Conditions are improving in Europe

“On the one hand, the evidence suggests that the acute deflation risks have disappeared and that inflation is set to pick up over the coming years. And contrary to a widespread perception, euro area economic conditions have also been steadily improving…And in the last quarter, the recovery has been broadening across sectors and across countries.”

…as inflation picks up

“The pickup in headline inflation in December and in January largely reflects sizeable upward base effects and recent increases in energy prices. So far underlying inflation pressures remain very subdued and are expected to pick up only gradually as we go on. This lack of momentum in underlying inflation reflects largely weak domestic cost pressures. The still significant degree of labour market slack and weak productivity developments are weighing down on wage growth.”

Euro area subject to global risk

“Looking ahead, risks to the euro area outlook remain tilted to the downside and relate predominantly to global factors. Our current monetary policy stance foresees that, if the inflation outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council is prepared to increase the asset purchase programme in terms of size and/or duration.”

Low interest rates have an impact on banks

“Low (and negative) rates might dent bank profits through the narrowing of net interest margins. At the same time, in supporting the recovery, accommodative monetary policy reduces delinquency and default. It thus improves the credit quality of firms and households. This improved credit quality in loan portfolios – together with increasing intermediation volumes – is certainly positive for banks. It has been a key factor sustaining banks’ earnings over the last year. Moreover, low longer-term interest rates increase the market value of financial assets held by banks. This, in turn, results in capital gains that further support bank profitability. This aggregate picture masks some heterogeneity within the banking sector.”

He doesn’t think there are asset bubbles presently

“Currently, we do not see compelling evidence at the euro area level of stretched asset valuations. Both corporate bond spreads and equity prices appear to be broadly in line with fundamentals. Similarly, real estate price growth remains moderate in the area as a whole, although significant cross-country heterogeneity is observable. This assessment is corroborated by the fact that credit growth is still modest, which suggests that asset price developments are not accompanied by increasing leverage.”

https://www.ecb.europa.eu/press/key/date/2017/html/sp170206.en.html

ECB rates unchanged and expected to stay lower for longer

“… 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 0.00%, 0.25% and -0.40% respectively. The Governing Council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases.”

Asset purchases to continue but at a reduced rate

“…we will continue to make purchases under the asset purchase programme (APP) at the current monthly pace of €80 billion until the end of March 2017. From April 2017, our net asset purchases are intended to continue at a monthly pace of €60 billion until the end of December 2017, or beyond,”

Slightly stronger growth globally

“The pass-through of our monetary policy measures to the real economy is supporting domestic demand and has facilitated deleveraging. Improvements in corporate profitability and very favourable financing conditions continue to promote a recovery in investment. Moreover, sustained employment gains, which are also benefiting from past structural reforms, provide support for households’ real disposable income and private consumption. At the same time, there are indications of a somewhat stronger global recovery.

..but dampened Growth in Europe

“…economic growth in the euro area is expected to be dampened by a sluggish pace of implementation of structural reforms and remaining balance sheet adjustments in a number of sectors. This assessment is broadly reflected in the December 2016 Eurosystem staff macroeconomic projections for the euro area, which foresee annual real GDP increasing by 1.7% in 2016 and 2017, and by 1.6% in 2018 and 2019. Compared with the September 2016 ECB staff macroeconomic projections, the outlook for real GDP growth is broadly unchanged. The risks surrounding the euro area growth outlook remain tilted to the downside.”

Inflation expected to pick up 

“Looking ahead, on the basis of current oil futures prices, headline inflation rates are likely to pick up significantly further at the turn of the year, mainly owing to base effects in the annual rate of change of energy prices. Supported by our monetary policy measures, the expected economic recovery and the corresponding gradual absorption of slack, inflation rates should increase further in 2018 and 2019.”

A modest recovery in Europe 

“The recovery – albeit modest – is robust. We are growing and inflation is improving. Europe’s GDP has returned to its pre-crisis level, although this has taken seven and a half years…The main drivers behind this recovery have been low oil prices and our monetary policy. This recovery is stronger than past ones because it is based on the increase in consumption and domestic demand, and not only on exports.”

Politics has been and will continue to be a major influencer

“Indeed, political uncertainty is dominant. This year we have suffered a multitude of uncertainties: first there was the slowdown in China and the stagnation of world trade, then the Brexit referendum and the election in the United States. The key question is how much this political uncertainty is going to affect the economic recovery…In the medium term it is not yet clear what the consequences of past, current and future political uncertainty will be. There will be consequences, that much is certain.”

On Brexit

“The longer the negotiations take, the longer the uncertainty. It will be more difficult for investors and other economic agents in the UK to make decisions. Now, the impact of course is going to be stronger on the UK than it is on the EU and on the euro area, but certainly the UK is a large economy, so it will have an effect here too.”

There are no bubbles in the Euro area

“We are monitoring financial stability risks, but we see no bubbles in the euro area. There are house price increases in Milan, Barcelona and some German cities, but they are selective and limited to specific areas. In order to speak of bubbles there must be a hike in prices and strong increases in lending. We are not seeing that dynamic. Lending is growing, but at rates of 3%, not at the 15% we saw before the crisis.”

