–Adds Explanation On Comment About Future Monetary Easing
–Adds Comments On Banks’ Possible Reaction To Rate Move

FRANKFURT (MNI) – The European Central Bank’s 25 bp rate cut
Thursday is justified by the spread of economic weakness across the
whole of the Eurozone, ECB President Mario Draghi said.

The rate cut should lower pricing on the ECB’s long-term repos and
on its Emergency Lending Assistance, Draghi told reporters after the
meeting of the Governing Council here.

The cut would also provide stimulus via expectations for further
monetary easing in the event that economic developments warranted yet
another move, he added.

Queried later about the predictive weight of this comment, Draghi
said, “People are reading too much into this. What I said is: ‘You can
translate this to say that whenever the bank pursues the objective of
price stability in medium term, that in itself has a positive effect on
the economy’.”

The rate decision “was unanimous on all grounds, which by itself
carries a special strength,” Draghi noted.

“Another reason why this price signal has more power than before is
that it is accompanied by a reduction in the rate of the deposit
facility” to zero, he added.

“We see now a weakening of growth in the whole of the euro area,
including the countries that had not experienced before,” Draghi
explained. “We can genuinely say this measure is addressed to the whole
of the euro area.”

Growth in the Eurozone is “hovering around zero,” he observed. “We
still expect a gradual and slow recovery around the end of the year. So
in a sense, the baseline scenario of the ECB hasn’t changed, although
the downside risk to that baseline scenario are now materialising”

This should quell price pressures in short and medium term, he
said, predicting that inflation would fall below 2% by 2013 – perhaps
before. But he ruled out risks of deflationary tendencies: “We see no
sign of this in any country.”

Defending the ECB’s long-term repos despite their apparent failure
to lead to increased credit flows, Draghi said that a key factor in the
weak credit situation was feeble demand:

“We need time to see this,” he said. “The size and complexity of
these two LTROs is such that we cannot expect to see immediate action
and especially as far as the transmission of the LTROs into higher
credit flows.”

Risk aversion, lack of capital and lack of funding could all play
a part in failure by banks to lend, he said. “We have removed only the
third, not the other two. The second reason is that this lack of
transmission between the LTROs and the enhancement in credit flows is
not the same in all countries.”

National factors are also playing a role in credit developments,
which varied between different Eurozone countries, he said:

“You have countries like France, where credit flows actually
continue to be sustainable, and you have other countries where credit
flows are actually decreasing, which leads us to think that the
transmission mechanism is also linked with national factors that have to
do with the way banks lend, special contracts, contractual arrangements
of different countries.”

“But there is a third consideration and that is that credit is led
now predominantly by demand,” he added. “And if demand is weak you
wouldn’t expect a strong credit growth.”

Draghi quashed any lingering market hopes for further non-standard
measures, as there are no signs of a liquidity trap: “We don’t think
we’re in that situation. At this point in time we’re not really
elaborating or thinking on various non-standard situations in which we
may find ourselves”.

Draghi was sceptical that the rate cut would have a dramatic impact
on the behaviour of the banks, although it is very hard to forecast how
they would respond. While banks would receive less on their ECB
deposits, they will pay less on their LTRO borrowing.

“So they get less on the deposit but they pay less on the other
side,” he said. “How this is going to effect their business decisions or
their convenience decisions is very hard to predict.”

–London newsroom: 4420 7862 7492; email: ukeditorial@marketnews.com

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