gradually in the course of the year.”
Mr. Draghi refused to discuss how and when the central bank would unwind its unconventional measures, dismissing any talk of exit strategy as “premature” for now, despite warnings earlier by Germany’s Jens Weidmann about the risks of loose ECB policy.
The Bundesbank has raised questions in recent months about risks arising from ECB policy on what collateral it accepts for its loans in the context of its three-year operations.
The ECB has injected more than €1 trillion ($1.323 trillion) into the euro-zone banking system in the form of three-year loans helping ease tensions in the euro zone’s financial markets after yields in Spanish and Italian bonds rose to euro-era highs while European banks struggled with a liquidity crunch late last year.
The central bank has also stepped in to buy sovereign bonds in the secondary market while other nonstandard measures include its policy of fully meeting demand at its various liquidity-providing tenders.
Mr. Draghi’s comments come as a Spanish bond auction Wednesday saw the Spanish government’s borrowing costs rise as investors cast doubt over the country’s ability to meet a challenging budget deficit target this year.
Spain raised funds at the low end of its target range as market response was clearly weaker than in auctions so far this year, spurring concerns that the impact of the ECB’s generous liquidity boost is also starting to dwindle.
Mr. Draghi noted that the second offer of three-year loans only settled March 1, suggesting the measure hasn’t had time to affect lending.
His comments were in line with expectations that the ECB would adopt a wait-and-see attitude to its unprecedented Longer-Term Refinancing Operations, or LTROs.
“We have to understand the impact of the two LTROs…and assess the implications of the LTROs,” Mr. Draghi said. He said the three-year loans have bought time for governments to carry out fiscal and structural measures and for banks to strengthen their balance sheets and for an orderly deleveraging.
While denying that he stepped up his rhetoric on inflation, Mr. Draghi said the ECB will watch “particularly any sign of pass-through [of higher commodity prices] to wages, profits and general prices.” At the same time, Mr. Draghi reaffirmed the ECB’s forecasts for both the inflation and the economic recovery outlook.
The ECB is ready to address potential upside risks to medium-term price stability “in a firm and timely manner,” Mr. Draghi said. Mr. Draghi reiterated the ECB’s forecast last month that inflation will remain this year above the central bank’s target of just under 2% due to higher-than-expected energy prices and some state-administered tax increases.
Risks to inflation remain on the upside in the short term because of high energy prices but they are “still broadly balanced” for the coming years, Mr. Draghi said, in line with the ECB’s view in March.
Underlying price pressures should remain limited amid an environment of modest growth in the euro zone, Mr. Draghi said. The ECB sees “signs of a stabilization” in the euro-zone economy, Mr.
Draghi said, leaving the ECB’s view of the economy unchanged from last month, as expected.