Introductory statement with Q&A
Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB,
Frankfurt am Main, 7 April 2005
Ladies and gentlemen, it is our pleasure to welcome you to this press conference. The Vice‑President and I will now report on the outcome of today’s meeting of the Governing Council of the ECB, which was also attended by Commissioner Almunia.
All in all, we have not changed our assessment of risks to price stability over the medium term. So far, we have seen no significant evidence of underlying domestic inflationary pressures building up in the euro area. Accordingly, we have left the key ECB interest rates unchanged. Both nominal and real interest rates are at exceptionally low levels, lending ongoing support to economic activity. However, upside risks to price stability over the medium term remain and continued vigilance is therefore of the essence.
I shall now explain our assessment in more detail, turning first to the economic analysis. Recent data and survey indicators on economic activity have been mixed. In general they point to ongoing economic growth at a moderate pace over the short term, with no clear signs as yet of a strengthening in underlying dynamics.
Looking further ahead, the conditions remain in place for moderate economic growth to continue. Global growth remains solid, providing a favourable environment for euro area exports. On the domestic side, investment is expected to continue to be supported by very favourable financing conditions, improved profits and greater business efficiency. Consumption growth should develop in line with real disposable income growth. However, at the same time, persistently high oil prices in particular pose downside risks to growth.
Turning to consumer prices, Eurostat’s flash estimate for annual HICP inflation was 2.1% in March, unchanged from February. In the coming months, annual inflation rates are likely to remain somewhat above 2%, although the exact figure will depend largely on how oil prices develop. Looking further ahead, so far we have seen no significant evidence of underlying domestic inflationary pressures building up in the euro area. Wage increases have remained contained over recent quarters and, in the context of moderate economic growth and weak labour markets, this trend is likely to continue for the time being.
However, upside risks to price stability remain. Given recent oil price rises, it is once again paramount that second-round effects stemming from wage and price-setting throughout the economy are avoided. It is particularly important that the social partners assume their responsibilities in this respect. In addition, developments in longer-term inflation expectations need to be monitored closely.
The monetary analysis provides further insight into the outlook for price developments at medium to longer-term horizons. While the latest monetary and credit data show some moderation in the pace of monetary expansion, they confirm that the stimulative effect of the low level of interest rates has remained the dominating force. In addition, the fact that monetary dynamics continue to be driven mainly by the most liquid components suggests that excess liquidity may entail risks of upward inflationary pressures in the medium to longer term. Furthermore, strong monetary and credit growth indicates the need to carefully monitor whether risks are building up in the context of strong house price increases in some regions of the euro area.
To sum up, the economic analysis confirms that underlying domestic inflationary pressures remain contained, while there continue to be medium-term upside risks to price stability which need to be monitored closely. Cross-checking with the monetary analysis supports the case for continued vigilance with regard to the materialisation of such risks.
Turning to fiscal policies, recent information provides a mixed picture and continues to raise concerns. Although public finances remain sound in a few euro area countries and fiscal consolidation is progressing slowly in others, in several countries fiscal perspectives are worrying, as imbalances are not projected to decline, as planned earlier, and in some cases are even forecast to rise.
Given that inappropriate consolidation strategies and shortcomings in their implementation have, in the past, made compliance with the Stability and Growth Pact difficult, it is now essential that consolidation plans are ambitious and are fully implemented. It is equally essential that the European Commission and the ECOFIN Council strictly enforce the new agreement on the implementation of the Pact so as to restore the framework’s credibility. The Governing Council would also like to reiterate the need to deliver on fiscal and structural reforms that enhance the sustainability of public finances and confidence in the growth prospects of all Member States.
As regards structural reforms in the euro area, the Governing Council welcomes the Presidency Conclusions of the Brussels European Council of 22 and 23 March 2005, which state that “it is essential to relaunch the Lisbon Strategy without delay and re-focus priorities on growth and employment”. EU countries urgently need to promote innovation and human capital formation, establish a regulatory environment which is friendlier for businesses, accelerate market liberalisation, and increase labour market flexibility.
Attention must now shift towards implementing this reform agenda. Closing the implementation gap is essential in order to reap the full benefits of structural reforms in terms of both a higher growth potential in the medium term and improved consumer and business confidence in the short term.
We are now at your disposal for questions.
