Introductory statement with Q&A

Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB,
Frankfurt am Main, 1 December 2005

Jump to the transcript of the questions and answers

Ladies and gentlemen, let me welcome you to our press conference and report on the outcome of today’s meeting of the ECB’s Governing Council. The meeting was also attended by the President of the Eurogroup, Prime Minister Juncker, and Commissioner Almunia.

On the basis of our regular economic and monetary analyses, we have decided to increase the key ECB interest rates by 25 basis points, after two and a half years of maintaining rates at historically low levels. Our decision to increase interest rates was warranted so as to adjust our accommodative monetary policy stance, while taking into account the risks to price stability that we have identified in our economic analysis, cross-checked by our monetary analysis. Our decision will contribute to keeping medium to long-term inflation expectations in the euro area solidly anchored at levels consistent with price stability. Such anchoring of inflation expectations is a prerequisite for monetary policy to make an ongoing contribution towards supporting economic growth in the euro area. In fact, interest rates across the entire maturity spectrum continue to remain very low in both nominal and real terms. Thus, our policy remains accommodative and continues to lend considerable support to sustainable economic activity and job creation. We will continue to monitor closely all developments with respect to risks to price stability.

Allow me to explain our assessment in greater detail, starting with the economic analysis.

Recent data and survey evidence indicate that economic activity has strengthened in the second half of this year. According to Eurostat’s first estimate, real GDP growth was 0.6% quarter on quarter in the third quarter of 2005, after 0.3% in the first and 0.4% in the second quarter. Moreover, the information on business confidence broadly remains consistent with continued economic growth towards the end of the year. Looking ahead, on the external side, ongoing growth in global demand should support euro area exports, while on the domestic side, investment should benefit from continued favourable financing conditions and the robust growth of corporate earnings. Private consumption should grow broadly in line with expected developments in real disposable income. At the same time, the outlook for economic activity remains subject to downward risks, relating mainly to higher than expected oil prices, concerns about global imbalances and weak consumer confidence.

This assessment is broadly consistent with the December 2005 Eurosystem staff projections. Euro area real GDP is projected to grow at rates of between 1.2% and 1.6% in 2005, and between 1.4% and 2.4 % in 2006 and 2007. Most recent forecasts by international organisations give a similar picture. In comparison with the September 2005 ECB staff projections, the ranges projected for real GDP growth in 2005 and 2006 have been revised slightly upwards.

Turning to price developments, recent increases – mainly in energy prices – have lifted headline inflation rates to levels significantly in excess of 2%. According to Eurostat’s flash estimate, annual HICP inflation was 2.4% in November 2005, compared with 2.6% and 2.5% in the two preceding months. It is likely that annual HICP inflation rates will remain elevated in the short term.

In interpreting current inflation rates, it is important to make a clear distinction between temporary, short-term factors, on the one hand, and factors of a more lasting nature, on the other. In that respect, it is of crucial importance to take a strictly forward-looking perspective, which does not allow much comfort to be drawn from the current, comparatively lower rates for measures of inflation that exclude certain components, such as energy or certain categories of food. Such measures of “core” inflation have, at least in the past, been shown to lag behind, rather than lead, the developments in headline inflation. In addition, the increase in energy prices to a large extent reflects higher global demand for energy. While it is difficult to quantify precisely this effect, it would appear inappropriate to exclude energy from the price index and at the same time retain other items, such as internationally traded manufactured goods. Owing to the same forces of globalisation, these goods currently exhibit little upward movement in prices and even suggest a downward trend. All in all, in line with our monetary policy strategy, a comprehensive and forward-looking analysis is warranted of the main underlying developments driving the outlook for price stability. This comprehensive assessment encompasses the information contained in various measures of inflation.

An important input into our analysis is provided by the Eurosystem staff projections. The projections indicate average HICP inflation to lie between 2.1% and 2.3% in 2005, and between 1.6% and 2.6% in 2006. These results constitute an upward revision to the ECB staff projections of September 2005. They mainly reflect that the effects of the statistical treatment of the 2006 health reform in the Netherlands are no longer expected to distort the inflation figures for 2006. For 2007 an average inflation rate of between 1.4% and 2.6% is projected. Underlying these projections is the assumption that wage increases will remain contained, as has been the case over recent quarters. Most recent forecasts by international organisations give a broadly similar picture.

