European Central Bank President Mario Draghi warned Monday that growth and inflation prospects in the Eurozone are both subject to downside risks and vowed the Bank stood ready to take further action if necessary to underpin price stability.
In prepared remarks for his appearance at the regular Quarterly Hearing of the Committee on Economic and Monetary Affairs of the European Parliament in Brussels, also said he expects the Bank’s new targeted liquidity operations to have a significant monetary policy impact.
“The Governing Council remains fully determined to counter risks to the medium-term outlook for inflation,” Draghi said. “Therefore, we stand ready to use additional unconventional instruments within our mandate, and alter the size and/or the composition of our unconventional interventions should it become necessary to further address risks of a too prolonged period of low inflation.”
“While it is yet too early to assess the impact of the TLTROs on the broader economy, their announcement already had a noticeable positive impact on financial market sentiment,” he added. “Overall, we expect the TLTROs to act as a powerful tool to strengthen the transmission of monetary policy and facilitate new credit flows to the real economy, given the predominantly bank-based financing structure of the euro area economy.”
The ECB President also laid out details of the Bank’s asset purchase programmes, which include plans to buy both asset backed securities (ABS) and covered bonds that he has said will have a “sizeable” impact on the ECB’s balance sheet.
“With the purchase programmes, we are starting a transition from a monetary policy framework predominantly founded on passive provision of central bank credit to a more active and controlled management of our balance sheet,” he said.
Taking questions from lawmakers, Draghi was confident ABS purchases would have a marked impact on both the size of the current market and the expansion of the bank lending channel. He vowed, however, that the Bank would keep a stern eye on the risks associated with the programme and said it would not purchase lower-rated ‘mezzanine’ tranches of ABS without a specific public guarantee.
The overall tone of his question-and-answer session, however, appeared to underscore the Bank’s recent efforts to establish its forward guidance and assure investors that its current accommodative monetary policy will remain in place for an extended period of time.
“Let me add however that the success of our measures critically depends on a number of factors outside of the realm of monetary policy,” he noted. “Courageous structural reforms and improvements in the competitiveness of the corporate sector are key to improving business environment. This would foster the urgently needed investment and create greater demand for credit.”
“Structural reforms thus crucially complement the ECB’s accommodative monetary policy stance and further empower the effective transmission of monetary policy,” Draghi said. “As I have indicated now at several occasions, no monetary – and also no fiscal – stimulus can ever have a meaningful effect without such structural reforms.”