July ECB Presser YouTubed

--Below we’ve dictated the major highlights from the ECB’s Q&A press conference this morning. A few key take-ways include that President Mario Draghi gave little color on the size, shape, or scope of a European banking authority (as discussed at last week’s EU Summit), including if the ECB would be a backstop for the future facility.  He continued to highlight that the pass-through effects of the LTROs have not been fully realized and gave no further detail on future measures such as another LTRO or the re-engagement of the SMP down the road. Speaking less to the duty of individual governments to stay the course of fiscal consolidation, Draghi’s comments suggested that there’s still a long road to sorting out a banking supervisory mechanism in this highly “fragmented” environment for banks and sovereigns, as lending from either the EFSF and future ESM could have different consequences for the banks and sovereigns. Draghi did not rule out future interest rate cutting, and noted that economic growth remains weak, with “heightened uncertainty weighing on confidence and sentiment.”  In our assessment, today’s 25bps cut leaves the door open for future cuts into year-end.

At the Governing Council of the ECB meeting today the ECB cut the interest rate on the main refinancing operations by 25bps to 0.75%; cut the interest rates on the marginal lending facility by 25bps to 1.50%; and cut the deposit facility 25bps to 0.00%.

You can find Mario Draghi’s Introductory Statements to the press conference related to inflation, growth and monetary outlook here. We have no major changes in language versus June's script to highlight. 

Highlights from the Q&A:

-We see a divergence in bank lending across Europe, and heightened risks in Spain and Italy. What can be done to mitigate these risks?   MD: The idea that the ECB could channel funds via a bank lending channel to a specific category of firms or households is as wrong as those that say the ECB shouldn’t buy government bonds. Both ideas are very hard to implement. What the ECB has done is broadened collateral standards to be more inclusive of all banks.

-What if Italy needs aid? Is the structure of EFSF/ESM large enough?   MD: No answer.

-Will all banks be included in a pan-European banking supervisory?   MD: It’s too early to answer these questions. A few general messages: (1.) The EU council has made important steps towards a financial market union. Leaders committed substantial political capital towards a union. (2.) Whatever the proposal will be, the ECB should be placed in a task to carry it out in an independent way without risk of its reputation. (3.) Any new task should be separated from monetary policy tasks. (4.) The ECB should remain independent to carry out this work. (5.) We will work with national supervisors (National Central Banks). ( 6.) New tasks will be given a higher level of democratic accountability.

-Is the ESM big enough, large enough in scope?  MD: How big is enough? We know what we have. We have to make it work. I think that the ESM and EFSF with their new modalities are adequate to cope with the risks/contingencies that we can envisage now.

-Should the ECB back the ESM and give it a banking license?   MD: We believe the institution should hold up to its mandate. As we speak the details of this issue are still being discussed. [ = non answer]

-Was the decision to cut 25bps unanimous?   MD: Unanimous.

-With your decision to cut the deposit rate to 0%, what’s your response that banks are still not using the money to pump it into the economy?   MD: We still need time to see the impact of two LTROs.

-Will we see additional LTROs or temporary measures?   MD: We never pre-commit.

-How much coordination today, with Bank of China and BOE?   MD: No coordination beyond normal exchange between central banks.

-There has been talk that ECB staff feels overworked given the environment over the last two years. Is this an operational risk and are there plans to hire more staff?  MD: We’ve taken some measures to alleviate this stress and we may increase resources. 

Matthew Hedrick

Senior Analyst