Brussels, 03/11/2011 (Agence Europe) - At its meeting in Berlin on Thursday 3 November, the Governing Board of the European Central bank (ECB) decided “unanimously” to reduce key interest rates by 25 basis points. Thus, for operations from 9 November: - the interest rate on the main refinancing operations will be decreased from 1.50% to 1.25%; - the interest rate on the marginal lending facility will be brought down from 2.25% to 2.00%; - the interest rate on the deposit facility will come down from 0.75% to 0.50%. This decision indicates that the central bankers were swayed more by concerns related to the worsening crisis than inflation, which remains high. It also relaxes somewhat the pressure on the euro which still offers a significant yield differential compared with the key interest rates in the United States.
To explain the reduction in interest rates, new ECB President Mario Draghi said that “while inflation has remained elevated and is likely to stay above 2% for some months to come, inflation rates are expected to decline further in the course of 2012 to below 2%”. At the same time, the underlying pace of monetary expansion continues to be moderate. After the decision of 3 November, “inflation should remain in line with price stability over the policy-relevant horizon”, Draghi added. He went on: “Owing to their unfavourable effects on financing conditions and confidence, the on-going tensions in financial markets are likely to dampen the pace of economic growth in the euro area in the second half of this year and beyond”.
The economic outlook continues to be subject to particularly high uncertainty and intensified downside risks, he said. Some of these risks have been materialising, “which makes a significant downward revision to forecasts and projections for average real GDP growth in 2012 very likely”, Draghi argued.
The provision of liquidity and the allotment modes for refinancing operations will continue to ensure that euro area banks are not constrained on the liquidity side, he said. He noted, too, that all the non-standard monetary policy measures taken during the period of acute financial market tensions are, by construction, temporary in nature
With regard to budgetary policies, Draghi said that all eurozone governments need to show “inflexible determination” to fully honour their own individual sovereign signature as a key element in ensuring financial stability in the euro area as a whole.
The ECB Governing Board “takes note” of the budgetary commitments set out in the statement of the euro area summit on 26 October and “urges all governments to implement fully and as quickly as possible the measures necessary to achieve fiscal consolidation and sustainable pension systems, as well as improve governance”, Draghi said. He added that the governments of countries under joint EU-IMF adjustment programmes and those of countries that are “particularly vulnerable should stand ready to take any additional measures that become necessary”.
The ECB president then answered questions from the press on the following issues:
Purchase of sovereign debt holdings. Market pressure increased on Italy on Thursday, with its borrowing rates soaring to a record high. In the morning, just before the G20 meeting in Cannes, Italian 10-year interest rates peaked at 6.402%. By the middle of the afternoon, they had fallen back to around 6.2%, thanks largely to intervention on the part of the ECB, but remained at a level that would be difficult for Italy, whose debt is €1,900 billion, or 120% of GDP, to bear in the longer term.
Draghi called on eurozone governments not to count too much on the ECB to resolve the debt crisis. When asked about the ECB's possibly increasing its purchase of public bonds of countries in difficulty, Draghi replied that the way to react was not to count on external assistance. These governments must look to their own ability to reform. In the face of expectations, Draghi stated that no one can force the ECB to increase its purchases: “We are independent”. He added: “The ECB can't do everything. Bond rates should not fall because of external intervention. The main pillar is the economic policy that governments follow. Public finances have to be in order and the structural reforms needed have to be implemented to create jobs and increase competitiveness.”
In spring 2010 the ECB was convinced of the need to buy up public debt on the secondary markets in an effort to lower lending rates to Greece. Since then, it has also intervened in an effort to buy up debt in Portugal, Ireland, Spain and Italy, in an attempt to prevent crisis contagion.
Consequences of the referendum in Greece. The president of the ECB, Mario Draghi, stated that “it is very difficult to respond on something that is evolving so quickly. We are following current developments very closely and are confident in the measures formulated in the aid programme to Greece if they are implemented together with the decisions on recapitalisation of the banks and strengthening the European Financial Stability Fund (EFSF), which will help towards meeting the commitments.” He acknowledged, however, that many things depended on what happened in Greece and other political developments.
Is the situation the same for the ECB if Greece leaves the eurozone? Draghi explained that they are not under any obligation in the provisions of the Treaty on this subject. Nothing is said in the Treaties.
Recession/Inflation? He explained that they were moving towards a slight recession towards the end of the year and said that inflation is expected to fall, particularly in 2012, to 2% or even less.
Will China be able to help the ECB reduce tension? He explained that this was not within the scope of the ECB but that this possibility was being discussed with the IMF. (LC/transl.fl)