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Transcript of the questions asked and the answers given by Jean-Claude Trichet, President of the ECB, and Lucas Papademos, Vice-President of the ECB
Question: How concerned are you that there are as yet no indications of a pick-up in the economic recovery, given that interest rates have been at historical lows for such a long time? And has your view on the recovery changed at all since last month’s meeting?
Trichet: Our judgement is that we are presently observing moderate growth and we are vigilant. We are in an environment where all information is very important for us. We are capturing the mixed signals I mentioned on behalf of the Governing Council. As regards forecasts, I was struck by the fact that a lot of forecasters – our own (the staff of the ECB), the Commission, the private sector, international institutions – are very close when you look at what they are projecting for this year and next year. As you know, we only provide ranges ourselves, capturing also the concept of uncertainty as regards what could happen. A number of other forecasters deliver precise figures. And when I look at these figures, whether they are from the European Commission, the Survey of Professional Forecasters, the Consensus Economics forecasts, and so forth, they are very close. There is some kind of consensus on the present projections. Again, we are making the working assumption that we will progressively see this moderate ongoing growth develop, but we are very pragmatic. We are waiting for confirmation, facts and figures.
Question: Mr Trichet, we all know that central bankers are famously cautious when talking about currency exchange rates and exchange rate targets. A couple of weeks ago your colleague on the ECB Council, Axel Weber, I dare say “let it slip” that the Bundesbank has hedged the euro/dollar at around 1.46-1.47 for 2005. And he kind of put it into perspective and said “well, as cautious central bankers we’ve got to do that, even if we do not expect the euro/dollar to go that way”. How cautious is the ECB on that score?
Trichet: I will let Axel tell you what he has to say on the Bundesbank’s strategy. I have absolutely no comment on that. As you know, we did not change our own Governing Council position, the ECB position, which is very simple, has been reiterated many times and was crystallised when we observed sharp moves upwards. I have nothing to add to that. But it is our clear-cut position. It is absolutely unchanged.
Question: Two questions: first, I noticed in your statement you have not included the usual line that you expect inflation to fall below 2% in the course of this year. Is that because you fear that the recent oil price rise means it may not fall below 2% this year? And second, would you accept that there is a risk that the European Union will fail to adopt its new Constitution? Could you explain what you see as possibly the consequences of that for the euro zone economy and monetary policy?
Trichet: There is no “usual” sentence on the evolution of inflation. We are not in a world where we repeat sentences. We are saying what we think, taking account of all the information we have. I remember that at a time when inflation was reasonably low – below 2% – I said there would be a hump. We said that in advance, which was very important to avoid any misunderstanding with observers, markets or investors. I think it is our duty to be as clear as possible on that. It’s absolutely clear that the recent, very significant increases in the price of oil – together with a number of other factors, but the price of oil is certainly a very important one – have to be taken into account. This is the reason why I mentioned that in the months to come we would perhaps observe a level above 2%. That is absolutely clear. It was important for us to say that in advance, and it is associated with the increase of the price of oil. As regards the longer-term perspective, we see it is also clear that we think – this is the reason why we did not increase rates – that we will deliver price stability in the medium-term in line of the definition of the Governing Council. I can also say on oil prices that we are now at levels which are very, very high. We have to be pragmatic, to respect facts and figures, and that is what we do. Oil price has an impact both on inflation, which we have just mentioned, and also on growth. It is the usual impact of an oil shock. It has a depressive impact on growth; it has an inflationary impact on the HICP. This is something which is very unwelcome, for global economic growth in general, and it is also very unwelcome for the euro area. I myself signed the G7 communiqué calling for the oil market to function better and to improve transparency, and I will reiterate that goal: as high a level of responsibility as possible from all partners concerned, whether they are producers or consumers. I would also mention that I could see one of the producers had decided to produce as much as possible without any other limit than its own capacity. It is certainly a welcome decision. I also think that it is important for consumers to be as good energy savers as possible. As you know, we have protected ourselves in the euro area and in Europe in general since the first and second oil shocks and we are benefiting from that situation in comparison with what would have happened in the present very difficult circumstances had we not made those energy saving efforts. We call for all of the consumers to be highly responsible in terms of energy consumption.