In the view of the Governing Council, the main scenario for price stability emerging from the economic analysis remains subject to upside risks. Such risks relate to uncertainties arising from oil market developments, the pass-through of previous oil price increases to consumers via the domestic production chain, the possibility of second-round effects in wage and price-setting behaviour, as well as further increases in administered prices and indirect taxes.

Evidence pointing to increased upside risks to price stability over the medium to longer term comes from the monetary analysis. Liquidity in the euro area is ample by all plausible measures. The strengthening of monetary growth observed since mid-2004 has gained further momentum over the past months. Growth in the monetary aggregate M3 has been driven by its most liquid components, confirming the increasingly dominant impact of the low level of interest rates. Furthermore, the growth of borrowing – especially mortgage loans – remains very robust. In this context, price dynamics in a number of housing markets need to be monitored closely.

To sum up, increased risks to price stability identified by the economic analysis have been cross-checked with the monetary analysis. An adjustment of our monetary policy stance was therefore warranted. Today’s decision will contribute to keeping medium and long-term inflation expectations in line with price stability. Keeping inflation expectations firmly anchored at levels consistent with price stability will permit monetary policy to continue to make a significant contribution towards a sustainable recovery in economic growth and job creation in the euro area. To this effect, we will continue to monitor closely all developments relevant to the medium-term outlook for price stability.

As regards fiscal policies, euro area countries are now finalising their 2006 budgets and stability programmes. Plans to foster sound public finances and to undertake fiscal reforms that boost economic growth and prepare for the challenges related to population ageing in some countries are welcome. However, in countries with fiscal imbalances, the speed of consolidation is disappointingly slow and there is a high risk that commitments are not being met. It is, therefore, essential that fiscal consolidation is prioritised again as part of a comprehensive and growth-friendly reform programme. This would build confidence in the proper functioning of the Stability and Growth Pact and be the best way in which fiscal policies in the euro area can underpin economic growth.

With respect to structural reforms, the Governing Council welcomed the 2005-2008 Lisbon National Reform Programmes that were submitted by EU Member States in October and November 2005, in line with the renewed Lisbon Strategy. These programmes present key country-specific challenges and structural reform measures to increase growth and employment. A parallel Community Lisbon Programme was adopted by the Commission in July 2005 to complement the national programmes with actions to be taken at the European level. Taken together, the programmes show a welcome political commitment on the part of the Member States and the Community, which could give renewed impetus to the implementation of structural reforms. To this end, it is important to match ambitious objectives with concrete policy measures and take new reform initiatives, and to monitor, evaluate and communicate the reform process effectively. Achieving the goals of the Lisbon Strategy is critical in the face of the triple challenge of accelerating globalisation, rapid technological change and ageing populations.

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: The first question I would really like to ask is about the future direction of the European Central Bank’s policy and I was wondering if you could tell us a bit more about how much accommodation the European Central Bank still sees left in its monetary policy and how much of that accommodation needs to be withdrawn to ensure price stability over the medium term?

Trichet: On this point I will be very clear. There is not an “ex ante” decision of the Governing Council at today’s meeting to engage in a series of interest rate increases. We have decided to increase rates by 0.25 percentage point because we judged that, with this new level, we are in line with our duty, our mandate, which is to preserve price stability and to be credible over time in preserving price stability. It is our responsibility vis á vis the 311 million people in the euro area, our fellow citizens. It is our duty because it is what the Treaty is calling for. And it is the best way to anchor inflationary expectations. We will see, then, what the new information, the new facts and the new figures are that will permit the Governing Council to make a judgement and take new decisions. We are not engaging, ex ante, in a series of interest rate increases. And, as I have said, we will continue to monitor closely all developments with regard to risks to price stability.

Question: Two questions. I assume that the projections that you will release today do not incorporate today’s interest rate decision. And, if that is correct, if you re-ran the projections with a rate of 2.25%, would the 2007 inflation mid-point be lower than the 2% you have projected today? And the second question I have is: What do you make of all the political voices that you have been hearing, from finance ministers, for example, about your policy?

Trichet: As regards your first question to the extent that the short-term market rates had already anticipated our today’s move this move was incorporated in the Eurosystem staff projections.

