ECB ready to act, says Draghi, as shares move higher on stimulus hopes -as it happened

With no guidance from Wall Street, one way or the other, European markets continue to perform strongly.

Investors had feared there would be a collapse in the Chinese market which wouild cause more turmoil elsewhere, but this failed to happen. Instead a 7.% rise in Japan is one of the driving factors behind broad based gain elsewhere.

The FTSE 100 is currently more than 2% higher while Germany’s Dax has jumped 3%, France’s Cac has climbed 3.5% and Spain’s Ibex is up 3.1%.

On that note, it’s time to close for the day. Thanks for your comments and we’ll be back tomorrow.

Augustin Eden at Accendo Markets said:

Mario Draghi’s speech at the European Parliament is essentially an exercise in reassurance, because no one – not even the central banks - knows what’s going on at the moment. The market simply doesn’t stay in one place long enough to be prescribed the right treatment. So we must wait until March for genuine talk about specifics, and things could well be very different by then. Of course, they could also be exactly the same as they are now!

Question: Inflation expectations over 10 years are well below ECB targets. Which indicator would you use. What would be success or failure of monetary policy? What is the appropriate fiscal stance.

Draghi: We are far away, we do not use one set of indicators [five years, ten years]. But we are far away, so we will reconsider stance in March.

Our objective is rate below but close to 2%. Our horizon to reach the target has been lengthened... due to developments out of our control: emerging markets, oil prices, etc. The same situation is in the US, Japan.

Appropriate fiscal stance for eurozone. At the moment, lightly expansionary. Ideally should be expansionary while in line with stability and growth pact.

Draghi’s comments about being ready to act seem to be sending the euro lower.

The single currency is down more than 1% on the day against the dollar at $1.1141.

Question: Your policies have been criticised for not working, including savers with low interest rates. Also I read the ECB is in talks with Italian government about buying bundles of bad loans. My question is, why? How is it in the interests of rest of euro area?

Draghi: Don’t agree QE and monetary policy not working. It has been the only one stimulative policy. We now face a situation different to two years ago. We have a gradual recovery, which continues.

We have to get inflation back to our objective, below or close to 2%. On that front the situation is less satisfactory.

The council will review and reconsider monetary policy stance in March.

This policy produces low interest rates. But we have low interest rates everywhere.

The problems savers etc in eurozone are the same as in US and Japan. The solutions are slightly different. We are very conscious of this, and wish rates could go up again. It would mean recovery is proceeding successfully.

On Italian talks - not that I know.

The story that ECB would buy non-performing loand in Italy. We are not talking about buying anything. The question is could they be accepted as collatoral. [But] collatoral is different from purchasing.

He added that having NPLs in asset backed securities would not disqualify using ABS’s as collatoral.

But I am not aware of talks, and I would say we have no losses on our collatoral at the moment.

Question on the current negotiations between the EU and Britain.

Draghi: The ECB is not a party to these negotations. We can say two things. There are two aspects we should protect [in any negotiations]. One is single market, second is our monetary union. Further integration of our monetary union is essential.

The EU and Britain have to work together, both drawing benefits from it, he says, adding: The objective of the talks is to anchor the UK in the EU.

Question about abolition of €500 note [as it is linked increasingly with crime]

Draghi: We are considering action on that front. We have to do it very carefully. The council and board reflecting on how to do it in best way.

But nothing to do with reducing cash [in the system].

Draghi has also addressed the meltdown in the banking sector in recent days, which has been partly caused by concern about the effect of negative interest rates on banks’ margins. He said:

Since early December, a general deterioration in market sentiment has taken root and has gathered pace over the last week. This initially appeared closely linked to concerns regarding weakening economic activity around the globe – notably in emerging markets – and to potential adverse signals from falling commodity prices. Over time however, market sentiment has become more volatile and susceptible to rapid change. In this environment, stock prices significantly declined and bank equity prices were particularly hit, both globally and in Europe. The sharp fall in bank equity prices reflected the sector’s higher sensitivity to a weaker-than-expected economic outlook; it also reflected fears that some parts of the banking sector were exposed to the higher risks in commodity-producing sectors. The bulk of euro area listed banks, although they have relatively limited exposure to emerging markets and commodity producing countries, are currently trading well below their book values.