As regards your second question, I would only say that I am making the working assumption that the Constitution will be approved. And, because you asked a question which is associated with the advantages that are due to the euro, I would only mention that if we have the very low level of market interest rates I have been mentioning for 306 million inhabitants it is thanks to the euro and thanks to the price stability credibility the Governing Council of the ECB are giving to the European and euro area economy. Let me also mention that in the present international environment we observe none of the intra-European turbulence that there would have been with the various national currencies before the euro. We would have had a lot of turbulence, a lot of difficulties, and not only on the exchange rate side, between the various European currencies, but also on the interest rate side, with a piling-up of risk premia, volatility and turbulence in the interest rate market. I mention all that because it is forgotten. We have the euro now; we have totally forgotten the difficulties and the drawbacks that were associated with the absence of the euro. It is a necessary reminder.
Question: Last month, you said that everybody knows that at a time we will have to increase interest rates and that that was anticipated by all observers. But since then, some large banks have actually predicted that the next move by the ECB would be a cut and I wondered whether you would still reiterate what you said last month?
Trichet: A decrease of rates is not an option for the Governing Council. There was no discussion in today’s Governing Council meeting of an increase of rates. We all considered that the present level of interest rates was in line with our overall assessment, which I have summed up in the introductory statement, and so we consider that we have the right level of interest rates. As you have noted, I also mentioned that vigilance was of the essence. We have not observed up to now secondary effects, which would be detrimental for inflation and for growth in Europe. It is because all observers know that we are vigilant and that vigilance is of the essence. They all know that, if needed, we would immediately increase rates. There is no doubt about that, it seems to me, in the perception of observers and market participants. And it is because they know this that we are not observing secondary effects and that present inflationary expectations – in particular the longer-term inflationary expectations over five years and ten years – are in line with our definition of price stability. It is because everybody knows that we are vigilant. And the contradiction, which I hear from time to time, between price stability on the one hand and to growth and job creation, on the other hand, does not exist. In being credible on price stability, and in being credible because we are vigilant, we are permitting these low inflationary expectations and, therefore, a yield curve, which is exceptionally favourable to growth and to job creation. It is also clear that if it is a necessary condition for growth and job creation, it is not a sufficient condition per se. We do everything that we can to preserve this favourable financial environment through price stability. On top of that, there are other conditions for growth and job creation and that do not depend on us. I have to be clear also on that.
Question: I have three questions. First, the bond markets expect depressed growth in Europe for the years to come. Do you agree? Second, industrial production in Germany and in other countries and sentiment are experiencing a downturn. Does this create risks to the ECB’s expectations for the second quarter? And third, is the ECB supporting a policy of public offers for banks in other countries or are you in favour of a closing-up of national countries? What could be done to increase the unification of markets in the banking sector?
Trichet: On bonds, it is a very, very interesting and stimulating question, on which a lot of academics and staff, including our own, are working to extract from the bond market all the information which would be pertinent. It is not sure that the bond market signals everywhere in the world – in the United States, in Europe – depressed sentiment on future growth. There are a number of other elements which are incorporated in the bond market evolution including a number of risk premia that might be very low in the present period for a number of reasons. There are also a number of factors that are coming from investors; for instance, it is clear that a number of pension funds and insurance businesses are shifting part of their investments into long, fixed interest rate securities and the bond market is influenced by that factor. So I would be very cautious – and more cautious than you are – in making the working assumption that what you can extract directly from the present bond market signals the fact that they incorporate depressed long-term growth. The consensus of international and national public institutions and of the private sector projections is that growth will be there. So again I do not see in the global consensus and in the European consensus a confirmation of what you said.
In reply to the second question, again, we are very pragmatic. We are observing what is projected by our staff and by a number of other institutions. I will not elaborate on the second quarter or the third quarter of this year. I would only say that we are looking at facts and figures and we are seeing mixed signals from the various economies concerned. I already said here when I was asked “but are you optimistic?” that I am not optimistic, I am not pessimistic, I am a realist. We have to take reality into account permanently as far as our Governing Council responsibility is concerned.
As regards the third question, I would say that we are in favour of European financial integration. We are not hiding that. It has been the overall strategy of Europe and I take it that it is the rule that we are all following and I will not embark on any qualification of any particular decision to be made, which I am sure will fully respect the European rules.
Question: Contrary to your working assumptions, opinion polls are suggesting that the Constitution may be rejected at the next referendum, in France. How do you explain the opposition in this country to the Constitution in particular, but also more broadly to the European design?
