European Central Bank President Mario Draghi

A combative Mario Draghi, president of the European Central Bank, strongly defended one of his bank’s most unorthodox and controversial moves of the eurozone crisis as “probably the most successful monetary policy measure undertaken in recent times”.

Speaking after the ECB kept its main refinancing rate on hold at 0.5 per cent and decided to keep any other non-standard measures “on the shelf”, Mr Draghi said an absence of deflationary risks in the eurozone and a stock market rally were the fruits of the bank’s outright monetary transactions, or OMT scheme, announced last September.

He also contrasted how the ECB had succeeded in shrinking its balance sheet with the bond market gyrations caused by investors anticipating an end to the Federal Reserve’s measures to stimulate the economy.

“The ECB hasn’t done anything to increase volatility in the markets,” Mr Draghi said. “If you think the ECB has done anything comparable to other central banks, we wouldn’t agree.”

His robust defence of OMT, which was opposed by Germany’s Bundesbank and stirred controversy in Germany, comes ahead of court hearings at the constitutional court in the German spa town of Karlsruhe next week, which is considering the legality of the scheme under Germany’s Basic Law.

“The OMT has brought stability not only to the markets in Europe but also to the markets worldwide,” he said, adding that he was “absolutely confident” that the constitutional court, which will not make any ruling until later in the year, would “analyse with thoroughness, fairness and competence all the advice from all the sides”.

He took on critics, particularly in Germany, who have argued that ECB action has increased risks for German taxpayers. Just under 60 per cent of long-term cheap loans made to banks in December 2011 had been repaid, he said.

While confirming that action to help small and medium-sized business access cheaper financing in countries such as Spain and Italy was a long-term project that would not entail radical action by the ECB, Mr Draghi also called on governments and officials in Brussels to agree on how to recapitalise eurozone banks once it undertakes a balance sheet review.

He contrasted the ECB’s asset quality review, planned later this year ahead of stress tests by the European Banking Authority next year, with a similar exercise by the Federal Reserve during the financial crisis. He noted the level of backstop required was agreed before the review.

“Miraculously the capital needs of these banks came out exactly according to the backstop that had been allotted,” he said, adding the ECB did not have “these magic powers” but wanted explicit commitments by governments, the eurozone’s rescue fund and the Eurogroup on how to recapitalise any shortfall.

The bank’s staff also released new quarterly forecasts. The ECB now expects the bloc’s output to shrink 0.6 per cent this year, compared to 0.5 per cent previously, and grow 1.1 per cent next year.

The ECB had in March expected a contraction of between 0.9 and 0.1 per cent of gross domestic product this year. The previous forecast for next year was growth of between 0 and 2 per cent.

Mr Draghi said the changed forecasts reflected recent GDP data but stuck to his view that the economy would gradually recover later this year driven by exports, lower inflation and an accommodative monetary policy.

Mr Draghi said a slight improvement in some survey data, offset by a continuing credit squeeze, did not justify further monetary policy action at this stage, he said, adding that this was the consensus view of the governing council.

“The changes are not sufficiently one directional to act,” he said.

He said there was no sign of deflation in the eurozone. “Deflation is a protracted fall in prices with self-fulfilling expectations. It has explosive dynamics downward. We don’t see anything like that in any European country.”

Nonetheless, Mr Draghi said the ECB stood ready to take further action, using a range of conventional and non-conventional measures. He repeated that the ECB was “technically ready” to take its deposit rate negative, but that such a move could have unintended consequences.

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