The fall in bank equity prices was amplified by perceptions that banks may have to do more to adjust their business models to the lower growth/lower interest rate environment and to the strengthened international regulatory framework that has been put in place since the crisis.

He also tried to calm concerns about the state of European banks, in particular in relation to non-performing loans:

In the euro area, the situation in the banking sector now is very different from what it was in 2012. Perhaps most importantly, euro area banks have significantly strengthened their capital positions over the past few years...

Clearly, some parts of the banking sector in the euro area still face a number of challenges. These range from uncertainty about litigation and restructuring costs in a number of banks to working through a stock of legacy assets, particularly in the countries most affected by the financial crisis. There is a subset of banks with elevated levels of non-performing loans (NPLs). However, these NPLs were identified during the Comprehensive Assessment, using for the first time a common definition, and have since been adequately provisioned for. Therefore, we are in a good position to bring down NPLs in an orderly manner over the next few years. For this purpose, the ECB’s supervisory arm is working closely with the relevant national authorities to ensure that our NPL policies are complemented by the necessary national measures.

European Central Bank president Mario Draghi has said the bank will not hesitate to act in the light of the recent economic and market turmoil.

At its last meeting the ECB said it would review its monetary policy stance at its next meeting in March, but in a speech to the European Parliament, Draghi suggested the turbulence in the markets last week has given it extra urgency:

In order to make the euro area more resilient, contributions from all policy areas are needed. The ECB is ready to do its part. As we announced at the end of our last monetary policy meeting in January, the Governing Council will review and possibly reconsider the monetary policy stance in early March. The focus of our deliberations will be twofold.

First, we will examine the strength of the pass-through of low imported inflation to domestic wage and price formation and to inflation expectations. This will depend on the size and the persistence of the fall in oil and commodity prices and the incidence of second-round effects on domestic wages and prices.

Second, in the light of the recent financial turmoil, we will analyse the state of transmission of our monetary impulses by the financial system and in particular by banks. If either of these two factors entail downward risks to price stability, we will not hesitate to act.

And he repeated his calls for fiscal policies to help the economy recover:

In parallel, other policies should help to put the euro area economy on firmer grounds. It is becoming clearer and clearer that fiscal policies should support the economic recovery through public investment and lower taxation. In addition, the ongoing cyclical recovery should be supported by effective structural policies. In particular, actions to improve the business environment, including the provision of an adequate public infrastructure, are vital to increase productive investment, boost job creations and raise productivity. Compliance with the rules of the Stability and Growth Pact remains essential to maintain confidence in the fiscal framework.

It is doubtful that HSBC ever intended to leave the UK and highly likely chancellor George Osborne paid too high a price to ensure it stayed, says economics editor Larry Elliott.

His full analysis is here:

Is the European Central Bank’s Outright Monetary Transactions policy - president Mario Draghi’s promise in 2012 to do “whatever it takes” to save the euro - legal?

The European Court of Justice has ruled it is, but on Tuesday a German court will look at the issue (although no judgement is expected until the summer. UniCredit’s Andreas Rees says:

Tomorrow, a public hearing on the OMT before the German Constitutional Court (GCC) will take place. Besides the complainants, Bundesbank President Weidmann and ECB Executive Board Member Mersch will also attend. The ruling is expected by summer.

In June 2015, the European Court of Justice (ECJ) already stated that the OMT is legal under EU law. However, the GCC made the controversial claim of having the right to deliver a final judgment as far as German institutions (the Bundesbank) are concerned.

In general, we expect the GCC to accept the verdict of the ECJ. In order not to lose its face, the GCC could stress the responsibility of the German government and the Bundestag in case of the OMT being activated.

One possibility is the making of provisions for the federal budget in the theoretical case of losses for the Bundesbank. Even if the GCC was heading for an outright confrontation with the ECJ there would not be any legal obstacles (for the Bundesbank) to participate further in QE.

Over in Greece and the country’s budget primary surplus came in at €1.19bn in January, up from €443m last year and well above the target of €307m.

The figures were helped by better than expected revenues and lower than forecast outlays.

The Bundesbank president Jens Weidmann may find himself in a tricky spot: