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-- At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 1.00%, 1.75% and 0.25%, respectively, which is in-line with consensus expectations. Draghi did not drift far from his statements last month on growth (expects the Eurozone economy to recover gradually in the course of the year); inflation (close to 2% over the medium term); and money supply (broad stabilization off subdued pace).

You can find Mario Draghi’s Introductory Statement to the press conference here:


Draghi again stressed the work of the two 36 month LTROs as decisive measures to put Europe back on track, yet (again) wasn’t able to show material evidence that real lending has happened in response to these huge liquidity dumps, and called on governments and banks to continue reforms and repair balance sheets to support recovery. He noted that today’s projections do not take into account the impact of the second LTRO.

Draghi did not indicate any intention for a third LTRO, said today’s decision to keep rates unchanged was unanimous, and stressed that the Bank pays particular attention to any signs of pass through from energy prices to wages.  Broadly, Draghi’s answers in the Q&A were vague, including on such questions as Greek bank recapitalization steps, unemployment rate risks in countries like Greece and Spain, and the real impact of the LTRO.

Below we present the Q&A highlights:

-When will the LTROs reveal their full force?    MD: I cannot answer when. I can answer what we do and what we watch. We look at consolidated bank balance sheets country by country to see if liquidity creation translates into deposits (banks buy securities, buildings, bonds, for example) and increases in required reserves.

-Greek banks were hit hard by the PSI deal. Will the ECB have to drop certain banks as counterparties?   MD: Greek banks capital has been wiped out. A €50 Billion recapitalization fund for Greece has been set up, €25 Billion of which is available immediately. The ECB will decide which banks are viable for counterparties for monetary policy operations, which is still in the works.

-Are you stepping up your inflation rhetoric given your new sentence to the introductory statement “have to address inflation pressures in a firm and timely manner”?   MD: Not stepping up rhetoric on inflation. To the extent energy prices rise, pass through pressures must be monitored.

-Are banks getting addicted to cheap money?   MD: there’s no sign of addiction to ECB loans. LTROs are a window opportunity for governments to take fiscal consolidation and structural reforms, and benefit from relative peace on financial markets.

-On the inflation calculation…   MD: We can have everyone at 2% inflation, without having to have higher inflation rates for the stronger countries.

-We see youth unemployment rates in Spain and Greece at extremely high levels; are there damaging effects from fiscal consolidation?   MD: Growth can come from foreign demand and short term interest rates (which are negative at present time). Supply reforms must be taken. High youth unemployment rates develop mostly in countries that have had dual labor markets. Under one wing there are firm laws and benefits; other the other wing there are younger worker that are typically temporary, or hired on a short term basis. So during crisis, the latter group was the first without a job. So we must see reforms to better distribute the weight of labor market movements.


Matthew Hedrick

Senior Analyst