As regards the various voices that you mention, I will only say that we are fortunate to live in a lively set of democracies. We are fortunate to live in a European democracy which is itself lively. I myself, as you know, recently addressed the European Parliament. And I would mention, en passant, that I address the European Parliament as frequently as my colleague Alan Greenspan addresses the US parliament “on the hill”. I have said, as clearly as possible, what we thought and what our own understanding of the situation was. We try to be as transparent and predictable as possible. We are not influenced – as stated in the Treaty, which is very clear in that respect – by any so-called “voices” or recommendations. We have a duty not to be influenced – in any respect. Not up or down. Because it was suggested we do this or that. Our colleagues, the Vice-President and myself, all members of the Governing Council know that we have a mandate – a very clear mandate – given by the Treaty. We know what the people of Europe are calling on us to do. We are responsible for price stability. 311 million people are expecting us to deliver price stability. And their message is very clear: they are asking us to live up to our mandate. That is the message of the 311 million people. And because we live up to our mandate, we can reinforce confidence in those 311 million people. And we also inspire confidence to investors and savers in Europe and the world in a way which allows us to deliver the lowest market rates that existed in the most credible part of Europe, from a monetary point of view, before the euro. Which is an incredible success. And let me mention, en passant, that the 2% rate that we have maintained for two and a half years while very solidly anchoring inflationary expectations was a level of interest rates lower than the lowest rate that the Bundesbank had ever set since its creation, since World War II. The Bundesbank itself had never set its discount rate at the level of 2%. We were lower than its lowest level. And not for 80 million Germans, but for 311 million people in Europe. And again, this level of market rates, this level of market interest rates over five years, ten years, thirty years and fifty years is duet to the confidence in our own Central Bank. Our own credibility. The credibility of the Governing Council of the ECB. Among those people who are looking at what we are doing and taking decisions on a day-by-day – even a minute-by-minute – basis, you have non-euro area residents holding approximately EUR 3.5 trillion in negotiable instruments and liquid deposits. Those people are making judgements on our credibility to deliver price stability over ten years, over thirty years and over fifty years. Because we are credible they give us low market interest rates favourable for growth and job creation. And that is the reason why we are faithful to our mandate.

Question: Could we make a distinction between the long-term level of interest rates, which you have noted are historically low, and the effect of a price increase on the tentative recovery in Europe? If indeed, as you imply, there’s an accommodative overhang and you are correcting this, you are making this structural move, is this the right point in the cycle to be doing it when domestic demand in Europe is just coming out of a recovery? Would it not have been better to make such a structural correction when we are further into a cyclical recovery? You might note that this is the criticism made by the ECB Shadow Council, which includes a former head of the Monetary Policy Stance Division of the ECB. How would you respond to that observation?

Trichet: If I am not misled – but perhaps I was reading things too rapidly – they were divided: ten on one side and eight on the other side. So in this shadow group there are various views. Again, before the euro was set up nobody was predicting that we would be as credible as the most credible central banks. Every economist, every market participant, investors and savers were thinking that there would be a loss of credibility, which was after all understandable because we were going to merge highly credible currencies and currencies that were not at all as credible. So a kind of average of credibility and confidence was what the observers, economists, investors and savers were expecting. Because of our remarkable own credibility we could deliver this extraordinary low level of rates, which had been the privilege of only a part of Europe and not the privilege of 311 million people. Today we have judged unanimously that the increased level of risks to price stability embedded in the situation were such that today’s correction was necessary to fulfil our mandate and to maintain the full credibility that we have. I have to say that when you look at the figures extracted from the various bond markets – it’s not literature that we are discussing its fact, figures, numbers, arithmetic – when we said that we would moderately increase our rates, we gained in terms of credibility. We have gained in terms of forward break-even rates and we have proved that our own interaction with the European and global markets has led them to judge that we were right in doing what we have done. And in so doing, we will allow growth in Europe to be sustained and not short-lived. That is the conviction of the 18 members of the Governing Council.

Question: Mr President, you spoke of divisions on the ECB Shadow Council. Were there any divisions on the Governing Council?

Trichet: I said that we were unanimous.

