Thursday, March 10, 2016

ECB cuts rates, boosts QE to counter weak exports

    The European Central Bank (ECB) launched an aggressive package of measures in response to weaker demand from emerging markets on its exports that include cutting its key policy rate and pushing its deposit rate further into negative terrain.
     The ECB, which lowered its forecast for economic growth and inflation to reflect the twin forces of lower exports and oil prices, cut the refinancing rate by 5 basis points to 0.0 percent, the deposit rate by 10 basis points to minus 0.40 percent and the marginal lending facility by 5 points to 0.25 percent.
    "With today's comprehensive package of monetary policy decisions, we are providing substantial monetary stimulus to counteract heightened risks to the ECB's price stability objective," ECB President Mario Draghi told a news conference.
     Draghi said the ECB is committed to keeping its policy easy for a long time - and may even loosen it further if necessary - saying he "expects the key ECB rates to remain at present or lower levels for an extended period of time, and well past the horizon of our net asset purchases."
     However, Draghi added that as of now, taking into account the expected impact of the latest measures on growth and inflation, the ECB did not anticipate further rate cuts.
     In addition, the ECB expanded its monthly asset purchases by 20 billion euros to 80 billion, adding that the current program is intended to run until the end of March 2017 but could also run even longer or at least until inflation is nearing its target of below, but close to 2.0 percent.
    In order to strengthen the effect of its asset purchases, the ECB will now also purchase euro-denominated, investment-grade bonds by non-banks. This expanded list of bonds will take effect toward the second quarter, Draghi said.
    As the final part of its package, the ECB will launch four new longer-term refinancing operations - named TLTRO II - each with a maturity of four years and starting in June. Financial institutions will be able to borrow up to 30 percent of their stock of eligible loans and the interest rates will be fixed over the life of the loans at the rate of the main refinancing operations.
    For banks whose lending exceeds a certain level, the rate on the refinancing operations will be even lower, and may equal the ECB deposit rate, now at minus 0.40 percent.
   "The new operations will reinforce the ECB's accommodative monetary policy stance and will strengthen the transmission of monetary policy by further incentivizing bank lending to the real economy," Draghi told a press conference.
    The combination of rate cuts, expanded asset purchases and a new refinancing operation was more aggressive than expected by most economists and comes after the ECB at its previous meeting in January raised the prospect of further easing in connection with an update of its forecasts.
    Since January, the euro zone has fallen back into deflation with headline inflation falling to minus 0.2 percent in February from 0.3 percent in December, and core inflation, which excludes energy, food, alcohol and tobacco, down to 0.7 percent from 1.0 percent.
    Draghi acknowledged that low or even negative inflation is "unavoidable over the next few months," due to changes in oil prices, and underscored that the ECB was anxious to prevent low inflation from becoming entrenched in other prices and expectations.
    Fresh data show weaker-than-expected growth at the start of this year, with growth dampened by subdued growth prospects in emerging markets, volatile financial markets, the sluggish pace of structural reforms and the necessary pay-down of debt.
     In its latest forecast, the ECB lowered its forecast for 2016 economic growth in the 19-nation area to 1.4 percent from December's forecast of 1.7 percent, and the 2017 forecast to 1.7 percent from 1.9 percent. The forecast for export growth this  year was cut to 3.0 percent from 4.0 percent and the 2017 forecast was trimmed to 4.3 percent from 4.8 percent.
     The outlook for inflation this was cut to 0.1 percent, up from 2015's 0.0 percent, from the December forecast of 1.0 percent. For 2017 inflation is seen rising to 1.3 percent compared with the previous forecast of 1.6 percent.

     The European Central Bank issued the following introductory statement to a press conference by its president, Mario Draghi and a transcript of the question and answer session:

"Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. We will now report on the outcome of today’s meeting of the Governing Council, which was also attended by the Commission Vice-President, Mr Dombrovskis.
Based on our regular economic and monetary analyses, we have conducted a thorough review of the monetary policy stance, in which we also took into account the new macroeconomic projections by our staff extending into the year 2018. As a result, the Governing Council has decided on a set of measures in the pursuit of its price stability objective. This comprehensive package will exploit the synergies between the different instruments and has been calibrated to further ease financing conditions, stimulate new credit provision and thereby reinforce the momentum of the euro area’s economic recovery and accelerate the return of inflation to levels below, but close to, 2%. 
