Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. Owing to high energy prices and increases in indirect taxes in some euro area countries, inflation rates are likely to remain above 2% for the remainder of 2012. They are expected to fall below that level in the course of next year and to remain in line with price stability over the policy-relevant horizon. Consistent with this picture, the underlying pace of monetary expansion continues to be subdued. Inflation expectations for the euro area remain firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term. Economic activity in the euro area is expected to remain weak, although it continues to be supported by our monetary policy stance and financial market confidence has visibly improved on the back of our decisions as regards Outright Monetary Transactions -LRB- OMTs -RRB-. At the same time, the necessary process of balance sheet adjustment in large parts of the financial and non-financial sectors as well as high uncertainty continue to weigh on the economic outlook. It is essential for governments to support confidence by forcefully implementing the necessary steps to reduce both fiscal and structural imbalances and to proceed with financial sector restructuring.
The Governing Council remains firmly committed to preserving the singleness of its monetary policy and to ensuring the proper transmission of the policy stance to the real economy throughout the euro area. As we said before, we are ready to undertake OMTs, which will help to avoid extreme scenarios, thereby clearly reducing concerns about the materialisation of destructive forces.
Let me now explain our assessment in greater detail, starting with the economic analysis. Euro area real GDP contracted by 0.2%, quarter on quarter, in the second quarter of 2012, following flat growth in the previous quarter. As regards the second half of 2012, the available indicators continue to signal weak activity. While industrial production data showed some resilience in July/August, most recent survey evidence for the economy as a whole, extending into the fourth quarter, does not signal improvements towards the end of the year.
Looking ahead to next year, the growth momentum is expected to remain weak. It continues to be supported by our standard and non-standard monetary policy measures, but the necessary process of balance sheet adjustment in the financial and non-financial sectors and an uneven global recovery will continue to dampen the pace of recovery. The risks surrounding the economic outlook for the euro area remain on the downside.
Euro area annual HICP inflation was 2.5% in October 2012, according to Eurostat 's flash estimate, compared with 2.6% in September and August. On the basis of current futures prices for oil, inflation rates could remain at elevated levels, before declining to below 2% again in the course of next year. 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. Current levels of inflation should thus remain transitory. We will continue to monitor closely further developments in costs, wages and prices.
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. The main downside risks relate to the impact of weaker than expected growth in the euro area, in the event of a renewed intensification of financial market tensions, and its effects on the domestic components of inflation.
Turning to the monetary analysis, the underlying pace of monetary expansion continues to be subdued. In September the annual growth rate of M3 decreased to 2.7%, from 2.8% in August. Monthly outflows from M3 reflected to some extent the reversal of portfolio shifts into the most liquid components of M3. Accordingly, the annual rate of growth of M1 declined to 5.0% in September, from 5.2% in August. At the same time, we have observed a strengthening in the deposit base of banks in some stressed countries, amid improvements in investors ' confidence in the euro area.
The annual growth rate of loans to the private sector -LRB- adjusted for loan sales and securitisation -RRB- declined further to -0.4% in September, from -0.2% in August. This development was mainly due to further net redemptions in loans to non-financial corporations, which led to an annual rate of decline in these loans of -1.2%, compared with -0.5% in August. The annual growth in MFI lending to households remained unchanged at 0.9% in September. To a large extent, subdued loan dynamics reflect the weak outlook for GDP, heightened risk aversion and the ongoing adjustment in the balance sheets of households and enterprises, all of which weigh on credit demand. At the same time, in a number of euro area countries, the segmentation of financial markets and capital constraints for banks restrict credit supply. The recent results of the bank lending survey for the third quarter of 2012 underpin this assessment.
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, thereby contributing to an adequate transmission of monetary policy to the financing conditions of the non-financial sectors in the individual countries of the euro area. It is thus essential that the resilience of banks continues to be strengthened where needed.
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.