Question: Just a follow-up on that last point: I think it would be helpful to lots of people if you could give us your account of how the debate has evolved within the Governing Council in recent weeks and months. You said the Council is unanimous on today’s decision, but did anyone propose not raising interest rates today? Did anyone raise the idea of increasing them by 50 basis points? In this connection, perhaps you could tell us a little about your level of vigilance going forward? We became very used to you saying “strong vigilance, we can act any time”. That language has now disappeared. Is that because the 25 basis points mean you don’t have to say those things at this precise point in time? And if I may ask one other question on your profile for inflation, has inflation now peaked? When do you expect it to go back to below 2%?

Trichet: First on the Governing Council sentiment. You might remember that we had indicated that we were in a mode of strong vigilance in Athens and I remember that all of you noted that the sentiment of the Governing Council was different in Athens in comparison with what it had been a month before. We judged that the risks to price stability were increasing, were on the upside, and I made that very clear in responding to questions. We confirmed the view that risks were on the upside and had augmented at the press conference and in the introductory remarks a month ago, and that was again noted by everybody. It was so clearly noted that it triggered a great number of voices – that have already been mentioned – commenting on interest rates. We have various views inside the Governing Council, as it is necessary. Collegial wisdom implies that you exchange all possible information, arguments and analyses. The pertinent entity which is the Governing Council relies very much on a collegial, very confident and very comprehensive exchanges of views. And there emerges from that exchange of views a majority sentiment which can from time to time be a unanimous sentiment. We unanimously decided today to do what I have already announced, and of course we had various views, which were exchanged. Some perhaps could have imagined that we would have gone higher, and others perhaps would have thought before the discussion that we could wait a little longer. But after the discussion those who wanted to go higher considered the move that I am commenting today to be correct, and the others thought that it was appropriate to join in and to take the decision I announced, which again has been taken unanimously. You had a series of questions on vigilance. I will only say again what I have said very clearly. We are not, ex ante, engaging in a series of interest rate increases. We will monitor all developments closely, as I have said, with respect to risks to price stability. And we will continue to do exactly what is necessary to deliver price stability and to be credible. We will maintain the confidence of households in price stability, and maintain the confidence of investors and savers over time. We will solidly anchor inflation expectations and preserve a yield curve which is exceptionally favourable for growth and job creation in Europe. All this relies on our European and global credibility.

Question: Two questions. First, in July 2003 after the Federal Reserve System had begun its tightening cycle, you went out of your way to emphasise the different conditions in Europe. “We are in different universes”, you said at the time. Now that the Federal Reserve System has over a year of a tightening cycle behind it and is no longer, shall we say, the chief supplier of cheap money in the world as the ECB now is, I want to invite you to repeat this statement. Second, you have emphasised, as you have many other times, that you need to be as transparent and predictable as possible in your actions. A few weeks ago, you stood up at a banking conference in Frankfurt and dropped a strong hint that you would do today what you have indeed done. There are many banking conferences in Frankfurt; you will have many opportunities to do the same thing. Is there anything in today’s Governing Council statement that would prevent you from doing that?

Trichet: I am not sure if I understand your question correctly.

Question: Is there anything in this statement that would prevent you from making a similar statement as you did.

Trichet: If I understand the question correctly, certainly not! But allow me to mention two things: First, the Federal Reserve is responsible for price stability, which is a necessary condition for growth and job creation, as you will find out in the speeches of my colleague, Alain Greenspan. We share exactly the same sentiment: price stability is a necessary condition for growth, sustainable growth and sustainable job creation. Not per se, unfortunately, a sufficient condition, but a necessary condition. The Federal Reserve does what it has to do and we do what we have to do. The judges are the observers, households, market participants, investors and savers and the facts and figures I was mentioning. I recommend that you look at the figures. This morning I looked at the markets to check the differential between the US ten-year rate, for instance, and the Euro ten-year rate. I am not sure that the large public perceives that this differential is in the magnitude of 1%, a full 100 basis points.

Second, as regards the banking conference in Frankfurt which took place approximately a fortnight ago, I did not stand up, I was there at the banking conference, I had been invited, I was on the spot, and the Chairman of the panel, Mr Walter, asked me “could you tell us, Sir, what we need to know and to understand on interest rates and the monetary policy of the ECB”. It was a direct question, which I was asked when I was on the podium. I responded in what I trusted was necessary, namely to give those of you attending clarity and appropriate information and to give, through you, of course, market participants, observers, savers and public opinion the information that would be useful at that stage. We really trust that transparency is very important. At that time, there were so many voices speaking on interest rates, not inside the Governing Council but outside of it, that perhaps some of you might have had trouble understanding exactly what was happening, and I thought that it was appropriate to provide this information.

Question: Two questions: following up your previous answer, does that mean that you did not discuss the statement you made on November 18, 2005 with the other Governing Council members?

Trichet: I will respond immediately: I said that I conveyed the sentiment of the Governing Council.

Question: Do you expect core inflation to rise and does that not imply higher interest rates? And/or would you describe your position as being totally neutral on interest rates? Do you have any bias at the moment?

Trichet: Two very different questions. As you know, we do not follow core inflation. We follow headline inflation. And we are very clear as regards our monetary policy concept. We also say that it is extremely important to look to the medium term. In accordance with our mandate, we have to deliver price stability in the medium term, which means that we must understand what is transitory and what is permanent in the inflationary phenomenon. In the introductory remark, we mentioned the fact that, from time to time, we hear voices mentioning that core inflation – that is, their definition of core inflation – is the best predictor of future inflation. When you look at research, facts and figures, it is clear that it is much more complex. There are cases where core inflation is a good predictor. However, there are a lot of cases where core inflation is not a good predictor. This is because, contrary to what some are arguing – that headline inflation will go down to join core inflation – it is, in fact, the opposite that holds, that core inflation is going up to join headline inflation. It is therefore very misleading to trust that core inflation (of which there are various definitions) is always a good predictor. In any case, as you know, we look at all the information at our disposal, separating what we trust is transitory from what we trust is permanent. An additional remark we made was that there is now little doubt that a large part of what we are observing in the oil prices and in the commodity prices is a demand-driven process, that is, coming largely, but not exclusively, from emerging Asia and is also producing a lot of consequences in the manufacturing sector. And so some prices are pushed up, while others are pushed down. If you eliminate all those prices that are pushed up and maintain in your understanding of inflation those which are pushed down, perhaps it is not fair; perhaps it is better for demand-driven change in relative prices to look at the full picture and not only at part of the picture. This of course calls for additional research – there is a lot of research on that. Probably, what I am telling you now is an emerging consensus amongst our own constituency of central banks.

Question: It is a big day for all of us. We have been waiting for a move for months, if not years. How are you feeling today? You must be nervous. Can you tell us a bit about it? It’s important. And also, could you give us a bit of a sense of how the debate was within the Governing Council? I understand it was a unanimous decision, but was it a vivid debate? What were your feelings on the debate? And one last question regarding the so-called voices: your predecessor used to say “I hear, but I do not listen”. Would you say the same?

Trichet: First of all, I feel the responsibility of being the President of a college that must deliver price stability: a college that is called by a Treaty, and by 311 million people, to deliver price stability; and a college that has so far succeeded in achieving the highest level of credibility vis-à-vis Europe and the rest of the world, as far as market participants, investors and savers are concerned.

As regards my own feelings, they are feelings of responsibility and also that of a very strong team spirit. The 18 members of the Governing Council are a great team. And seen from the rest of the world and from Europe, that team is credible. And I can prove it. Who would have thought that I could stand here in front of you and tell you that over the past five years we have had the same level of medium and long-term market rates – not to speak of the short-term rates (we are lower as regards the short-term rates) – as the best and most credible currencies.

The debate today was profound, deep and highly responsible. We discussed all possible arguments and exchanged views to be sure that we were taking the best decision. And that is our intimate conviction.

Question: I have two questions. What is the level of potential growth in Europe? This is very unclear, because last time some people thought it was 1.5%, and second, I have the impression that your strategy, as far as announcing interest rate change is concerned, has changed to become somewhat clearer and more predictable. It has never happened before that the President of the ECB has said what the Bank will do 15 days before a Governing Council meeting, or 15 days after a Council meeting where no rate move has been made. And you were reading from a speaking note; it was not just coming out of your heart. It has also never happened before that a board member has said a day before the Council meeting that it was highly probable that a move would come, as Mr Bini Smaghi said yesterday. So, is this a change of strategy or is it wanted?