First, as regards the key ECB interest rates, we decided to lower the interest rate on the main refinancing operations of the Eurosystem by 5 basis points to 0.00% and the rate on the marginal lending facility by 5 basis points to 0.25%. The rate on the deposit facility was lowered by 10 basis points to -0.40%. 
Second, we decided to expand the monthly purchases under our asset purchase programme from €60 billion at present to €80 billion. They 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 aim of achieving inflation rates below, but close to, 2% over the medium term. To ensure the continued smooth implementation of our asset purchases, we also decided to increase the issuer and issue share limits for the purchases of securities issued by eligible international organisations and multilateral development banks from 33% to 50%.
Third, we decided to include investment-grade euro-denominated bonds issued by non-bank corporations established in the euro area in the list of assets that are eligible for regular purchases under a new corporate sector purchase programme. This will further strengthen the pass-through of our asset purchases to the financing conditions of the real economy. Purchases under the new programme will start towards the end of the second quarter of this year.
Fourth, we decided to launch a new series of four targeted longer-term refinancing operations (TLTRO II), starting in June 2016, each with a maturity of four years. These new operations will reinforce the ECB’s accommodative monetary policy stance and will strengthen the transmission of monetary policy by further incentivising bank lending to the real economy. Counterparties will be entitled to borrow up to 30% of the stock of eligible loans as at 31 January 2016. The interest rate under TLTRO II will be fixed over the life of each operation, at the rate on the Eurosystem’s main refinancing operations prevailing at the time of take-up. For banks whose net lending exceeds a benchmark, the rate applied to the TLTRO II will be lower, and can be as low as the interest rate on the deposit facility prevailing at the time of take-up. There will be no requirement for mandatory early repayments under TLTRO II, and switches from TLTRO I will be allowed.
Finally, looking ahead, taking into account the current outlook for price stability, the Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of our net asset purchases.
Separate press releases with further details of the measures taken by the Governing Council will be published this afternoon at 15:30 CET. 
Adding to the measures taken since June 2014, with today’s comprehensive package of monetary policy decisions we are providing substantial monetary stimulus to counteract heightened risks to the ECB’s price stability objective. While very low or even negative inflation rates are unavoidable over the next few months, as a result of movements in oil prices, it is crucial to avoid second-round effects by securing the return of inflation to levels below, but close to, 2% without undue delay. The Governing Council will continue to monitor very closely the evolution of the outlook for price stability over the period ahead. 
Let me now explain our assessment in greater detail, starting with the economic analysis. Euro area real GDP growth was confirmed at 0.3%, quarter on quarter, in the fourth quarter of 2015, supported by domestic demand, while being dampened by a negative contribution from net exports. The most recent survey data point to weaker than expected growth momentum at the beginning of this year. Looking ahead, we expect the economic recovery to proceed at a moderate pace. Domestic demand should be further supported by our monetary policy measures and their favourable impact on financial conditions, as well as by continued employment gains benefiting from past structural reforms. Moreover, the low price of oil should provide additional support for households’ real disposable income and private consumption, as well as corporate profitability and investment. In addition, the fiscal stance in the euro area is slightly expansionary, partly reflecting measures in support of refugees. However, the economic recovery in the euro area continues to be dampened by subdued growth prospects in emerging markets, volatile financial markets, the necessary balance sheet adjustments in a number of sectors and the sluggish pace of implementation of structural reforms.
This outlook is broadly reflected in the March 2016 ECB staff macroeconomic projections for the euro area, which foresee annual real GDP increasing by 1.4% in 2016, 1.7% in 2017 and 1.8% in 2018. Compared with the December 2015 Eurosystem staff macroeconomic projections, the outlook for real GDP growth has been revised slightly down, mainly reflecting the weakened growth prospects for the global economy.
The risks to the euro area growth outlook remain tilted to the downside. They relate in particular to the heightened uncertainties regarding developments in the global economy, as well as to broader geopolitical risks.
