Dods EU Briefing: Monetary Dialogue with Mario Draghi

European Central Bank President defends recent policy decisions in front of European Parliamentarians.

By Michael Wilson

23 Sep 2014

Please note that this does not constitute a formal record of the proceedings of the meeting. It is dependent on interpretation and acts as an unofficial summary of the debate.

On September 22, members of the European Parliament’s Committee on Economic and Monetary Affairs (ECON) met to discuss monetary matters with the President of the European Central Bank, Mario Draghi. The President debated the targeted longer-term refinancing operations (TLTROs) and Asset backed securities (ABS) with MEPs which are designed to improve bank lending to the Eurozone by offering extra liquidity at a fixed rate for up to four years. The scheme has so far suffered from a low uptake with just €82.6 billion of the €400 billion scheme being taken up.

Roberto Gualtieri (S&D, IT), Chair of the ECON Committee, welcomed Mario Draghi to the Parliament and noted the Committee’s appreciation for his appearance there, given the simultaneous G20 meeting taking place in Australia. He outlined some of the issues which were expected to be discussed but left the agenda open for him to embellish these points as he wished.

Mario Draghi, President of the European Central Bank, began by saying that the hearing is taking place at a moment of change for the ECB. On December 4, the ECB will become the primary supervisor for over 120 euro area banks, marking the biggest step towards European integration since the introduction of the euro, he said. New premises will split the two functions of the ECB between central Frankfurt and the city’s eastern periphery, for the monetary policy and supervisory functions respectively. Before the start of the Single Supervisory Mechanism ‘supervision function’ coming into force, the Parliament will be able to discuss the developments concerning the ECB’s preparedness with the chair of the supervisory board in the near future. Instead, he focused on the ECB’s current function, that of coordinating monetary policy.

Draghi said that any real growth in eurozone GDP came to a halt in the second quarter of this year. More recent survey indicators suggest that declines in industrial output recorded in August are likely to continue. Unacceptably high unemployment and weak credit growth are doing little to help the current levels of low consumer confidence he added. The progress of structural reforms will impact the levels of investment and growth.

Inflation rates are still very low and are expected to stay this way until 2015. The ECB will focus on the impact of low growth dynamics. The ECB has done a lot to keep price stability at a constant level. The banking system has been bailed out, structural reforms and cheap credit has been given but against the outlook of weak inflation, getting a return on these measures has not been as healthy as was first hoped. The ECB is continuing to support lending to the real economy and encourage inter-bank lending.

The ECB will soon start purchasing simple and transparent securities and covered bonds to help support its TLTRO operations. The first round of the TLTRO programme was taken up to a value of €82.6 billion which was within ECB estimates, he said. The next round will begin in December. He stressed that the two operations, from September and December, should be assessed together, saying that it is too early to assess the impact of TLTROs on the wider economy but, he added, their announcement has already had a positive effect on the markets.

Additional measures taken in September will improve the TLTROs:

  • Purchases in simple and transparent ABS should help ensure favourable rates will be passed from banks to their borrowers.
  • A portfolio rebalancing channel will be introduced.
  • The ECB will take an expansionary stance to help boost inflation to around 2%.

ABS purchases will allow for financing collateralised against bonds in the real economy. Market size and purchasing volumes are co-dependent, he explained, with risk exposure limited given that the ECB will only buy loans that already meet the Eurosystem criteria and that are characterised by low-default risk. The guaranteed mezzanine tranches of these ABS will add additional protection, he said.

Covered bonds and loans that back them have a relatively tight relationship, he said, adding that more loans will be available to cover them if needed. Positive spill overs should ease funding and help the transition of monetary policy, he said. The ECB expects a sizeable impact on its balance sheet and should see a shift back towards its pre-2012 balance sheet levels.

He said that the governing council stands ready to use unconventional interventions should it become necessary to address a pro-longed period of low inflation. These matters do however rely on factors outside of the ECB’s mandate – including structural reforms and the support of the private sector. He reiterated that structural reforms bolster the ECB’s work and underlined that fiscal impacts can only have a meaningful effect if reforms are introduced to compliment them.

Inflation differentials in the euro area, in which MEPs had expressed an interest, were a welcome topic of discussion, he said.

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