Trichet: First on the growth potential. We ourselves are not dictating what is the growth potential of Europe. All economists, all international institutions and national institutions are looking at it. And I will refer to what seems to me to be some kind of emerging consensus. When I take the analysis of the OECD, the IMF, the Commission, our own analysis, the private-sector analysis and so forth, I would say, as regards the medium and long-term growth potential, that the previous appreciation was that it was between 2% and 2.5%, and now there is probably a sentiment – again, I am cautious as you see – that we are closer to 2%: 2% plus something which is meagre, 2.1%, 2.2% perhaps; but closer to 2% than 2.5%. On a shorter-term basis, namely for next year for instance, there is also quite a large sentiment – but, again, I am very cautious – that perhaps we are just below 2%. 1.5% is not a figure which, to my knowledge, is applicable to the short term or medium term. It would apply rather to the much longer term – 20 or 25 years – taking into account very poor evolution of demography and perhaps also the very negative working assumption that structural reforms are not being done. I consider it not credible because it accumulates a number of negative factors that I trust will be corrected.

On predictability, we were very proud to be one of the most predictable central banks of the world, perhaps I could say “ex aequo” with a great sister institution – perhaps the most predictable – and we will continue to be highly predictable.

Question: … but is this an increase in predictability …

Trichet: … no, I am not sure it is an increase in predictability It is an implementation of predictability.

Question: I have a question on another topic. You have just changed the rules for collateral. A-minus and better-rated government bonds will be accepted in repos. Why have you shifted so much power to the private agencies? This is my first question. And the second is: are you not concerned that this would dilute the importance of democratic decisions of elected parliaments and governments if you gave the agencies power to decide over our budgets?

Trichet: First of all, it is not a new decision. It is a decision that was implemented when the euro was first introduced. And the market people – the specialists observing what we were doing, looking at our website – could see that there was no change. It was what we had done since the very beginning; it was embedded in our policy. It has been made more visible, but there has been no change. We are bound to treat private paper and public paper in the same fashion. And the A-minus threshold that you mentioned, again, is something which has been state of the art since the very beginning. We were told very often by parts of the economists’ community and by a lot of good advisors that we were – and this was exactly the contrary observation – too benign, too positive vis-à-vis government paper, that we should practice a lot of haircuts and so forth, or practice haircuts combined with the Stability and Growth Pact implementation – or non-implementation. We thought that this was not appropriate. We said that it was not appropriate for us to invent a new sanction that would apply for non-compliance with the Stability and Growth Pact via this collateral mechanism. We felt that we should not do that. But we mentioned also very clearly to market people that we were taking the paper at its market value, so that if the markets would assess that the paper was less credible and the spreads would augment, then the value of the paper that we would take as collateral would diminish. And then we were sticking to this appreciation by the market itself.

Question: Given your remarks today as well as your remarks last week before the European Parliament about the ECB not having any catching up to do, I am wondering if you could clarify something for us a little: are we supposed to see today’s move as a one-off measure for now or is it part of a broader policy shift towards a gradual removal of accommodation for the economy?

Trichet: I thought I had been clear, but this is an occasion to be clear again. We have not taken any ex ante decision to embark on a series of interest rate increases. We will look at the facts and figures, make our judgement on the risks to price stability and take the decisions we will judge appropriate to deliver price stability.

Question: For this question I would like to have a comment from Mr Papademos as well, if possible. In any case I would like to ask if you think your decision today would have a specific impact on the weaker economies of the European Union, especially in terms of their ability to cope with the Lisbon strategy?

Papademos: We do not expect that a change in the monetary policy stance is going to have a significant effect on economic activity in the euro area as a whole. And then the extent to which there would be a specific impact in a given country depends on a variety of other factors that influence economic activity in that country as well.

Trichet: As Lucas said, we look at the 311 million people and we cannot do otherwise. It would be exactly as if you would ask our friends in the US whether they are taking into account the position of Texas, of California, and so on. You see, we have a single monetary area, a single euro, and we have to make an overall judgement. And I mentioned in the introductory remarks that Lucas and I and all our colleagues were pleased, I have to say, with some of the measures that have been taken on the structural side,

Question: Just two small questions. One is: You characterised a 2% interest rate as historically low. Maybe you have never used the word “record” low, but the lowest since the establishment of the Bundesbank. What words would you use to characterise a 2.25% interest rate? That is the first question. And then the second question is: for those of us who are rusty on our Latin, we all getting to know the phrase “ex ante” and I just wanted to ask you – because I think it is not a trivial point – when you say an “ex ante decision”, what precisely do you mean by that?