According to Eurostat’s flash estimate, euro area annual HICP inflation was -0.2% in February 2016, compared with 0.3% in January. All main HICP components contributed to this decline. Looking ahead, on the basis of current futures prices for energy, inflation rates are expected to remain at negative levels in the coming months and to pick up later in 2016. Thereafter, supported by our monetary policy measures and the expected economic recovery, inflation rates should recover further. The Governing Council will closely monitor price-setting behaviour and wage developments in the euro area, paying particular attention to ensure that the current low inflation environment does not become entrenched in second-round effects on wage and price-setting.
This broad pattern is also reflected in the March 2016 ECB staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 0.1% in 2016, 1.3% in 2017 and 1.6% in 2018. In comparison with the December 2015 Eurosystem staff macroeconomic projections, the outlook for HICP inflation has been revised down, mainly reflecting the fall in oil prices over recent months.
Turning to the monetary analysis, recent data confirm solid growth in broad money (M3), with the annual rate of growth of M3 standing at 5.0% in January 2016, after 4.7% in December 2015. Annual growth in M3 continues to be mainly supported by its most liquid components, with the narrow monetary aggregate M1 growing at an annual rate of 10.5% in January, after 10.8% in December.
Loan dynamics continued the path of gradual recovery observed since the beginning of 2014. The annual rate of change of loans to non-financial corporations (adjusted for loan sales and securitisation) increased to 0.6% in January 2016, up from 0.1% in December 2015. Developments in loans to enterprises continue to reflect the lagged relationship with the business cycle, credit risk and the ongoing adjustment of financial and non-financial sector balance sheets. The annual growth rate of loans to households (adjusted for loan sales and securitisation) remained stable at 1.4% in January 2016. Overall, the monetary policy measures in place since June 2014 have clearly improved borrowing conditions for firms and households, as well as credit flows across the euro area.
To sum up, a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis confirmed the need for further monetary stimulus in order to secure a return of inflation rates towards levels that are below, but close to, 2% without undue delay.
Monetary policy is focused on maintaining price stability over the medium term and its accommodative stance supports economic activity. However, in order to reap the full benefits from our monetary policy measures, other policy areas must contribute decisively. Given continued high structural unemployment and low potential output growth in the euro area, the ongoing cyclical recovery should be supported by effective structural policies. In particular, actions to raise productivity and improve the business environment, including the provision of an adequate public infrastructure, are vital to increase investment and boost job creation. The swift and effective implementation of structural reforms, in an environment of accommodative monetary policy, will not only lead to higher sustainable economic growth in the euro area but will also make the euro area more resilient to global shocks. As indicated by the European Commission, the implementation of country-specific recommendations continued to be fairly limited in 2015; reform efforts thus need to be stepped up in the majority of euro area countries. Fiscal policies should support the economic recovery, while remaining in compliance with the fiscal rules of the European Union. Full and consistent implementation of the Stability and Growth Pact is crucial to maintain confidence in the fiscal framework. At the same time, all countries should strive for a more growth-friendly composition of fiscal policies.
We are now at your disposal for questions."

Question: My first question is about the forward guidance that you have given that rates will be lower for a long time, also after the end of asset purchases. Is the duration of the new TLTRO to be looked at in this respect? And this will also extend to past the end of your mandate, if I'm not mistaken, or almost.
And my second question would be, when you say lower, how low can this be? I know that this has changed a lot in the last few years as new horizons have opened for monetary policy, but do you have any idea, are you approaching a limit? Or do you still have ample room to go? 
Draghi: On the TLTRO I just can give you a brief overview of what this operation is, keeping in mind there's going to be a press briefing at four today for all the further technical details that you may be interested in. Now, the TLTROs are refinancing operations that provide loans to banks with long maturity, and banks are given additional incentives to lend on the funds received. 
The key features of our TLTRO programme are the following: we will offer four operations, one each quarter, starting June 2016, until March 2017. The maturity of the operations will be four years each, so that the last TLTRO II will mature in March 2021. Banks will pay the MRO rate at the time of bidding, so right now it's zero. And they may even get a reduction on that rate which increases with the amount of loans they grant. So the maximum reduction will bring the rate on the TLTRO II to the level of the deposit facility rate at the time of bidding. The amount that banks can borrow is linked to the amount of loans that they have on their balance sheet, so a bank that's very active in granting loans to the real economy can borrow more than a bank that concentrates on other activities. The full list of features is in the press release that will be published after this press conference.