Other economic policy areas need to make substantial contributions to ensure a further stabilisation of financial markets and an improvement in the outlook for growth. Structural reforms are crucial to boost the growth potential of euro area countries and to enhance employment. Policy action is also necessary to increase the adjustment capacity of euro area economies in order to complete the ongoing process of unwinding existing imbalances. Visible progress is being made in the correction of unit labour costs and current account imbalances. However, further measures to enhance labour market flexibility and labour mobility across the euro area are warranted. Such structural measures would also complement and support fiscal consolidation and debt sustainability. As regards fiscal policies, there is clear evidence that consolidation efforts in euro area countries are bearing fruit. It is crucial that efforts are maintained to restore sound fiscal positions, in line with the commitments under the Stability and Growth Pact and the 2012 European Semester recommendations. Full compliance with the reinforced EU fiscal and governance framework, including the rapid implementation of the fiscal compact, will send a strong signal to markets and strengthen confidence in the soundness of public finances.
The Governing Council takes note of the European Council conclusions on completing Economic and Monetary Union, adopted on 18 October 2012. In the context of measures to achieve an integrated financial framework, it welcomes in particular the objective of agreeing on the legislative framework for a Single Supervisory Mechanism -LRB- SSM -RRB- by 1 January 2013 with a view to the SSM becoming operational in the course of 2013.
Question: Given what you just said about the condition of the economy, and what you said in your speech yesterday, do you expect your projections for the economy to be revised downwards next month, and did you discuss a cut in interest rates?
Question: Also, considering the SME lending survey of last week, would you consider a further LTRO or possibly the purchase of corporate bonds or corporate ABS?
Draghi: We will certainly monitor developments in the euro area economy and these developments will be taken into account in the December staff projections. Certainly the outlook is being revised ; as you know, the European Commission has released its forecast, and there is a picture of a weaker economy, as I had the chance to say yesterday. So all this is bound to be taken into account in the staff projections in December.
Draghi: On interest rates, we always discuss all our instruments of monetary policy but, as I just said, the Governing Council decided to keep interest rates unchanged. We have not discussed what we are going to do next year in terms of monetary policy.
Question: Is the ECB satisfied with the degree of relief that the mere announcement of the OMTs has already brought to the markets? And in the current environment would you then theoretically be happy to never buy a single bond, or do you think that the rest of the euro area would benefit from a Spanish bailout request by giving you the opportunity to show your resolve and thereby clear the impaired transmission mechanism?
Question: My second question is on interest rates. I know you said you did not make a decision on the future main refinancing rate. Governing Council member Ewald Nowotny said that, for him, a negative deposit rate, should you decide to cut interest rates, does n't appear to be a realistic prospect to him. Is that an assessment that is shared in the Governing Council? Thank you very much.
Draghi: We did not discuss matters related to your second question.
Draghi: On the first question, we certainly take note that since the OMT announcement there has been a series of market improvements that I will just quickly list. First of all, we have a return of flows from the rest of the world, in particular from US money market funds, which was +16% in September, month on month, for the third consecutive month since the announcement. So, even though overall it continues to be a small exposure with respect to euro area banks and with respect to what it was at the beginning of last year, it is going up. Also, this form of lending has shifted considerably from secured to unsecured lending. Only 30% was secured, and this is the lowest figure since March. And this is a positive sign. Another positive sign is that there have been some limited renewed US dollar bond placements by euro area institutions. There has been a moderate pick-up in corporate issuance. As I had the opportunity to mention on other occasions, there have been a few issues of sovereign bonds by Ireland and Portugal. The funding plans of two large sovereigns like Italy and Spain are quasi-completed if not completed. And the share of foreign holdings of these bonds issued by Spain and Italy has gone up, which is also something that we had not seen for a while. Finally, the TARGET2 balances figure, which is another sign of how imbalances in the euro area are developing, has been stable now for two or three months, which is also another good sign. So all this is encouraging, and by itself this has certainly been equivalent to a further expansion of monetary policy, because financial market conditions are considerably easier now than they were two or three months ago.
Draghi: On the Spanish request, I will decline to make any comment. It is entirely in the hands of governments to decide about this. The conditions of the OMTs are clear and we stand ready to act. OMTs are, as you know, a fully effective backstop that is devised to remove the tail risk for the euro area, and we stand ready to act.
Question: I do need to press you again on Spain, unfortunately, because Spanish bond yields have gone up again -- you are nodding -- the longer Mr Rajoy hesitates. Would you like Spain to ask for aid?
