The European Central Bank cut three key interest rates by a quarter percentage point, including its main refinancing rate, now at a record low of 0.75 percent. President Mario Draghi at a press conference in Frankfurt said on Thursday: ”Based on our regular economic and monetary analyses, we decided to cut the key ECB interest rates by 25 basis points. Inflationary pressure over the policy-relevant horizon has been dampened further as some of the previously identified downside risks to the euro area growth outlook have materialised. Consistent with this picture, the underlying pace of monetary expansion remains subdued. Inflation expectations for the euro area economy continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2 percent over the medium term. At the same time, economic growth in the euro area continues to remain weak, with heightened uncertainty weighing on confidence and sentiment.
We have implemented both standard and non-standard monetary policy measures. This combination of measures has supported the transmission of our monetary policy. All our non-standard monetary policy measures are temporary in nature and we maintain our full capacity to ensure medium-term price stability by acting in a firm and timely manner. Let me also remind you of the decision taken by the Governing Council on 22 June 2012 concerning further measures to increase collateral availability for counterparties.
Let me now explain our assessment in greater detail, starting with the economic analysis. On a quarterly basis, euro area real GDP growth was flat in the first quarter of 2012, following a decline of 0.3 percent in the previous quarter. Indicators for the second quarter of 2012 point to a renewed weakening of economic growth and heightened uncertainty. Looking beyond the short term we expect the euro area economy to recover gradually, although with momentum dampened by a number of factors. In particular, tensions in some euro area sovereign debt markets and their impact on credit conditions, the process of balance sheet adjustment in the financial and non-financial sectors and high unemployment are expected to weigh on the underlying growth momentum.
The risks surrounding the economic outlook for the euro area continue to be on the downside. They relate, in particular, to a renewed increase in the tensions in several euro area financial markets and their potential spillover to the euro area real economy. Downside risks also relate to possibly renewed increases in energy prices over the medium term.
Euro area annual HICP inflation was 2.4 percent in June 2012, according to Eurostat’s flash estimate, unchanged from the previous month. On the basis of current futures prices for oil, inflation rates should decline further in the course of 2012 and be again below 2 percent in 2013. Over the policy-relevant horizon, in an environment of modest growth in the euro area and well-anchored long-term inflation expectations, underlying price pressures should remain moderate.
Taking into account today’s decisions, risks to the outlook for price developments continue to be broadly balanced over the medium term. The main downside risks relate to the impact of weaker than expected growth in the euro area. Upside risks pertain to further increases in indirect taxes, owing to the need for fiscal consolidation, and higher than expected energy prices over the medium term.
Turning to the monetary analysis, the underlying pace of monetary expansion has remained subdued, with short-term developments displaying some volatility. The increase in the annual growth rate of M3 to 2.9 percent in May, up from 2.5 percent in April and close to the 3.0% observed in March, mainly reflected a reversal of the outflows in April from overnight deposits belonging to non-monetary financial intermediaries (particularly investment funds). In addition to an increased preference for deposits with shorter maturities, these factors have also shaped M1 developments, with the annual growth rate increasing from 1.8 percent in April to 3.3 percent in May.
The annual growth rate of loans to the private sector (adjusted for loan sales and securitisation) declined to 0.4 percent in May (from 0.8 percent in April). Annual growth rates for loans to both non-financial corporations and households (adjusted for loan sales and securitisation) also decreased in May, to 0.2% and 1.3% respectively, with negative monthly loan flows to non-financial corporations. To a large extent, subdued loan growth reflects the current cyclical situation, heightened risk aversion, and the ongoing adjustment in the balance sheets of households and enterprises which weigh on credit demand.
Looking ahead, it is essential for banks to continue to strengthen their resilience where it is needed. The soundness of banks’ balance sheets will be a key factor in facilitating both an appropriate provision of credit to the economy and the normalisation of all funding channels.
To sum up, taking into account today’s decisions, the economic analysis indicates that price developments should remain in line with price stability over the medium term. A cross-check with the signals from the monetary analysis confirms this picture.
Let me now make a few remarks relating to other policies. We welcome the European Council conclusions of 29 June 2012 to take action to address financial market tensions, restore confidence and revive growth. We agree that Economic and Monetary Union needs to be put on a more solid basis for the future and that sustainable growth, sound public finances and structural reforms to boost competitiveness remain key economic priorities. We welcome the decision to develop a specific and time-bound road map for the achievement of a genuine Economic and Monetary Union. We also welcome the euro area summit initiative towards a single supervisory mechanism, the possibility – with appropriate conditionality – to recapitalise banks directly, and the use of existing EFSF/ESM instruments in a flexible and efficient manner in order to stabilise markets. Finally, the ECB is ready to serve as an agent to the EFSF/ESM in conducting market operations”.