MADRID (Reuters) - The European Central Bank could only consider employing its bond-purchase plan if there were major problems in the transmission of its monetary policy, ECB President Mario Draghi told Spanish lawmakers on Tuesday.
Draghi’s comments indicated that the ECB is in no rush to tap the yet-to-be-used plan, dubbed the Outright Monetary Transactions (OMT) programme, which it announced last September.
At the same event, Draghi also said talk of currency wars was exaggerated and rejected the idea of the ECB setting an exchange rate target, and said Spain’s economy was on the right track.
Since the bank announced its bond-buying plan, the mere threat of ECB intervention - if needed - has helped lower Spain’s borrowing costs. Yields on 10-year Spanish sovereign bonds are now around 5.3 percent, compared with well over 7 percent last July.
“The ECB can only consider OMTs if there are major problems in the transmission of monetary policy and if there is strict and effective conditionality attached to an appropriate European Stability Mechanism (ESM) programme,” Draghi said in a text of his remarks to Spanish lawmakers, released on the ECB’s website.
After meeting lawmakers behind closed doors for about an hour, Draghi said Spain was on the right track towards economic recovery and that he saw several positive signs.
The lawmakers invited Draghi to Madrid after he spoke to Germany’s Bundestag in October to defend the OMT plan - his signature policy tool, which has met scepticism in Germany and is opposed by the Bundesbank.
Spanish Prime Minister Mariano Rajoy has said that for the moment he has no plans to make a request for aid, a pre-requisite to trigger OMT buying, since sovereign bond yields have eased back from euro-era highs last summer to more sustainable levels.
“If Spain asks for help now, with yields where they are at the moment, we would not expect the ECB to buy much,” said Berenberg Bank economist Christian Schulz.
“I think Draghi’s speech in Madrid makes really clear that the OMT is only a panic-prevention tool,” he said. “It’s a backstop against destructive speculation, not a subsidy to government financing.”
Last month, ECB policymaker Luc Coene said the ideal situation would be for the OMT programme “never to be used”.
“It’s like a nuclear deterrent. Whenever you use it, that will raise new questions and new issues,” said Coene, who is also the head of the Belgian central bank.
Shifting his attention to foreign exchange rates, Draghi told reporters that talk of a currency war was far exaggerated. He vigorously rejected any call for the ECB to expand its mandate beyond price stability to also focus on exchange rates.
“I think the term currency wars is way, way over done. We are not witnessing anything like that,” he told a news conference.
Earlier on Tuesday, the Group of Seven nations said in a statement aimed at cooling growing international tensions over exchange rates that fiscal and monetary policies must not be directed at devaluing currencies.
This followed a barrage of rhetoric about a currency war, prompted largely by Japan’s new government pressing for an aggressive expansion of monetary policy, which has seen the yen weaken sharply as a result.
Last week, France also called for a medium-term target to be set for the euro out of concern the exchange rate had become too strong. Berlin rejected that suggestion.
The issue was discussed at a meeting of euro zone finance ministers in Brussels on Monday but French Finance Minister Pierre Moscovici made little headway.
Draghi also dismissed the idea and said comments on exchange rates by people not immediately involved in monetary policy were “inappropriate or fruitless”.
“When they are made by people (who are) not immediately related to monetary policy, some of these comments are perhaps inappropriate or fruitless,” he said.
“They are innapropriate if they are meant to instruct the ECB to achieve a certain exchange rate and mean to basically violate the independence of the ECB and forget that the ECB’s mandate is not the certain level of the exchange rate but the certain price stability in the medium term.”
However, he said exchange rates were important for growth and for price stability.
“So, what we want to assess now is whether the appreciation, if sustained, has the potential to change our risk assessment for price stability.”
Draghi said the ECB would have new projections in March and would then be in a better position to discuss the situation.
For the text of Draghi’s remarks to the lawmakers, click:
Additional reporting and writing by Paul Carrel in Frankfurt; Editing by Susan Fenton