Question: And my second question is: Do you consider financing conditions appropriate across the euro area right now, or do the current Italian and Spanish spreads still contain a redenomination risk? Thank you.
Draghi: Again, you keep on pressing, but I will keep on answering in the same way. It is entirely up to Spain, and to the Spanish Government, to take this decision. It is not up to the ECB. As I have said many, many times, the ECB has produced the OMTs. The OMTs are a fully effective back-stop mechanism. They are a device to remove tail risk, while -- at the same time -- not removing incentives for fiscal discipline, and delivering price stability. That mechanism is in place. And the conditions for accessing that mechanism are also very, very clear. Now, for the rest, the ball is now completely in the governments ' side of the court, not in that of the ECB.
Draghi: With respect to the financing conditions, I think that, rather than focusing on the levels of the spreads or interest rates, one should look more at the fragmentation of the euro area. So, when we talk about financing conditions, for example at financing for small and medium-sized enterprises -LRB- SMEs -RRB-, as was asked in the preceding question, when we are asked whether we are satisfied with the financing conditions, the answer is: no, we are not satisfied at all. We are observing a fragmentation of the euro area, a re-nationalisation of the banking systems, differences in the cost of funding that go beyond the fundamentals. Therefore, our priority now is to repair the monetary policy transmission channels, so that our monetary policy will actually deliver, will be able to deliver price stability.
Question:... you have always said that you can only fix the transmission mechanism if the OMTs are activated without the Spanish request. Then...
Draghi: No. OMTs will help to fix the transmission mechanism, but there are many other reasons why the transmission mechanism is not working. First and foremost among them is the lack of appropriate economic policies that are now in the process of being fixed. But let us not forget how we came to find ourselves in this situation. We know that there was a situation marked by bad equilibrium, where -- until three months ago -- we had self-fulfilling expectations, self-feeding expectations. At the same time, the countries concerned found themselves in this bad equilibrium because of policy mistakes of the past, or because of the lack of policy altogether. So the origins of the fragmentation of financial markets in the euro area are basically to be found in policy mistakes, and these have to be corrected.
Question: Mr Draghi, the Spanish Prime Minister, Mr Rajoy, has said that one of the reasons why he is taking his time with the request for a European bailout is because he wants assurance that the ECB 's intervention will actually bring down his country 's borrowing costs. Can you give Mr Rajoy this assurance today?
Draghi: No. I think I have answered this question before. First, there is a general statement. The way the OMTs have been designed foresees, as we have discussed many times, that, as a necessary condition, the country should sign up with an ESM programme, and that a role for the IMF would be actively sought and would be welcome. But this is the necessary condition -- it is not also the sufficient condition. So, the Governing Council will take its final decision in total independence. And in so doing, it can not give any assurance ex ante. Because we have to make our monetary policy assessment, we have to make an assessment of the actual state of fragmentation of the financial markets. So, I think there is not any automatic quid pro quo. We know that the mechanism is a fully effective back-stop, and it is in place. But it is up to the countries to take all the right steps to ensure that this mechanism can be activated.
Question: My second question is on Greece. Last night, Greece managed to approve another austerity package. Is this enough and would the ECB now be willing to help make Greece 's debt burden more sustainable, and if so, what could you do?
Draghi: The ECB and the Governing Council certainly welcome the outcome of the vote yesterday. It is a very important step that the Greek government and the Greek citizens have undertaken. It really represents progress, especially if one compares the situation with what it was a few months ago. Another vote is expected on the budget on Sunday. The governments will discuss the Greek situation at next week 's Eurogroup meeting. The ECB ensures price stability and wants to repair monetary policy transmission channels, but it can not undertake monetary financing.
Question: Next week Greece will have to refinance $ 5 billion of Treasury bills and that is likely to be done again through emergency liquidity assistance. How much longer is the ECB going to tolerate that sort of behaviour and could you also please explain why emergency liquidity assistance is not a form of monetary financing?
Question: Second, do you see evidence that this sort of funding is being used increasingly elsewhere, for example in Cyprus? Are you worried about this, especially in the light of very tight fiscal policies?