Trichet: Ex ante means “ex ante” in English and in Latin. In French, I would say “a priori” and not “ex ante”, but only in French. In English it would be – it seems to me – “ex ante”.

2% is not the lowest, it is lower than the lowest figure attained by the Bundesbank. It is perfectly possible that 2.25 has the same characteristics!

Question: Mr President, if I am not mistaken, the rate of contractual wage increases in the last available quarter was 2.1%. Now some economists think this is unhealthily low. You seem to be in a spirit that you would be alarmed if it was going higher. Could you give us an idea what would be a rate, or a range of rates, of wage increases that you would think in line with price stability?

Trichet: No, I will not. But I will tell you – because you are offering me the possibility of making the point – that what we do is to cope with the risks we see. From time to time, I am told that these risks do not actually materialise. And then it is added that one should wait for the materialisation of these risks. But if a risk materialises, it is no longer a risk! It has become the figure you have in front of you, and that would be too late. So, here we are doing something that we consider to be exactly appropriate to cope with those risks and to avoid a materialisation of those risks. And this is the understanding of the global market. The global markets have understood this, if you look at the range of market information we are receiving, particularly from the bonds market, whether indexed or not.

Question: Mr President, could you give us an idea of what percentage the effect of the German VAT increase contributed to your inflation forecast for 2007 and – a second question, if I may – could you give us an idea of where you see a neutral rate, even if you are saying now that there is not ex ante decision to approach it, but which range could we think of?

Trichet: I will certainly not give you a neutral rate figure. It was not done on the other side of the Atlantic either. I do not myself refer to a neutral rate. I refer to the rate which is in line with what allows us to deliver price stability and to be credible in the delivery of price stability over time. As regards your first question, I will only mention that, at the level of the staff – and do not forget it is the staff of the Eurosystem who prepared the projections – we have taken all information into consideration, including the information that was available in Germany, of course, but not only that on Germany, all the information available in all of the 12 economies that make up the euro area.

Question: Mr President, I have a question on your dialogue with Eurogroup Finance Minister Juncker. At the next G7 Meeting you have to speak with one voice because foreign exchange rate policy is a divided matter that belongs to you and the ECOFIN President, Eurogroup President. What is your dialogue today to find one voice after the monetary recommendations of Jean-Claude Juncker over the last days?

Trichet: As regards monetary policy, Jean-Claude Juncker himself said it very clearly in front of the Parliament: It is our decision. It is the decision of this institution and there is no dispute on the fact that it is our decision. So, where monetary policy is at stake, there is absolutely no ambiguity. As regards the dialogue with Jean-Claude Juncker in preparation of the G7, we have never had any problem of that kind in the past, and I do not expect any such problem in the future. You know that we will be having discussions with our other friends, with members of the G7 on exchange rates. In that respect, we had in the last G7 meetings a very clear sentiment that I have signed up to myself and that was endorsed by all members, including Jean-Claude Juncker and his predecessor. And I expect that we will reach a consensus in exactly the same fashion, a consensus that will not only be a consensus amongst Europeans – because that would obviously not be very efficient – but a consensus with the United States, with Japan and with the other friends – the United Kingdom and Canada – and that we will together sign what we trust and judge to be appropriate. You will see what we will say in London, and I will of course not reveal in advance what we will say.

Question: Mr Trichet, just two short questions. Suddenly, a fortnight ago, we as observers were surprised by a statement in front of the banking congress. Were some members of the Governing Council surprised as well by that statement? And the second question refers to the communication in front of the first press conference in November and the press conference today: historically, you had this idea that the week before the meetings no one on the Governing Council would speak to the public about monetary policy and, suddenly, that was broken in November as well as in December. Are you going to stop that or do we have to live in a new universe of communication?

Trichet: It is absolutely clear that we have a purdah period and that if there has been such communication; it was not in line with our concept. I have no memory of anything in November, but then it was because one person did not realise that there were journalists in the room. But it is not the intention of any member of the Governing Council not to respect the purdah period, that is absolutely clear and it is important. It is a rule which is also state of the art in the constituency of central banks.

As regards your first question, no members of the Governing Council were surprised by what I said because I expressed the sentiment of the Governing Council.

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