PARIS (MNI) – The following is the first installment of
introductory statement delivered Monday by European Central Bank
President Mario Draghi in the European Parliament in Brussels.

“Since the last regular hearing in October with former President
Trichet, the ECB has taken a number of steps to ensure that it will
continue to deliver price stability in the medium term in an environment
that remains challenging. These steps relate both to changes in our
interest rates and to non-standard measures.

As you know, regarding interest rates, the Governing Council early
December decided to lower the key ECB interest rates by 25 basis points,
following a 25 basis point decrease on 3 November 2011.

As regards the short-term growth outlook for the euro area, the
intensified financial market tensions are continuing to dampen economic
activity in the euro area and the outlook remains subject to high
uncertainty. Euro area economic activity should recover, albeit very
gradually, in the course of 2012, as also projected by Eurosystem staff
in early December. Substantial downside risks to this economic outlook
nevertheless remain.

With regard to price developments, inflation was 3.0% in November.
Inflation is likely to stay above 2% for several months to come, before
declining to below 2%, which view is also broadly confirmed in the
December staff projections. Given the environment of weaker growth in
the euro area and globally, underlying cost, wage and price pressures in
the euro area should also remain modest. Risks to the medium-term
outlook for price developments remain broadly balanced.

The latest monetary data reflect the heightened uncertainty in
financial markets. Looking beyond short-term volatility, the monetary
analysis indicates that the underlying pace of monetary expansion
remains moderate.

The Governing Council of the ECB is determined to ensure that
inflation expectations continue to be firmly anchored in line with our
aim of keeping inflation rates below, but close to, 2% over the medium
term.

Let me now turn to the latest non-standard measures. Such measures
should prevent adverse effects on the monetary policy transmission
mechanism stemming from the ongoing tensions in parts of the euro area
financial markets. They should in particular mitigate the effects of
strains in financial markets on the supply of credit to firms and
households.

First, several measures have been enacted to ensure that banks
maintain access to funding markets.

–We have decided on three-year refinancing operations to support
the supply of credit to the euro area economy. These measures address
the risk that persistent financial markets tensions could affect the
capacity of euro area banks to obtain refinancing over longer horizons.

–Earlier, in October, the Governing Council had already decided to
have two more refinancing operations with a maturity of around one year.

–Also, it was announced then that in all refinancing operations
until at least the first half of 2012 all liquidity demand by banks
would be fully allotted at fixed rate.

–Funding via the covered bonds market was also facilitated by the
ECB deciding in October to introduce a new Covered Bond Purchase
Programme of 40 billion.

–Funding in US dollar is facilitated by lowering the pricing on
the temporary US dollar liquidity swap arrangements.

These measures should ensure that banks continue to have access to
stable funding, also at longer maturities, which gives them the
opportunity to continue lending to firms and households.

Second, some banks’ access to refinancing operations may be
restricted by lack of eligible collateral. To overcome this, a temporary
expansion of the list of collateral has been decided. Furthermore, the
ECB intends to enhance the use of bank loans as collateral in Eurosystem
operations. These measures should support bank lending, by increasing
the amount of assets on euro area banks’ balance sheets that can be used
to obtain central bank refinancing.

Third, the Governing Council decided on measures aimed at fostering
money market activity. Amongst others, the reserve ratio will be
temporarily reduced, from 2% now to 1%. This increases the incentives
for market participants to engage in money market transactions. Also, it
increases the collateral available to banks, as it reduces their
liquidity needs vis-a-vis the Eurosystem and thereby the amount of
collateral that needs to be posted.

Overall, all measures mentioned aim to ensure enhanced access of
the banking sector to liquidity and facilitate the functioning of the
euro area money market, thereby avoiding severe limitations to the real
economy from a lack of financing possibilities. This also helps ensure
that the official interest rates set by the ECB are transmitted in an
appropriate way to the economy, and in that way help maintaining price
stability in the medium term.”

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–Paris newsroom, +331-42-71-55-40; paris@marketnews.com

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