Draghi: We consider this type of financing to be temporary. We do not consider emergency liquidity assistance to be monetary financing ; it is one of our instruments.
Draghi: We are keeping a close eye on developments in Cyprus, but it is ultimately up to the government to respond to this situation, not the ECB.
Question: My first question is on inflation expectations. After OMTs were announced in September, we saw a very strong increase in gold prices, with $ 3 billion going into gold ETFs and ETCs just in that month. Is that a sign of speculation or of increased inflation expectations?
Question: My second question relates to unit labour costs. You said that there has been visible progress in the correction of unit labour costs. Most economists say that unit labour costs are not a good way to measure competitiveness because you have this unemployment productivity. They say that one should look at the GDP deflators because there we do not really see any great progress being made. Are they right or wrong?
Draghi: The increase in gold prices is exactly that. Why this should depend on OMTs is a mystery to me. We are constantly looking at inflation expectations over several horizons, and no matter what horizon we look at, we continue to see that they are solidly anchored. To ask whether the price of a specific asset forecasts an increase in the inflation rate is always a very risky question. You see asset prices going up and down, and to infer from an increase in the price of one asset that inflation will go up, and that inflation will go up because of OMTs, which have n't created any liquidity yet, is really a very rash assumption.
Draghi: With regard to the improvement in labour costs, yes, there has been an improvement in unit labour costs in several countries. This may certainly be partly the consequence of an increase in productivity, which, as the economists you mentioned correctly say, could be cyclical. However, we also observe an improvement in the current account balances of these countries. You are also right when you say that, in spite of the changes in unit labour costs in some countries, we do not observe comparable changes in the GDP deflator, which may be due to other reasons. For example, in one country unit labour costs have fallen, but there has been no change in the GDP deflator or HICP inflation rate because energy prices remain very high. The other reasons have more to do with the inertia that the components of value added show in adjusting to the new situation.
Question: I have a completely different question concerning collateral framework rules. I just want to know how exactly you want to make sure that national central banks might not again bend the collateral framework rules according to their needs. How do you want to make sure that the credibility of the ECB as a risk manager will not be hurt?
Draghi: Let me first make a clarification, because there has been a lot of press on this point in the last week. The first clarification is purely factual: the nominal amount of collateral being posted was not EUR 80 billion, but EUR 10 billion. The second clarification is that all this had no impact at all on our lending. So nobody received more than they should have received because of this mistake -- because it was a mistake. The impact of this is zero, but we take this mistake very seriously. And so the Governing Council has mandated the Eurosystem Audit Committee, which is chaired by Governor Liikanen, to assess the implementation of the collateral framework in the Eurosystem and we will have an initial assessment of this at our next Governing Council meeting and then we will discuss whether further analysis or further action is needed and I will keep you posted on that.
Question: I would like to go back to the economic outlook. You have mentioned recently that there are some deflationary risks in some European countries. You have talked about unemployment being deplorably high. Why are n't you cutting rates, why are n't you considering some kind of quantitative easing? Is n't that an appropriate role for monetary policy?
Question: And my second question, back to the Greece issue: You said you wo n't do anything that is monetary financing, but are there things you could do that would not cross that line? Specifically, could you sell your bonds at cost to Greece or to the ESM? Could you somehow redirect your profits back to Greece? Do you have options or are you just telling the governments that you have no role in this whatsoever?
Draghi: Well, let me first just point out that I never mentioned deflation. Deflation is a generalised fall in the price level across sectors and it is self-sustaining. And so far we have not seen signs of deflation, neither at the euro area level nor at country level. We should also be very careful about not mixing up what is a normal price readjustment due to the restoration of competitiveness in some of these countries. They will necessarily have to go through a re-adjustment of prices. We should not confuse this readjustment of prices, which is actually welcome, with deflation. Basically, we see price behaviour in line with our medium-term objectives. So, we see price stability over the medium term. Also consider that monetary policy is already very accommodative, consider the very low level of interest rates and that real interest rates are negative in a large part of the euro area, and consider how many measures we have taken in just one year: several cuts in interest rates, halving the reserve ratio, two LTROs for a gross amount of EUR 1 trillion and so on and so forth. We have gone through this together many times, so I will not repeat it. And then we had the OMT announcement, which by itself produced an easing of financial market conditions. But we will certainly continue monitoring economic activity and we stand ready to act. As I said before, we stand ready to act with the OMT once the prerequisites are in place, but we also stand ready to act with the rest of our standard monetary policy instruments.