Why did we decide to have another series of TLTROs? Well, some of the main reasons are: loan growth in the euro area has been recovering now for quite a time, but it's still too low. Also, TLTRO II will – and we had actually a pretty successful experience with the first TLTRO – so we expect that TLTRO II will offer attractive long-term funding conditions to banks to further ease private-sector credit conditions and to stimulate credit creation. I think this is quite important now. Also it provides funding certainty – let's not forget it's a four-year operation – at an attractive price, in an environment of increasing volatility, and also an environment of large upcoming bond redemptions, bank bond redemptions. So banks face sizeable forthcoming funding needs, and so this occurs in an environment where the pricing of bank debt is volatile and uncertain. So we think that in conjunction with all the other measures, standard and non-standard, in place, this TLTRO II will contribute to a return of inflation rates to an objective of close to but below 2% over the medium term.
How low can we go? Let me say that rates will stay low, very low, for a long period of time, and well past the horizon of our purchases. From today's perspective, and taking into account the support of our measures to growth and inflation, we don't anticipate that it will be necessary to reduce rates further. Of course, new facts can change the situation and the outlook. Let me also add that the experience we've had with negative rates, in our case at least, has been very positive, in easing financing conditions, and in the transmission of these better financing conditions to the real economy. We are also aware that – by the way, here there are different views about whether negative rates have affected, or how they affect, the profitability of the banking system. We can discuss this later.
But let me tell you: does it mean that any negative rate will be positive? Does it mean that we can go as negative as we want without having any consequences on the banking system? The answer is no. And you probably know that we've discussed for some time the possibility of having a tiering system, so an exemption system for this operation, and in the end the Governing Council decided not to, exactly for the purpose of not signalling that we can go as low as we want on this. So the Governing Council, although it gives a positive judgement about the past experience, is increasingly aware of the complexities that this measure entails.
As I said before, we think, and we have numbers that show – and the Vice-President is particularly well documented on this – that the aggregate profitability of the banking system has not been hindered by the experience we had of negative rates, and he can comment on that at great length. But of course, this is an aggregate, and banks are not in the same position, and it doesn't mean that this is going to be true forever. So the bottom line of this is that basically more and more the emphasis will shift from rates instruments to other, non-conventional instruments. 
And one final word on this: you remember that negative rates were introduced for one specific reason: when interest rates reached the zero lower bound, the expectations for the future rates in the long term are only that the rates can go up. So with negative rates we were successful in taking these expectations down. To the extent that we have other instruments to do this, we'll certainly shift the emphasis to other instruments. And we've shown that through our APP purchases and other instruments; we've done that. 
May I ask the Vice-President to comment on his views on the profitability of the banking system?
Constâncio: The main point is, of course, that we have to consider a general equilibrium approach. It's not just taking one particular thing and then drawing the conclusion that our policies would be creating problems for the banks. But even in what regards the pure net interest margin of the banks, what we see for last year – a year during which throughout the whole year there were already negative rates in the deposit facility, as you recall – there was an increase in the net income margin in relation to the total assets of the banks. Or if you wish, also, in relation to the assets that earn an interest. So there was an increase, on average, of course, as the President referred to. 
This is important because this is not just about the volumes – because there was some increase in credit – no, this is about the average rate in relation to total assets. This reflects the fact that one of the consequences of negative rates is to decrease the funding rates for banks. Because the whole set of rates in the money market, the short end of the interest rates, came down as a result of the negative rates, and the banks that used money markets to fund themselves had much lower funding costs.
Then there are other effects of our policies. The fact that negative rates push down the whole yield curve, because by opening up the possibility in terms of expectations for future rates that the rates will be very low, the whole yield curve is lowered. And this means as it is lowered that there are capital gains, because the reverse of this is that the price of all the securities go up, and so the banks indeed had capital gains last year, and that was a result of our policy. 
And the other thing is that, according to our counterfactual with our models, we can demonstrate that the growth of the economy was higher than it would have been if we had not taken those measures, which means that the reduction in impairment costs that the banks incurred last year is due to the continuing recovery of the economy which we helped with our monetary policy, and this reduction in impairment costs was an element, with all the others, that led the return on equity of euro area banks to go up from 3.8% in 2014 to 5.7% last year. And let me remind you that the 5.7% is also in real terms, because inflation was zero. So this is the more general equilibrium analysis that has to be really considered when the question the impact of our policies on banks' profitability is discussed.
