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Dragui confirms extraordinary long-term funding to financial system will continue

Thursday, April 5th 2012 - 17:07 UTC
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ECB president said unemployment in the EU is at a historical high  ECB president said unemployment in the EU is at a historical high

European Central Bank President Mario Draghi dismissed a German-led push for the bank to start planning a retreat from emergency crisis-fighting, but stressed it was keeping a close eye on price pressures.

After holding interest rates at a record low of 1.0% on Wednesday, Draghi said “downside risks to the economic outlook prevail” and the ECB would need time to see the full impact of bumper funding operations it has used to help banks.

The ECB has pumped over 1 trillion Euros into the financial system with the twin 3-year funding operations, or LTROs, to head off a credit crunch that late last year risked exacerbating the Euro zone crisis and jeopardizing the currency project.

Draghi dismissed the push to begin preparing an exit from the ECB crisis mode - a drive led by Bundesbank President Jens Weidmann, with whom Draghi has stressed in recent months he has an excellent relationship.

“Given the present conditions of output and unemployment, which is at historical high, any exit strategy talking for the time being is premature,” he said, adding bluntly: “I think the president of the ECB is the one who has the last word on this.”

Draghi's sober message on the state of the economy followed a batch of grim economic indicators which have heightened concerns that 17-country Euro zone economy is in recession.

He said the policymakers did not discuss changing rates. However, in his opening statement Draghi sought to assuage German concerns that the wall of money unleashed by the twin LTROs could stoke inflation pressures.

“All our non-standard policy measures are temporary in nature,” he told the regular post-meeting news conference. “All the necessary tools are available to address upside risks to medium-term price stability in a firm and timely manner.”

The German-led group of policymakers is concerned that the LTROs risk stoking inflation pressures.

Euro zone inflation eased to 2.6% in March - above the ECB target of just below 2% and higher than expected - but the weak economic picture meant the ECB could not afford to signal a rate rise or an exit from the funding measures.

The slump means that even though inflation has proved to be stickier than forecast, the ECB is not about to tighten policy any time soon. It had to reverse two rate rises last year as the crisis came back with a vengeance and will be careful not to repeat the mistake of abandoning its low-rate policy too soon.

“I don't think I'm stepping up my rhetoric on inflation,” Draghi said, though he identified inflationary pressures coming from higher oil prices and indirect taxes.

Categories: Economy, International.

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