Draghi: On Greece, we certainly can not do monetary financing. I repeat this. On the profits of the SMP holdings, we already decided this at the time of the first PSI because what happens is that these profits naturally accrue to the central banks that are members of the Eurosystem. And then the central banks, in their independence or according to their legislation, will transfer these profits to the governments and then it is up to the governments to decide whether they want to re-use these profits for Greece. And the governments actually committed themselves to do so at that time.
Question: So you 're done, the ECB is done on Greece?
Draghi: The ECB is as you say, by and large, done.
Question: A question still relating to SMP profits. I am just trying to make a fair estimate of the scale of this profit, assuming that you have 60 billion on your balance sheet, bought at 75% of its face value, and get interest income of 5% over five years ; that would mean 30 billion profit. Is that a fair estimate of the profit of the SMP holding?
Draghi: I am very sorry but I am not in a position to answer this question. I can provide you with an answer later.
Question: Provided that it is being paid back in full. Is it a fair estimate?
Draghi: I do not have an answer now.
Question: Two questions. First of all, just again on inflation. You said today that the risks were balanced on the upside and the downside. I think when you were talking behind closed doors to German Members of Parliament, you said the other day, in the text of the speech that was released anyway, that there was, if anything, a downside risk. Could you just clarify, which is it? Is it balanced or is it a downside risk?
Question: The second question is on LTROs. Your neighbours in the tower block just over there in Commerzbank said, this morning, that they plan to hand back their LTRO funding at the end of the year, as soon as they can, basically. This is essentially because they do not seem to be able to find anything useful to do with it ; it costs them 0.75% ; they are just parking it with the Eurosystem at 0%. Is that a worrying sign? Should these banks be finding companies to lend that money to, or are you relaxed about a sudden end to all these LTRO borrowings?
Draghi: On inflation, I think I have always said, at least in the recent past, that risks are broadly balanced because, on the one hand, you have the downside risks that come from the weak level of economic activity and high unemployment. On the other hand, you have the upside risks that come from energy prices and the widespread use of indirect taxation, especially VAT, by countries that need to consolidate their budgets. So, the two things, by and large, balance themselves and this is the assessment that I would still maintain today.
Draghi: On the LTRO: no, it is not necessarily a matter of concern. Actually, in a sense, it is the best response to all those who were saying" you are flooding the world with liquidity '' ; now, you see that this is not happening. You see that, in fact, money is coming back, and the balance sheet of the ECB will shrink down correspondingly. No consequences on inflation had followed since the time when we decided on the LTRO, way back in January/December last year. Whether banks return LTRO because they do not lend it because of risk aversion or because credit demand is weak, I am not in a position to say today. But, certainly, these must be the two reasons: either they are fearful to lend -- and here we are talking about banks that do not have capital constraints of course -- so, assuming that they do not have any capital constraints, banks do not lend because either the risk aversion is too high or because there is no demand. This could be a sign of either of the two factors. The important thing with the LTROs was that, again, we removed tail risks coming from the lack of funding that would have happened in the first quarter of this year. The objective has been achieved.
Question: Did you try to saddle the" OMT horse '' from the other side? You said the OMT was there to avoid extreme scenarios, extreme risks. Could you foresee a scenario, an extreme scenario, where the OMT would be triggered without the conditionality in place, or without parts of the conditionality in place, because, as I said, it might be too extreme a scenario?
Question: The other thing is, after yesterday 's speech, and also after the statements today, the markets are taking the view that we are going to see a rate cut next time around. Would you say that the markets are grossly misguided?
Draghi: Well, on the second question, as you know, I can not comment.
Draghi: On the first question, you are asking me: could there be an OMT without conditionality? The answer is no.