Having weighed the pros and cons of low interest rates, low rates are essential for recovery

“We are aware that low interest rates affect the interest rate margins of some banks, but they also have positive effects on bank profitability by supporting the recovery, reducing loan losses and increasing the valuation of assets. We also cannot deny that some people, like pensioners without debt who rent their homes, may be hurt by low interest rates. The only honest answer that we can give them is that the low interest rates are essential for a full recovery, and when this is achieved interest rates will rise.”

Full transcript at:

https://www.ecb.europa.eu/press/inter/date/2016/html/sp161130.en.html

https://www.ecb.europa.eu/press/pressconf/2016/html/is161020.en.html

Same Old: As lower for longer rates continue

“…we decided to keep the key ECB interest rates unchanged. We continue to expect them to remain at present or lower levels for an extended period of time, and well past the horizon of our net asset purchases. ”

..and with continued asset purchases

“Regarding non-standard monetary policy measures, we confirm that the monthly asset purchases of €80 billion are intended to run until the end of March 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.”

Resilient Eurozone

“Following the UK referendum on EU membership, our assessment is that euro area financial markets have weathered the spike in uncertainty and volatility with encouraging resilience. ”

Slower growth in Q2; Modest growth expected in Q3

“Euro area real GDP increased by 0.6%, quarter on quarter, in the first quarter of 2016, after 0.4% in the last quarter of 2015. Growth continues to be supported by domestic demand, while export growth has remained modest. Incoming data point to ongoing growth in the second quarter of 2016, though at a lower rate than in the first quarter. Looking ahead, we continue to expect the economic recovery to proceed at a moderate pace..”

Headwinds remain

“…headwinds to the economic recovery in the euro area include the outcome of the UK referendum and other geopolitical uncertainties, subdued growth prospects in emerging markets, the necessary balance sheet adjustments in a number of sectors and a sluggish pace of implementation of structural reforms. Against this background, the risks to the euro area growth outlook remain tilted to the downside.”

From deflation to Inflation with inflation

“According to Eurostat, euro area annual HICP inflation in June 2016 was 0.1%, up from -0.1% in May, mainly reflecting higher energy and services price inflation. Looking ahead, on the basis of current futures prices for oil, inflation rates are likely to remain very low in the next few months before starting to pick up later in 2016, in large part owing to base effects in the annual rate of change of energy prices.”

Tapering is not on the table yet

“We did not discuss tapering”

A 0% target inflation is not good for the economy

“Sometimes people wonder whether price stability doesn’t mean inflation of 0%. It does not, because both inflation that is too high and inflation that is too low for too long can damage the economy. A steady, measured rate of inflation below, but close to, 2% in the medium term acts like a cushion that protects our economies from drifting into the dangerous territory of negative inflation even when there is just a minor economic shock.”

The measures to boost the inflation rate have been successful

“Our measures have delivered. We estimate that they will raise the inflation rate by more than half a percentage point, on average, over 2016 and 2017. They will also contribute to increasing real euro area GDP growth by more than one and a half percentage points cumulatively between 2015 and 2018, which will support job creation.”

Low rates reflect the slump in economic growth

“Low rates are a symptom of the underlying economic situation. They reflect weak long-term growth trends and the protracted macroeconomic slump that has resulted from the crisis. ”

Efforts bearing fruit

“Through our efforts to bring inflation back towards 2%, we have contributed to higher growth and the creation of more jobs. In Germany, exports are benefitting from the recovery in the euro area, unemployment is at its lowest level since reunification, people’s take-home pay is increasing noticeably, and venture capital is pouring into Berlin’s silicon alley.”

Lose here, gain there

“What a household may lose in terms of little interest on their bank account, it might save in lower mortgage payments for their home. And it might benefit from rising bond and stock prices in their retirement fund. In fact, evidence shows that between 2008 and 2015 interest payments by households in Germany, as a percentage of gross disposable income, fell more sharply than interest earnings.”

The ECB is not solely to blame for low bank profitability

“The ECB’s monetary policy is not the main factor for the low profitability of banks. While some banks’ business models may indeed need to adapt to the current low interest rate environment, they also need to address their own structural issues, such as overcapacity, the stock of non-performing loans and the potential impact of technological innovation. Low profitability is closely linked to low operational efficiency.”

The Euro area is not overheating.

“Of course, low interest rates for a long period might carry the risk of overvaluation in asset markets as a result of the search for yield. This is why we closely monitor potential risks to financial stability that might emanate for instance from local real estate markets. But at the moment we are not seeing any overheating in the euro area or the German economy as a whole.”

Real interest rates depend on the long term growth prospects of the economy

“It should also be noted that the level to which real interest rates can eventually return when the economy strengthens is not determined by monetary policy. Instead, it depends on the economy’s long-term growth prospects. Productivity and demographics play a decisive role in this, and the development of these factors has not been favourable in Europe in recent years.”