The ECB published edited excerpts from Cœuré's comments on i.a. financial market fragmentation, the economic outlook, bank lending and the AQR.
On financial-market fragmentation:
“Fragmentation in European markets will subside only very gradually. That’s because economic convergence itself is slow. It’s taking place but it takes time for reforms to feed into the economic fabric of each country. And then it takes time for structural changes in the economy to be acknowledged by financial market participants, particularly in terms of credit supply. There’s not much that we can do about that time dimension.”
On interplay between government reforms and monetary policy:
“The priority is for governments to deliver on what they have committed to in terms of growth and structural reforms. We have positive news that the situation is improving in several countries and we have strong commitments to reforms, such as the announcements made last Tuesday by the French president, which I take as an important statement of intent. We also need strong actions to strengthen confidence in the banking sector and complete the whole banking union project. The role of the ECB is to support these processes. We have a clear treaty mandate to support the policies of the community. The best way to do this is to deliver on our inflation mandate. The ECB will deliver on its mandate. But that’s not a sufficient condition to deliver growth in Europe. It’s a necessary condition but not a sufficient condition.”
“Coming to monetary policy, we have the scenario of a slowly developing growth, inflation slowly coming back to the 2 per cent number over the medium term, but there are risks around this baseline scenario. We would have different answers to different risks. That’s why we need a range of instruments. But it doesn’t serve a purpose if the public discussion of monetary policy starts with the instruments. The instruments are the tail that wags the dog.”
On the economy:
“What we’ve seen lately is a series of positive economic data which are broadly consistent with the ECB staff forecast. So the economy is on track for a recovery but it’s still a weak, slow, subdued recovery and there’s no reason, at least from the data we have, to revise the expected path and no reason to think that the economic recovery will be stronger than what we’ve expected so far. But it’s broadly on track.”
“We do believe in the recovery. We do trust the recovery. In terms of risks, the range of uncertainty is narrower today than it was some months ago. That doesn’t change the baseline scenario. The baseline scenario is weak but tail risks are much more limited today than six months ago. So to that extent, we’re more confident in the recovery. The recovery will become stronger as we go through 2014 and 2015. It’s a gradual acceleration.”
On risks to the economic outlook:
“There are short-term risks related to the liquidity situation and the money-market curve. There are outside risks from the international economic environment. There are also possible endogenous, or local risks. We have to make sure that the ebbs and flows of liquidity in the euro area don’t generate excess volatility of the money-market curve. That’s the normal job of a central bank. That’s what we’re monitoring.
"Then there are long-term risks. They relate to our price stability mandate and to our policy aim of maintaining inflation below but close to the 2 per cent number. We want to be sure that price stability will be delivered in the medium term and we want to make sure that inflation expectations in Europe remain anchored. We are very attentive to any sign that inflation expectations in Europe would be de-anchored because that would be following the Japanese path that we don’t want the eurozone to follow.”
On bank lending:
“The AQR will make a very important contribution to support the effectiveness of monetary policy if it is transparent enough and if it is strict enough. That does not imply that there is a sequence whereby we first go to the end of the AQR, meaning November 2014, and then we see. A lot of the benefit of the AQR can be front-loaded. We have seen already banks beginning to adjust.”
“There will be a gradual improvement anyway in bank lending due to the improvement in the economic situation. Also, risk being reduced in stressed economies and ongoing structural reform should have an impact on credit spreads. The improvements that we’ve seen over the last months on capital markets for government funding, for the funding of banks in stressed countries, these will feed gradually into lending rates. That’s a normal mechanism. I don’t expect the landscape to change overnight.”
On exiting expansionary monetary policy:
“The tapering decision and more generally the improving economic situation in the US and the confirmation that monetary policy in the US is on a normalisation path, are generally expected to drive up global long-term yields. So far the European market has shown a good deal of resilience and capacity to disconnect from US developments, which is welcome because it’s consistent with the state of the euro area economy. But it’s something that needs to be monitored very closely.”
“Everything we’re doing now is temporary; it has to end at some point. It’s not meant to stay here eternally. But the time isn’t ripe. The euro area economy is improving but it’s still weak. The recovery is fragile and there are still downside risks so it will need the very accommodative policy for an extended period of time, as we’ve said. The time is not ripe yet for normalisation but it will have to come and when it comes, that will be good news.”
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