Question: Mr Draghi, I have a question concerning the euro zone and the United States, where we just had the elections. Under the pressure of the markets in Europe, the reform process started two years ago in Italy and in Spain. In the United States it is said that there the reforms could not start. We are all wondering whether they will start now. What do you think, in your eyes, is Europe 's potential to catch up with the United States? Do you think that Europe can have a comeback, a sort of comeback, in the near future?
Draghi: What I can say is that both the euro area as a whole and the individual countries forming the euro area -- and I would not have made this statement a year ago, by the way -- have a fundamental position, which is way more balanced than the United States, but also than other countries: Japan or the United Kingdom. The euro area has a current account balance which is basically in balance -- zero -- that, both as corporate debt and household debt, is relatively low all over the euro area ; saving ratios are high ; and as I was saying before, unit labour costs are on their way down. The fiscal consolidation that has taken place all over the euro area is amazing. When we look at the other parts of the world, it is not so amazing at all. So, deficit-to-GDP levels are on their way down everywhere, even in the countries which have the highest ones. So, all this basically poises the euro area for a recovery, which should be, or probably is going to be, slow, gradual but also solid, looking exactly at these fundamentals. So, what we have to overcome now is the sort of fragmentation ; that is our major challenge ahead and I think we have made, collectively, significant progress on that route.
Question: Mr Draghi, you said before that that the monetary policy stance is very accommodative at this time and you mentioned the bunch of measures taken in the past year. Is this the time, or is this absolutely not the time, to think about the point when you will abandon this strategy? Do you prepare for it, maybe in your mind, or is it not something you are thinking about at all at the moment?
Question: Secondly, through the supervisory mechanism that you welcome, the ECB will soon be giving a formal legal opinion, but could you give us your opinion now, if you have one, on the information that Paris and Berlin are in favour of a woman chairing this authority.
Draghi: On the first question: we look at price stability and we will decide on our strategy and the timing of our exit depending on how we see price stability over the medium term. So far, we see no reason to change our monetary policy, looking at price stability over the medium term.
Draghi: On the second point: gender considerations are close to our hearts and minds. That goes for both the Executive Board and me personally. We understand that the European Parliament, with whom we have always had excellent relations, has valid concerns about this, and our hearts and minds are really open with respect to this. This has to do with my answer to your point about the supervisory mechanism and who might chair it. Gender concerns are very important and, actually, the ECB has been quite active on this. Let me just go through some of the things we have done in order to show you how we all care about this. We have been very active as far as our recruitment success rate is concerned and we are doing fairly well at staff level. We are not doing well at management level, so we have to improve in that respect. However, we have launched a series of actions which I think will bear some fruit here. We know we have to improve at management level.
Question: You said the original financial fragmentation was a policy mistake and that structural reforms are needed. Are you satisfied with the reform path and the reform speed you see in Spain and Italy, or would you expect more and faster reforms?
Draghi: I think this is an important question. In answering it, I would ask you not to take a medium-term, but a short-term perspective. Compare the situation today with how it was even less than a year ago and the conclusion is unavoidable: there has been substantial progress. Is the task finished? Not at all. There is a lot more to do, obviously on the fiscal consolidation path, but -- and this is more and more significant as time goes by -- also on the structural reforms.
Question: But is it happening fast enough?
Draghi: Again, it depends on your perspective, because if you compare the current speed of reform with the speed of reform in those countries in the previous five years, then you are bound to say that it is very fast. But if you are asking me whether it will ever be fast enough, I will put it this way: the faster it is ; the sooner financial market conditions in Europe will return to normal.
Question: I will take your perspective, because you said the main problem was the lack of structural reforms and that you can not solve the problem -- it is up to the countries to do so. So, from your perspective, is the speed of reform fast enough for financial conditions to return to normal?
Draghi: It does not matter what speed we would like to see, as it is ultimately for the citizens of these countries to decide on the speed. They should know that these structural reforms have to be made. They are unavoidable and necessary. Eventually, prosperity, growth and job creation will come out of them. The actual pace of the reforms is a combination of many factors but, first and foremost, the political realities of these countries. As I said, the sooner this process is brought forward, the quicker the euro area will get back to normal in the euro area because -- and let us not forget this -- the financial conditions in the euro area started to worsen after the financial crisis, but this was because very unsatisfactory policies were found to be in place in many countries.