ECB president Mario Draghi said that, in the short-term, banks might be unwilling to lend as they try and boost their capital requirements in advance of the asset quality review
“Generally speaking, one certainly might have some short-term deleveraging by the banking system as they prepare for the review,” he said.
Mr Draghi was at pains to point out that this short-term pain is being taken in order to fix the entire banking system. He said the review will improve transparency and ultimately result in the markets lending more to European banks.
Asked if Ireland’s recent success in returning to the markets marked a final victory in the battle against the euro crisis, Mr Draghi said he was still cautious about the health of the continent’s economy.
“I’d be very cautious about saying that, I’d be very, very cautious. Unemployment stands at 12% or more, the only good news about this is that this high, unacceptably high, rate is stabilising. In other words, it’s not going up each and every month… The recovery is there, but it is weak, it is modest, and I have said many times, it is fragile.”
Mr Draghi said he foresees a prolonged period of low inflation before a gradual return to the ECB’s target level of just below 2%.
The ECB, which last cut its main rate to 0.25% in November, “strongly emphasised” its willingness to act boldly, if needed, to prevent any slide towards deflation — a term it rejected — but left itself more time to assess price and money market trends.
“Overall, we remain determined to maintain a high degree of monetary accommodation and to take further decisive action if required,” Mr Draghi said.
He acknowledged this was a more strongly worded expression than in the past of intent to act if market interest rates rose too far or there was a fall in the bank’s outlook.
The decision to hold rates unchanged was widely expected despite news this week that eurozone inflation slowed to 0.8% in December.
Low inflation is not the ECB’s only concern. A lack of lending and receding excess liquidity — the amount of money in the market on top of what banks need for their day-to-day operations — are adding to its dilemma.
Excess liquidity — the money from ECB loans — almost halved overnight to €157bn as banks took up fewer funds from the ECB, which has reduced liquidity further by offsetting its bond purchases.
Early repayments of three-year ECB loans resume next week, meaning even more funds will be siphoned out of the markets, helping push money market rates up more.
Mr Draghi has repeatedly said banks returning money to the ECB is a positive. But if banks hoard less cash, borrowing costs rise.
Lending to companies in the bloc shrank at the fastest pace on record in November and the difference in corporate loan costs grew. This suggests the ECB’s low rates are still not filtering into all countries.
Nevertheless, Mr Draghi said confidence was gradually returning to the eurozone economy. Source: The Irish Examiner