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Interview with Mario Draghi, President of the ECB, conducted by Alessandro Merli and Roberto Napoletano
[...]In Malta, you said you were “less sanguine” about the inflation outlook. Based on the most recent data, the inflation path now starts from a lower point than what was expected as recently as September, as we will see from your December macroeconomic projections. How realistic is it at this stage to speak of inflation reaching 1.7% by the end of 2017?
I would make a distinction between the forecasts for the next period and those for the medium to long term. As far as the next few months are concerned, the most relevant factor will be the price of energy. We expect inflation to remain close to zero, and maybe even to turn negative, at least until the start of 2016. After that, the effect of the sharp decline in oil prices that we have seen between the end of 2014 and the end of this year will disappear from the one-year ahead annual price index. This will lead to a purely mechanical increase in annual inflation.
What will happen in the medium term?
From mid-2016 to the end of 2017, also due to the delayed effect of the depreciation in the exchange rate, we expect inflation to increase gradually. But what is important to note today is that, even in September’s forecasts, we had already lowered our inflation expectations for 2017 compared with those we forecast in March, when we had just started purchasing €60 billion of public sector securities a month.
It will therefore take longer than was foreseen in March to return to price stability. The good news about medium-term inflation expectations is that, after falling in September, these have now returned to a level above 1.7%, which is not far from our inflation objective. However, these figures should be viewed with caution, because these expectations have always showed a degree of volatility. [...]
However, for the first time you mentioned a cut in the ECB’s bank deposit rate and you said that “things have changed” since you had stated that -0.20% was the minimum lower bound. Can you explain what has changed?
The circumstances informing the decision to reduce the bank deposit rate to its current level actually consisted of a macroeconomic framework that has since changed. The price of oil and the exchange rate have changed. I would say that the global economic situation has changed. The interest rate on deposits could be one of the instruments that we use again. Now we have one more year of experience in this area: we have seen that the money markets adapted in a completely calm and smooth way to the new interest rate that we set a year ago; other countries have lowered their rate to much more negative levels than ours. The lower bound of the interest rate on deposits is a technical constraint and, as such, may be changed in line with circumstances. The main test of a central bank’s credibility is – as I have said before – the ability to achieve its objectives; it has nothing to do with the instruments. [...]
What has been the impact of your monetary policy on Italy, in particular on credit and indirectly on the recovery which is finally arriving?
The impact of the ECB's monetary policy is clearly visible in the cost of bank loans to businesses and households. Since the announcement of the credit expansion measures in June 2014, based on a composite index which measures the cost of loans, the index has gone down by 120 basis points for businesses and by 80 basis points for households. The sovereign spread between Italy and Germany on ten-year securities has fallen from 160 basis points in early June 2014 – not to mention the 600- 700 basis points in 2012 – to around 100 today. The interest rate on two-year Italian securities is near zero; it was above 5%. Even the spread between mortgages of over €1 million and the small-sized ones, up to €250,000, has got smaller. Positive effects can also be seen in lending volumes. Our Bank Lending Survey points to similar trends. On the whole the attitude of Italian banks with regard to lending has changed; lending standard have become easier and continue to improve. [...]
The ECB’s Governing Council stands ready to increase monetary stimulus, should this be necessary. Your critics claim that this reduces the incentive to implement reforms.
I think that this is wrong for a number of reasons. First, if we look at the time frame of the main structural reforms implemented in the euro area over the past five years, it shows that this has no correlation with the level of interest rates on government debt in the countries concerned. Labour market reforms, for example, were implemented in both Spain and Italy when interest rates were already very low, and the same is also true in other cases. Second, the structural reforms cover a very wide range of areas. I do not believe, for example, that reform of the legal system has anything to do with interest rate developments. Third, recent experience shows that also when interest rates are high because a country’s fiscal credibility is threatened, this does not increase governments’ propensity to carry out reforms. [...]
Can banking union be considered complete without a common deposit guarantee system, which some countries are opposed to?
Banking union should be completed. Agreements have been drawn up both on the composition of a deposit guarantee system and on a Single Resolution Fund. These measures should be implemented, also because, in this way, one of the problems that characterised the crisis – the two-way relationship between banks and sovereign states – would be weakened by these two measures.
Speaking of Greece, you have acknowledged that even with the implementation of the programme, Athens will need debt restructuring. Do you think that this should be done gradually, so as to preserve the incentive for the Greek government to comply with its obligations?
Greek debt is sustainable if, first, the government complies with the obligations under the programme that it has agreed to, taking responsibility for or ownership of the programme. Second, for the debt to be sustainable a certain degree of relief is required; the latter should be such as to remove any doubt as to the future sustainability of the debt itself, once the first condition has been met. What type of “debt relief” to provide and how to calibrate it so that incentives for compliance with the programme are not distorted are decisions for the Member States, namely for those whose balance sheets will be affected by the decision. The ECB has nothing to say in this regard.