Trichet: Again, the only working assumption I am making is that the Constitution will be approved and ratified. I will not embark on a qualification of the sentiment, or the absence of sentiment, in any particular country. That is not my responsibility. I look at the euro area as a whole. I will only say that, as far as the euro is concerned, it seems to me that there is a tendency to forget the situation before the euro. And this is the reason why I mentioned earlier that before the euro we had a number of difficulties, drawbacks and very important risks that we had to cope with. Of course, the benefit of good decision is that those kinds of risks and difficulties are eliminated, but you then forget the risks and the difficulties. I have to mention that because I believe that it is something that is important.
Other than that, I will respect European democracy. You know that we are ourselves an institution which has enormous responsibility and we are responsible for a large part, a significant amount of the confidence, because confidence in Europe is very much based upon the sentiment that price stability is ensured. And I would only say that we will remain a sanctuary of confidence, an anchor of confidence. And I would also tell the European households who are hesitating – and a number of them are reluctant to consume because they fear future possible price instability – I would tell them “No, we are here to ensure that you have price stability and you have your purchasing power protected. And if you intend to consume, do not hesitate. Go ahead and do what you have in mind. Have confidence in the fact that, as far as our responsibility is concerned, we will live up to that responsibility”.
Question: Mr Trichet, I have two questions. First of all, you have modified slightly the passage in the statement where you comment on the contribution that interest rates make to the ongoing recovery in Europe. I will leave it to you to say whether we should read something into that. But, more broadly, my question to you is: with rates virtually near zero right now, can interest rates still rise and lend support to what is still a very ongoing moderate recovery?
And my second question to you is: given the apparent effects, curious effects, interesting effects that excess liquidity is having on real estate prices in some parts of the euro area, perhaps on the bond market, has this led you to rethink how to best apply your strategy for the monetary pillar of the analysis?
Trichet: First question. Again, I do not want to bore you, but, as I have already said, we do not only influence an economy with short-term rates, or the shortest-term rates. Market rates are the rates that are important for economic agents on a three-month, six-month, two-year, five-year, ten-year, thirty-year, fifty-year basis. Fifty years also because, as you know, we now have issuance on a fifty-year basis. The Treaty says that we have to deliver price stability. If we are credible in delivering price stability, all the market interest rates that I have mentioned and all the yield curves will incorporate the inflation expectations for these periods of time, these various horizons. If the situation required us to raise interest rates and we did not do that “to help growth”, quote unquote, you yourself would judge that inflationary expectations had to be raised. And all the market rates at the various horizons would not go down; they would go up. So, we are absolutely convinced that, by delivering price stability, being vigilant and acting where necessary, we are helping the financial environment of Europe. We are not hampering it. It is as simple as that. And that is the reason why the response to your question is, for us, not that complicated.
As regards real estate, I have mentioned that we are observing in some regions of Europe a phenomenon that needs to be monitored. It is clear that at this stage we think that we have to look at it carefully, to monitor it carefully. I would not say that, at the level of the euro area as a whole, we have an alarming situation. That said, I was sufficiently precise on our monetary analysis for you to see that we have there elements that are confirming that we have to remain vigilant. As I have said, vigilance is of the essence. But again, vigilance being of the essence does not mean that we are hampering the overall financial environment of the euro area. On the contrary.
Question: Why did the ECB sell gold – do you not need it any longer? And a second question: what is the position of the ECB concerning potential gold sales by the IMF?
Trichet: First of all, as you may know, we are a signatory to the Central Banks’ Gold Agreement that was published on 8 March 2004 following discussions by a number of central banks. Not only is the ECB a signatory, but we were also the first signatory to that press release, along with a large number of central banks from the euro area, from the European Union, as well as others. We participate fully in this agreement. There is, as you know, a ceiling that has been agreed upon as regards the 12-month period, which is of 500 tons. The Governing Council of the ECB decided to sell gold, which we thought appropriate to the overall reshaping of our reserve assets, in full compliance with the Agreement, as – it goes without saying – do all other signatories. This we made public recently, and it was very well understood by the market. We also indicated that it was not our intention to sell gold again during the first 12 months of the Agreement.
