Brussels, 04/07/2013 (Agence Europe) - On Thursday 4 July, the European Central Bank said that euro interest rates would remain unchanged, or even fall, for an extended period of time. This surprised observers, because the bank will not usually comment on future trends in monetary policy.
“Looking ahead, our monetary policy stance will remain accommodative for as long as necessary. The Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period of time. This expectation is based on the overall subdued outlook for inflation extending into the medium term, given the broad-based weakness in the real economy and subdued monetary dynamics”, said the president of the European Central Bank, Mario Draghi, without specifying what “medium term” meant. He said the view was unanimous on the Governing Council which, during an in-depth discussion, had decided in favour of maintaining interest rates or reducing them. The low interest rates are encouraging speculative bubbles on a number of markets.
The eurozone is in recession. Real GDP declined by 0.3% in the first quarter of 2013, following a contraction of 0.6% in the last quarter of 2012. At the same time, labour market conditions remain weak. Inflation was 1,6% in June, up from 1,4% in May. The EU's statistical office, Eurostat, says inflation is well below the ECB's 2% target (1.6% in June and 1.4% in May).
Backstops. Mario Draghi, a former governor of the Bank of Italy, said it was important for eurozone nations to establish backstops ahead of any crisis and in advance of the outcome of the stress tests to be carried out by the ECB on their banks in the winter ahead of introduction of the single bank supervision mechanism. Draghi hoped the mistakes of two years ago would not be repeated and said it was crucial for markets, supervisory bodies and governments to know exactly how any bank capital requirements revealed by the stress tests would be addressed. He explained in what order bank recapitalisations should unfurl - firstly, market mechanisms (raising capital, selling business and so on), then national bailout funds, then indirect intervention from the European Stability Mechanism (ESM) as occurred with the Spanish banks, and lastly direct recapitalisation from the ESM, which will not be possible until the common bank supervision system is up and running.
Portugal. Asked about the political crisis in Portugal (see EUROPE 10880), Draghi praised the painful work done by the Portuguese government and borne by the country's population. He said the results had been significant and exceptional, refusing to answer a question from a reporter wanting to know how the austerity policies had impacted on the country. Commenting on the new Portuguese finance minister, Maria Luis Albuquerque, Draghi said “Portugal is in good hands”. He said the country was not eligible at this stage for OMT (purchase of its bonds) because this only applies if the integrity of the eurozone is jeopardised. (MB/transl.fl)