The ECB, which last month took the first step toward normalizing its monetary policy by ending almost four years of bond purchases, acknowledged recent economic data continued to be weaker than it had expected on a combination of slower demand for exports and what he described as "sector-specific factors," a reference to recent difficulties Germany's car industry has faced in light of new emission standards.
While the issues facing Germany's car industry will fade, ECB President Mario Draghi acknowledged persistent uncertainty on the global level and the threat of protectionism was weighing on economic sentiment and "significant monetary stimulus remains essential to support the further build-up of domestic price pressures and headline developments over the medium term."
The exchange rate of the euro weakened slightly against the U.S. dollar in response to Draghi's statement to around 1.134 from 1.138, or 0.3 percent.
Illustrating the weakening economy, IHS Markit composite PMI data for the euro zone fell to 50.7 in January, the lowest since July 2013, while the manufacturing PMI for Germany fell to 49.9 percent, the first shrinkage in manufacturing since November 2014.
In addition to rock-bottom interest rates, the ECB will continue to reinvest its stock of some 2.6 trillion euros of maturing bonds and reiterated that it "stands ready to adjust all of its instruments, as appropriate, to ensure that inflation continues to move towards the Governing Council's inflation aim in a sustained manner."
In its latest forecast from December 2018, the ECB lowered its growth forecast for the third time, reflecting a sharp fall in third quarter growth when gross domestic product slowed to quarterly growth of 0.2 percent from 0.4 percent in the two previous quarters.
The ECB publishes projections for growth and inflation four times a year; in March, June, September and December.
The estimate for 2018 growth was cut to 1.9 percent from 2.0 percent while the economy was forecast to grow 1.7 percent, then also 1.7 percent in 2020 and 1.5 percent in 2021.
Inflation also remains below the ECB's target of below, but close to 2.0 percent, dropping to 1.6 percent in December from 1.9 percent, reflecting lower energy prices.
Although Draghi said inflation was likely to decline further in coming months based on futures prices for oil, he was still confident inflation would converge to its target as labour costs were continuing to strengthen amid higher capacity utilization and tighter labor markets.
In addition, the impact of various monetary measures since June 2014 - when the ECB launched its first round of targeted longer-term refinancing operations (TLTRO I) - is continuing to support firms and households's access to financing and credit.
"To sum up, a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis confirmed that an ample degree of monetary accommodation is still necessary for the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term," Draghi said.
The European Central Bank released the following introductory statement to the press conference by its president, Mario Draghi:
"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 decided to keep the key ECB interest rates unchanged. We continue to expect them to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.
Regarding non-standard monetary policy measures, we intend to continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time past the date when we start raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
The incoming information has continued to be weaker than expected on account of softer external demand and some country and sector-specific factors. The persistence of uncertainties in particular relating to geopolitical factors and the threat of protectionism is weighing on economic sentiment. At the same time, supportive financing conditions, favourable labour market dynamics and rising wage growth continue to underpin the euro area expansion and gradually rising inflation pressures. This supports our confidence in the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term. Significant monetary policy stimulus remains essential to support the further build-up of domestic price pressures and headline inflation developments over the medium term. This will be provided by our forward guidance on the key ECB interest rates, reinforced by the reinvestments of the sizeable stock of acquired assets. In any event, the Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation continues to move towards the Governing Council’s inflation aim in a sustained manner.
Let me now explain our assessment in greater detail, starting with the economic analysis. Euro area real GDP increased by 0.2%, quarter on quarter, in the third quarter of 2018, following growth of 0.4% in the previous two quarters. Incoming data have continued to be weaker than expected as a result of a slowdown in external demand compounded by some country and sector-specific factors. While the impact of some of these factors is expected to fade, the near-term growth momentum is likely to be weaker than previously anticipated. Looking ahead, the euro area expansion will continue to be supported by favourable financing conditions, further employment gains and rising wages, lower energy prices, and the ongoing – albeit somewhat slower – expansion in global activity.
The risks surrounding the euro area growth outlook have moved to the downside on account of the persistence of uncertainties related to geopolitical factors and the threat of protectionism, vulnerabilities in emerging markets and financial market volatility.
Euro area annual HICP inflation declined to 1.6% in December 2018, from 1.9% in November, reflecting mainly lower energy price inflation. On the basis of current futures prices for oil, headline inflation is likely to decline further over the coming months. Measures of underlying inflation remain generally muted, but labour cost pressures are continuing to strengthen and broaden amid high levels of capacity utilisation and tightening labour markets. Looking ahead, underlying inflation is expected to increase over the medium term, supported by our monetary policy measures, the ongoing economic expansion and rising wage growth.
Turning to the monetary analysis, broad money (M3) growth moderated to 3.7% in November 2018, after 3.9% in October. M3 growth continues to be backed by bank credit creation. The narrow monetary aggregate M1 remained the main contributor to broad money growth.
The annual growth rate of loans to non-financial corporations stood at 4.0% in November 2018, after 3.9% in October, while the annual growth rate of loans to households remained broadly unchanged at 3.3%. The euro area bank lending survey for the fourth quarter of 2018 suggests that overall bank lending conditions remained favourable, following an extended period of net easing, and demand for bank credit continued to rise, thereby underpinning loan growth.
The pass-through of the monetary policy measures put in place since June 2014 continues to significantly support borrowing conditions for firms and households, access to financing – in particular for small and medium-sized enterprises – and 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 that an ample degree of monetary accommodation is still necessary for the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.
In order to reap the full benefits from our monetary policy measures, other policy areas must contribute more decisively to raising the longer-term growth potential and reducing vulnerabilities. The implementation of structural reforms in euro area countries needs to be substantially stepped up to increase resilience, reduce structural unemployment and boost euro area productivity and growth potential. Regarding fiscal policies, the Governing Council reiterates the need for rebuilding fiscal buffers. This is particularly important in countries where government debt is high and for which full adherence to the Stability and Growth Pact is critical for safeguarding sound fiscal positions. Likewise, the transparent and consistent implementation of the EU’s fiscal and economic governance framework over time and across countries remains essential to bolster the resilience of the euro area economy. Improving the functioning of Economic and Monetary Union remains a priority. The Governing Council welcomes the ongoing work and urges further specific and decisive steps to complete the banking union and the capital markets union.
We are now at your disposal for questions."
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