Question: By how much do you estimate that the adjustment of the issue and issuer limit and the inclusion of corporate bonds into the QE programme boosts the universe of QE-eligible assets? And how confident are you that this will be big enough now that you can comfortably implement the programme without either running into constraints or having to adjust the parameters of the QE programme again?
And perhaps a second question, I think the question just now on the forward guidance was whether it would be fair to see a link between the time you expect interest rates to stay low, or lower, to link that to the maturity of your new liquidity operations.
Draghi: We are confident that our decisions today in changing the parameters will provide the necessary boost for adequate operations of €80 billion a month until the horizon specified. So that's the answer. That is the answer, I think, and it's given €80 billion per month for the horizon specified. 
I'm sorry, what was the second question? It's the same question about the TLTRO?
Question: I think the question is whether you can deduce from the maturity of the TLTRO at four years that you don't expect interest rates to move up over the next four years.
Draghi: No, there is no relationship.
Question: You said that you'd ruled out using a tiered deposit rate system because you wanted to send a message about negative rates. Can I ask whether we're at the lower bound, then, for the deposit rate, or could we still go negative from here, even without a tiered deposit rate?
And a quick question about corporate bond purchases: there are many assets that are known as financials that are not specifically banks, so can you just clarify actually what assets can be purchased under that programme, or part of the programme?
Draghi: The answer to the second question is, we're going by investment grade of non-financial companies, and the committees will actually look into the specific definition of the companies you mention, that are not banks but are financial companies. So we haven't taken any decision today. The committees will look into this. 
On the first question, I think I've answered before. By the way, the final decision on not having a tiering system or an exemption system was not only the desire not to signal that we can go as low as we want, but also the complexity of the system is remarkable in an area like the eurozone, with many banks of different sizes, different conditions, in totally different market situations. So it was both the desire of not signalling, but also the inherent complexity in that. So I think I've answered the other question as well.
Question: Would you be able to quantify the size of the corporate debt market that you're talking about buying into, and perhaps also about the size of the take-up that you would anticipate for TLTROs and how you would explain the additional €20 billion of monthly purchases?
And then secondly, will the TLTROs do something to help Italian banks, and does that remain a concern of yours going forward?
Draghi: For me, there are different estimates as far as the potential volumes that can be mobilised in the corporate bonds markets, but I would defer to the press briefing later on to have an idea about that, rather than guessing numbers right now. Just say that the number of €80 billion includes that, so we are confident – I was asked before whether we are confident that that number can be achieved without further changes: yes, we are.
The other thing is, well, the take-up of TLTRO is very difficult to – it's up to the banks, it's up to the demand. We come from a successful experience with TLTRO I, as we know. We do expect a very sizeable take-up given that the recovery is continuing. It's fragile; it's continuing. It's actually admittedly gradual, but it's continuing. And given the very attractive conditions that are being put in place with these operations. 
I think when we discuss these issues, really, one doesn't have in mind a specific country. So you just have in mind the eurozone and what you want to do is to achieve price stability in the eurozone, not with a specific country in mind.
Question: You noted in your opening statement that the measures announced today exploit the synergies between different instruments. Could you explain a little bit more about what you mean by that?
And I don't quite understand the point about TLTROs not being some sort of guide to what's going to happen to interest rates in the year ahead. You've described the system as being one where banks can come and loan up to 30% of their assets for a period of four years at 0%. There's no payback options. Now, under those conditions would you not expect short-term interest rates to fall to near zero up to 2020? And if that is the case, and I haven't misunderstood, is that not removing some ability of your successor to be able to influence short-term rates during the first year in office?
Draghi: The first question is about the synergies. As you can see, the package is characterised by two different sets of actions. One is a general easing, namely the cut in the deposit facility rate, the sizeable increase in the monthly purchases, and the forward guidance. And then you have a second set of actions which is basically the TLTRO. I should also remember that in the asset purchase programme there's also other remarkable news, which is the broadening of the assets that we are purchasing to the corporate sector. 
Now, all these actions actually complement each other, in both increasing the amount of financing, in making financing conditions easier for the whole economy, attacking different points of the real economy, and favouring the pass-through from the banking system to the real economy. So we do expect substantially easier financing conditions through the various channels. So we do expect an increase in lending, but also increases, as I was saying before, in the bank bonds refinancing, so substantially easier financing conditions for the banks and for the final borrowers. In this sense there are very strong synergies between all the parts of this package.
The second question I'm not sure I understand. Banks will pay the MRO rate at the time of bidding, so they pay zero now. If the MRO rate were to change, they would pay the MRO rate at that point in time. And of course they can also switch from...
Constâncio: It's not indexed.
Draghi: It's not indexed, exactly. So they pay the MRO at that point in time. And then they may even get a reduction on that rate which increases with the amount of loans they grant. So the maximum reduction would bring the rate on the TLTRO II to the level of the deposit facility rate at the time of bidding. So a bank that borrows now would pay the MRO, zero. Then suppose that they actually go and satisfy the benchmark of lending: then they would get what the deposit facility rate is today, 40 [basis points]. So that's how it works.
Constâncio: Just to add something – that's absolutely correct, of course; that's the way it works – but to a point of your question: the MRO rate is paid now, during the 12 months during which the four operations will be launched. That does not have any impact on any possible increase in MRO rates down the road, in particular three years from now. There is no connection between the two things. That has already been paid by the banks when they borrow now, and then if the situation, hopefully, will improve so much in the euro area that interest rates can go up, there is no obstacle that is created by the TLTROs. That was a point of your question. The other points, the President covered. It's a fixed rate now when they draw, when they go to the facility, which will be launched in quarterly operations, four quarters, four operations, as we announced. So 12 months from now, let's say, more or less, those four operations are launched, and they pay what they will use of those facilities. The rate which now is zero, it's the MRO rate.
Question: I ask a question regarding unanimity of the vote today. Since Mr Weidmann, for example, did not vote due to the principle of rotation, can you say that the board was unanimous to adopt this bunch of nuclear-weapon measures?
Draghi: First let me say that even though we've had this rotation system in place now for quite a while, it hasn't made any difference in terms of our discussions. Everybody, voter or non-voter, expresses his or her viewpoint and is duly listened to, and in fact things are changed in the course of the discussion, regardless of whether one is a voter or not. So there is substantially no difference. 
In the adoption of the decision, I would say that the majority in favour has been overwhelming. Let me just incidentally add one side remark: you're all aware that there is substantial pessimism towards the actions of central banks, and also with respect to the ECB, and there are many reasons, but one of the reasons that was quoted widely was the willingness of the ECB Governing Council to act. Well, the discussion today and the overwhelming majority with which the package was approved makes full justice of these doubts about the willingness to act. So it was all in all, I would say, a very reassuring discussion, very positive, very constructive.
Question: A second question regarding the forward guidance from another point of view: there is an interesting sentence in the last Governing Council accounts, telling that it appeared logical from a medium-term perspective that after a prolonged period of undershooting the inflation aim of ECB, it could be logical for a limited period to accept an overshooting of the inflation. So it was noted as “a view” within the Governing Council. To what extent could that bethe view of the Governing Council? And then one could interpret this like it could remain in a very accommodative stance, ECB policy, even when inflation exceeds the 2% threshold during some months, and so a debate over exit strategy could be then triggered at some date; nobody can say when.
Draghi: I can't really comment on one view. What I can say, however, is that our mandate is defined as reaching an inflation rate which is close to 2% but below 2% in the medium term. Which means that we'll have to define the medium term in a way that, if the inflation rate was for a long time below 2%, it will be above 2% for some time. The key point is that the Governing Council is symmetric in the definition of the objective of price stability over the medium term.
Question: You've said the aggregate effect of the negative deposit rate on banks is not so negative, but some representatives of retail banks see their business model in danger. What would you argue on that?
My second question: excessive debt in the public and private sector seems to make very difficult the transmission of monetary impulses into the real economy. Why should the decided measures today make a difference on that?
Draghi: Responding to the first question, you're absolutely right. Banks are not all the same. Some banks have a business model which exposes them to the negative rates more than other banks, if they have a structure for funding themselves such that it's affected by negative rates more than other banks. And on the other hand, there are other banks where they can easily adjust to negative rates their funding structure. You have situations where deposit rates are set at the minimum by law, for example. To this extent, negative rates cannot be passed to depositors. So I perfectly understand the viewpoints expressed by this sector of the industry that you refer to, and our point, the point made by the Vice-President and myself, was referring to the aggregate situation. 