Regarding possible sales of gold by the IMF, this is indeed an issue that is discussed in the IMF. I understand that there is no consensus but you have to ask the various partners concerned. My understanding of the current situation is that we are far from agreement. In terms of our own position, we would certainly be cautious in this respect. As central bankers, we have a central bankers’ approach. There are different legal arrangements from country to country: in some countries the decision is left to the Executive, whereas in other countries the decision is shared by the central bank and the Executive; still in others, the decision may be left entirely to the central bank. In most countries, this is a decision that will be taken, ultimately, by the Executive. As central bankers we say that development assistance should normally be financed through budgetary resources. That would be the normal financing of all development assistance rather than through the use of monetary assets. We would also say that, if the IMF embarked upon gold sales, it would perhaps be better, from the IMF’s standpoint, to use them to reinforce its own position – its financial position – rather than to finance debt relief. Again, the approach I describe is of a central banker. I would add that, if – despite the thoughts I am expressing, which are certainly shared by a number of partners and shareholders of the IMF and perhaps even large shareholders – a decision were taken, then it would be absolutely essential that it should not upset the market. If sales did take place, they should not change what we have told the market with our own Gold Agreement. It would have to be discussed with the IMF, in any case, but certainly the market should not be upset. That said, it is a theoretical assumption. At this stage, to my knowledge, no such decision has been taken.
Question: Mr President, it has been suggested, or some commentators have said, that now that the Stability and Growth Pact has been watered down it is of particular importance that the market can reward sound public finances and punish unsound finances. And it has been suggested that the ECB, rather than helping the market, in doing that, is hindering it because it is not discriminating between top-quality, top-rated government paper and less well-rated paper. What would you answer to that?
Trichet: First of all, as I said today, reiterating what we said in real time – and it is very important for me to stress that – on 21 March, it is imperative that Member States, the European Commission and the Council of the European Union implement the revised framework in a rigorous and consistent manner conducive to prudent fiscal policies. I said today, on behalf of the Governing Council, in my introductory remarks, it is equally essential that the European Commission and the ECOFIN Council strictly enforce the new agreement on the implementation of the Pact, so as to restore the framework’s credibility. This is a strong message. We have already said that every institution has to be up to its responsibility, and this is truer than ever. As regards market sentiment, again, I already remarked that the market looks at situations and accumulates facts and evidence. At a certain point in time the market moves, so I would certainly not say that the market is incapable of discriminating between good and bad signatories. The market is certainly able to discriminate, and I think it would be a big mistake to say that this market discipline does not exist. And as far as we are concerned, we have our own framework, and it is not the intention of the Governing Council of the ECB to change our framework now.
Question: I would just like to ask whether in the main meeting of the Governing Council you are going to consider looking at monetary aggregates as a special topic and if that is the case – or even if it is not – whether, with the fact that a number of external forecasters have lowered their estimates of trend growth, it might be time for the ECB to consider lowering its reference growth value for M3?
Trichet: Again, since the setting-up of the euro and of the ECB we have had this two-pillar analysis. We are very clear on that, we have published articles on the subject. You know the facts and figures and you know our analysis because we are transparent. As I said, it is clear that there is more liquidity than is required for non-inflationary growth and we consider this one of the reasons why we have to be vigilant, why vigilance is of the essence. You also know that the monetary pillar is important for us because, in the long run, inflation is a monetary phenomenon. That is our belief. And the anchoring in particular of long-run inflationary expectations, even very long-run inflationary expectations, has been helped by the fact that we are one of the central banks in the world which has this monetary pillar. You know that when we reviewed our monetary policy concept to clarify it, we mentioned in particular the fact that the reference for M3 would be a medium-term reference and not a yearly reference, but we will certainly have to see exactly how things are going. For the present I summed up our sentiment by mentioning that we think there is more liquidity than is required for long-term non-inflationary growth.
Question: You said that oil prices affect both growth and inflation and I was wondering in the current situation which effect is the heavier one for you? Is it the effect on inflation or on growth?
Trichet: I am asked this question regularly. Of course, in our own perspective it is not pertinent. Mechanically, both growth and inflation are touched and there are a number of models that would give the impact. As you know, what we have to deliver is price stability, and by delivering price stability we also deliver the best monetary and financial environment we can for growth and job creation. There is no contradiction, so we will continue to do what is necessary to deliver price stability. What was necessary today was not to change rates.