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Mario Draghi: "Our response has certainly been unconventional... but far from unorthodox"

FXStreet (London) - Mario Draghi, president of the European Central Bank, today opened the Frankfurt European Banking Congress.

On the issue of the ECB response to weak Eurozone growth:

- "Our response has certainly been unconventional, in the sense that our measures are unprecedented – but it is far from unorthodox. We have responded in a way that any central bank with a strict price stability objective would do."

- “The first step […] was to lower overnight interest rates all the way to their effective lower bound – including below zero for the deposit facility. But once we reach this point, and if inflation is still too low and more monetary stimulus needed, the central bank has to adopt new instruments to fulfil its mandate.”

- “The next logical step to ease monetary conditions is to influence more directly the term structure of interest rates, which we did by introducing forward guidance in July of last year. We have recently re-affirmed our forward guidance that key policy rates will stay low for an extended period of time in line with the subdued outlook for inflation. And in the Targeted Long-Term Refinancing Operations (TLTRO) programme we have backed this up, by providing term funding over up to four years at a very low fixed rate.”

- “As a result, the level of the forward interest rate curve in the euro area is currently uniformly lower than it has ever been – and also lower for instance than at any point in the US since the start of the financial crisis.”

- “Both these steps have in common that they operate through steering current and forward money market rates. However, once the margin for manoeuvre here becomes exhausted – that is, overnight and near-term money market rates are both at the lower bound – a third step becomes necessary.”

- “If further monetary stimulus is needed, central banks need to by-pass the money market and intervene directly in other asset markets to affect, through prices and quantities, the various transmission channels of monetary policy.”

- “And this is the point the ECB has reached with the Governing Council’s decision to initiate purchases of asset-backed securities (ABS) and covered bonds.”

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