There are also other banks completely different, for example, that suffer from negative rates for another reason. They have a funding structure that adapts pretty well to the negative rates, but on the other hand, they have given their mortgages and loans, often, that are indexed to the Euribor. As negative rates bring down into negative territory the Euribor, you see that their mortgages go to produce a loss unless the spreads are sufficiently high, which is not always the case. Again, you have two different sets of banks: the banks where the spreads are sufficiently high can afford this effect on their asset side; but there are lots of banks the spreads of which are not sufficiently high. So it's one more reason to consider the negative rates as somewhat complex in the multifaceted banking world that we have in the eurozone.
The second question is, if I can rephrase, “How can an expansionary monetary policy measure, or a set of measures like we've decided today, how could that change a situation where debt, both public and private, is excessive?” Let me give you the opposite example. Suppose that we were not to do this. Suppose that we would give up. I said last time at the press conference, “We don't give up in our fight to bring inflation back to our objective.” Suppose we were to give up, and rather than having inflation, you had deflation. You know that one of the most important negative effects of deflation is to increase the real value, the real weight of debt. So to this extent, expansionary, accommodative monetary policy measures like the ones we've decided today are actually a very positive effect inducing people to reduce debt, not to increase it.
Question: You've announced a package of measures that's very broad, more than markets expected, but you say that it's mainly based on these inflation forecasts that are the result of cheaper oil. Isn't this package an overreaction to temporarily lower oil prices?
My second question is, some investors, and the Bank for International Settlements, have expressed concerns that policy tools are getting less effective and central banks are running out of tools. What would you say to those criticisms, and which major tools do you have left?
Draghi: The answer to your first question is that it's not an overreaction to low oil prices. It's a reaction to the fact that conditions have significantly changed since our last monetary policy measures were taken in early December, and this change was due first and foremost to a significant weakening of the global growth prospects. Incidentally, the IMF announced today that they are going to revise downward during the spring meetings their outlook for global growth. So this is one reason. The second reason is that financial conditions have changed considerably in this period of time, and there has been a widespread volatility of high intensity for a reasonably long period of time at that intensity. And that has caused, by itself, a tightening of financial conditions.
So these are the two major changes. Of course, you have also the oil price, which first fell and then went up again, but still they are in a zone where they are consistently lower than a year ago, for example. So this package is not an overreaction to the oil price. It's the adequate reaction to the weakening of the growth and price stability prospects. 
Your second question is about the perceived lack of power of central banks, and it allows me to address the other two sources of pessimism as far as central banks are concerned. One is, “Ah, central banks have no ammunition left. Central banks have no policy instruments.” But I think the best answer to this is being given by our decisions today. It's a fairly long list of measures, and each one of them is very significant and devised to have the maximum impact in boosting the economy, and the return to price stability. So we have shown that we are not short of ammunition.
The third source of pessimism is, “Yes, you are willing to act; yes, you have ammunition. But no matter, what, it's going to be ineffective.” Now, that is quite interesting because, well, first of all we have plenty of data, from growth, to easing financing conditions, to what happened to the credit flows in the euro area since we started taking these measures. So credit, I would say, volume-wise, spread-wise, between core countries and periphery, narrowed down – we can quite rightly say now today that fragmentation, which was the major problem of the eurozone until, say, two years ago, has now disappeared. But even spreads between large corporates and SMEs have narrowed down considerably. 
So all this was transmitted into a growth recovery, which is not spectacular, but it's there, it's gradual, and it's been continuing now for several months. Of course the others would say, “You haven't reached your inflation target.” Yes, it's going to take time. And it's going to take time because it would be foolish to think that we will go back to inflation of 2% or below 2% with an economy that hasn't recovered yet. So in order to get to our objective of price stability, we need first a stable, solid recovery for the euro area, and then you will see that the output gap will gradually close down and we'll start seeing movements on wages and prices, which are very important, of course, which we haven't seen so far in any significant way at a euro area average. We've seen something in specific countries. And then we will see the return back to the inflation objective. 
And also there is another observation to make here, when we talk about effectiveness. Suppose we had not acted at all. Suppose we had embraced what two years ago I used to call the “nein zu Allem” policy strategy, so do nothing. What would be the counterfactual? And of course we deem that the counterfactual would have been a disastrous deflation.
Question: Can we have a stable and solid recovery, as you have said a minute ago, with the present fiscal stance that the eurozone has, which is neutral? And can you give us a number of the fiscal expansion that the eurozone needs in order to support the comprehensive package that you have shown today in this meeting?
Draghi: Unfortunately, no, I cannot give you any number. But what one can say is that the current fiscal stance is mildly expansionary. It used to be neutral last year; now this year it's mildly expansionary. So I would say from this viewpoint it's one of the drivers of the economy; admittedly not the major driver of the economy. The major driver of the economy and the recovery basically remains our monetary policy. Then we have the oil prices and then we have also, together with some progress on the structural reform side, we also have some mildly expansionary fiscal policy.
Question: First of all, you already mentioned that you're shifting from interest rates to unconventional measures, and you answered to a previous question that you still have plenty of instruments. Theoretically, does your toolbox also include helicopter money, either in the form of direct financing of public investment, for example the EIB, or in the form of direct money to consumers? That's the first one.
And the second one: when the Bank of Japan voted for negative rates in February, four of the members voted against, also because they feared a global race to the bottom in terms of interest rates. Isn't that a fear you also share? And what will be the implications if monetary policy worldwide is more expansionary than might be appropriate?
Draghi: We haven't really thought or talked about helicopter money. It's a very interesting concept that is now being discussed by academic economists and in various environments. But we haven’t really studied yet the concept. Prima facie, it clearly involves complexities, both accounting-wise and legal-wise, for our view, but of course by this term “helicopter money” one may mean many different things, and so we have to see that.
On the other point about negative rates, let me just say again what I said at the very beginning: From today's perspective, and taking into account the support of our measures to growth and the return to our price stability objective, we don't anticipate that it will be necessary to reduce further rates. Of course, new facts can change the outlook. That is what I said at the beginning and I will say it again now.
Finally, your question was about the worries about a general worldwide money expansion?
Question: Some people have called it currency wars.
Draghi: Oh, I see. Well, our view on that is the following: first of all, the ECB has never started anything like that. Even our measures today are entirely addressed to our economy, domestic economy. Some of them are geared to lowering the yield curve; some others are geared to expand domestic credit. So we are not in this war at all. Also, let's not forget that in the G20 in Shanghai all countries took a solemn agreement that basically they would avoid such war. And it is true that some of the measures have obviously a spill-over on the foreign exchange market, but it's a very different thing between saying that we have increased the monthly size of our purchases from €60 billion to €80 billion, and saying that we are going to purchase foreign currency-denominated assets by €80 billion tomorrow, which is intervention. So we are not in that environment.
Question: The new four-year TLTRO, as I understand it, and I realise there are benchmarks, but at certain points it becomes a negative refi rate, which if I'm not mistaken is unprecedented for the eurozone; it's certainly unusual if not unprecedented otherwise, in other places. Is this opening the door to further expansion of negative refi rates? Could you see that going into other categories?
Second question: you mentioned deflation, and I wonder if you could just clarify, is there any worry that we're in deflation already?
Draghi: No, the answer to the first question is we really haven't discussed at all this and we think the measures we've taken today are adequate to address the change in underlying economic conditions since our last monetary policy measures were taken. 
The second question is, are we in deflation? No, the answer is no. We are not in deflation. The macro-projections show that inflation will indeed be negative for several months this year, but by year end it will go up again, basically because of our monetary policy measures, which will anchor inflation expectations so as inflation will return to the objective of a rate of inflation which is close to but below 2%. Admittedly, the horizon, in other words the time that it's taking to get back to this objective, is now longer than it was, but this doesn't mean that we have deflation. In other words, the situation is substantially different from what it was in Japan in the '90s. 
Before you close the press conference, there is one thing that I think is quite important that I should mention in the press conference, and it concerns the eurozone banking sector. It's quite important, and I want to point your attention to a communication by the Commission that was distributed this morning and that does clarify the nature of Pillar 2 requirements. And this communication opens the way for a clarification by supervisors of the implementation of the measures that determine the so-called MDA, the maximum distributable amount. Thank you."


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