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CNBC Transcript: Interview with European Central Bank Vice-President, Vitor Constancio

Following are excerpts from the transcript of a CNBC interview by Julia Chatterley and European Central Bank Vice-President, Vitor Constancio


JC: What specifically will measures announced yesterday achieve?

VC: It will reinforce the package as a whole our policy as it has been decided last year and in January, because we have taken a series of measures that will work together and they are about prolonging the period during which we keep this policy of using our balance sheet more than was foreseen at the beginning. This extension goes in the direction of reinforcing the impact of the policies so that we can achieve our target by end of 2017, which was not as sure as we thought before. And also the fact that we extended the policy of fixed rate full allotment of liquidity until the end of 17 also reinforces measures, our policy for guidance which is I think important as a guide to the market. And also the reinvestment policy insures that after March 17 we will continue to keep the stock of securities that we have bought constant because we will keep reinvesting the proceeds of our monetisations of securities after March 2017.

JC: You mentioned guidance there: Now market expectations into that meeting were incredibly high, in part guided by the governing council. Members like Peter Praet, by Mario Draghi himself in recent weeks. Do you think in hindsight the governing council raised the level of expectations too high?

VC: One can never tell before and it's very difficult to calibrate and fine tune that. What I can tell you is that what we decided yesterday was exactly what board proposed to the governing council so there was no change in what we proposed to the council. So we did what we intended to do. Now of course you're right, we have to recognise that the markets got it wrong informing their expectations – they did indeed have higher expectations than were there and that's why they reacted like they reacted. But that was not our intention. After our meeting in October we said that we would re-asses the degree of accommodation. So we were talking about a recalibration of our measures. We were not talking ever about a new type of QE2 or something like that. That's not what we were talking about.

JC: So in your view the pullback, the spike we saw in euro yesterday wasn't overdone?

VC: Well what is reassuring for us is the fact that in general the conditions in financial markets are today as we speak better than what they were in after our meeting in October. When we first announced that we were going to reassess the calibration of our policies and so there was this reaction. We hope that as markets realise the full effects of all the 5 measures in the package this may be corrected. but even without thinking about it, it's important to say that this consolidated our policy and when the extension of several measures are due, this will impact also the situation then and will help for us to achieve our goals until the end of 2017

JC: The guidance that was given going into this meeting. Was that an effort in some way by the doves on the governing council to use the market as leverage to force the hands of hawks into accepting further stimulus?

VC: well no i could not agree with that statement, which would by the way be very convoluted, sophisticated game playing which didn't cross anyone's mind. I am absolutely sure. We don't play with these things that way.

JC: But you just said to me that what you proposed you got. So actually you don't feel that you were bound in any way by the Germans here because Mr. Weidmann came straight our saying he disagrees with the stimulus.

VC: He had already disagreed before when we took the measures but that's of course not important. What is important is that there was a very large majority of the council in favour of what we proposed. That's what really counts in the end, which shows that there was a general understanding, that in view of events since January our measures had lost impact - they were working but less than we thought in March when we started implementation of the asset purchases. We thought with that we would be able to reach inflation below or close to 2 by 17 and now we realised since September, October we realised it was no longer enough to achieve that target by 17.

JC: Why will this now be enough?

VC: Well we think it will be because as I said financial conditions are better than what they were in October when we first announced the reassessment and also because there are measures in our package that will kick in as time goes by and will be prolonged beyond 2016 and that will also produce an effect on inflation.

JC: Mario Draghi also said you've got other tools you can use. Is a further cut in the deposit rate one of those options?

VC: I'm not going to speculate but just rewind what Mr Draghi said yesterday when he had the same question, he said what we did is adequate now and that's it so of course we will see. He also…

JC: He didn't rule it out?

VC: Yes and I also highlighted in general that we still have of course measures in our toolkit that can be used. And that depends on developments. We don't know what will happen exactly in 2016. It can go better, it can go worse and we have to adjust to significant changes in the overall situation.

JC: Did you discuss the prospect of a dual deposit rate in some way to perhaps cushion the banks?

VC: Well that was not discussed because we proposed a cut that was reasonable and did not require entering such considerations.

JC: Can I ask you what your message to investors here is? Because I think after what happened in the last 24 hours there's a perception actually that the bar now for further stimulus is actually pretty high. Particularly given the stance of Bundesbank.

VC: Well it has not to do with any particular member of the governing council, this is a general reflection. And decisions can only be taken when there is enough majority indeed to see that decision. So that's the first point. But depending on events, we still have measures in toolkit that we can use. That's important for the markets to know. And i think that they are fully aware of that - if there would be a need to use them.

JC: You're confident that you've got enough dry powder here? Because some of the markets are saying you're running out.

VC: Well they cannot say both things. They cannot say that we should have done more and then we don't have the instruments. So the two things don't add up, which means of course that we do have still measures in our toolkit if they will be needed.

JC: One of the comments that Mario Draghi made yesterday was effectively saying that the ECB can't do this alone. Was the ECB calling for further fiscal stimulus from Eurozone nations?

VC: What we were saying indeed was, the first part of your sentence, your question, which is monetary policy cannot do it alone to address all the problems and challenges that the euro area is facing. And that as much as possible according to the rules other policies have to help and to step in to really help because in such a situation, we all know, that monetary policy alone – there is a point when it becomes less effective alone. So that is the main message. The other aspect of your question is subject to further analysis and we'll continue to reflect on that for sure but we want the other authorities in the euro area also to reflect on the situation and not rely only on monetary policy.

JC: I think we have to face facts given the moves in the markets yesterday and the comments we've had from the ECB in the last 4 weeks, there was some kind of disconnect. Do you think the ECB has lost credibility in some way in the last 24 hours?

VC: Well my view is that the fault lies with the markets. They got it wrong. They didn't read well our reaction function. They should have thought in our wording in October when we said we are going to reassess the degree of accommodation so it was all the time about recalibration. It was not about a big change in policy.

JC: But Mario Draghi could have pushed back in the last 3 weeks?

VC: Well as I said it's very difficult to really measure and fine tune these impacts. So indeed what I think is that the markets got it wrong. Perhaps many were hoping to, you know, make some money if there would be a big event but indeed they got it wrong.


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