Introductory statement with Q&A
Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB,
Frankfurt am Main, 2 March 2006
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.
At today’s meeting, we decided to increase the key ECB interest rates by 25 basis points. This decision reflects the upside risks to price stability that we have identified on the basis of both our economic and monetary analyses. The adjustment of interest rates will contribute to ensuring that medium to long-term inflation expectations in the euro area remain solidly anchored at levels consistent with price stability, which is a prerequisite for monetary policy to make an ongoing contribution towards supporting economic growth and job creation in the euro area. Interest rates across the entire maturity spectrum still remain at very low levels in both nominal and real terms, and our monetary policy remains accommodative. While this policy stance reflects our current assessment, 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.
According to Eurostat’s flash estimate, quarter-on-quarter real GDP growth in the euro area was 0.3% in the fourth quarter of 2005. This was considerably lower than the strong 0.6% recorded in the previous quarter. However, looking through the short-term volatility and assessing recent economic indicators and survey information, the evidence suggests that economic activity is improving. Accordingly, we should see stronger growth rates over the short term, as also reflected in various indicator-based estimates.
Looking further ahead, the conditions remain in place for ongoing economic expansion in the euro area. The external environment remains favourable, providing support for euro area exports. Investment is expected to remain strong, benefiting from an extended period of very favourable financing conditions, corporate balance sheet restructuring and gains in earnings and business efficiency. Consumption growth should also strengthen gradually over time, in line with developments in real disposable income, as the labour market situation gradually improves.
The March ECB staff macroeconomic projections have provided an additional input into our analysis of the prospects for economic activity. These projections foresee average annual real GDP growth in a range between 1.7% and 2.5% in 2006, and between 1.5% and 2.5% in 2007. The results constitute a slight upward revision to the Eurosystem staff projections of December 2005, mainly reflecting a somewhat stronger outlook for private investment over the projection horizon. Most recent forecasts by international organisations and private sector institutions give a broadly similar picture. In the view of the Governing Council, downside risks to this outlook for growth relate mainly to oil price developments and global imbalances.
Turning to price developments, according to Eurostat’s flash estimate, annual HICP inflation was 2.3% in February 2006, compared with 2.4% in January. In the short run, inflation rates are likely to remain at above 2%, with the precise levels depending strongly on future energy price developments, which have recently been relatively volatile. Beyond the short term, changes in administered prices and indirect taxes are expected to significantly affect inflation in 2006 and 2007, and an upward impact can also be expected from the indirect effects of past oil price increases. At the same time, wage dynamics in the euro area have remained moderate over the recent past; our working assumption is that this will continue to be the case, due not least to strong global competitive pressures, particularly in the manufacturing sector. Moderate wage trends have helped to contain domestic inflationary pressure despite strong oil price increases. Therefore, looking ahead, it is crucial that the social partners continue to meet their responsibilities in this regard, also in the context of a more favourable economic environment.
Further input into our assessment of the outlook for price developments is again provided by the March ECB staff projections. Annual HICP inflation is projected to lie between 1.9% and 2.5% in 2006, and between 1.6% and 2.8% in 2007. Compared with the December 2005 Eurosystem staff projections, these ranges imply a slight upward revision to the profile for HICP inflation over the coming years, reflecting mainly an increase in the assumption for future oil prices, in line with market expectations.
Risks to the outlook for price developments remain on the upside and include further increases in oil prices, a stronger pass-through of oil price rises into consumer prices than currently anticipated, additional increases in administered prices and indirect taxes, and – more fundamentally – stronger wage and price developments than expected due to second-round effects of past oil price increases.
Turning to the monetary analysis, the Governing Council has again discussed the assessment of monetary developments in depth. The annual growth rate of M3 remains robust, notwithstanding signs of a resumption of the unwinding of past portfolio shifts into monetary assets, which exerts a dampening effect on headline M3 growth. Looking through the short-term effects generated by such portfolio behaviour, the trend rate of monetary expansion remains strong, reflecting the stimulative impact of the low level of interest rates. Moreover, the annual growth rate of credit to the private sector has strengthened further over recent months, with borrowing by households – especially loans for house purchase – and non-financial corporations rising at a marked pace. Overall, strong monetary and credit growth in an environment of ample liquidity in the euro area points to risks to price stability over the medium to longer term.
To sum up, annual inflation rates are projected to remain elevated in 2006 and 2007, and the economic analysis indicates that risks to price stability over the medium term remain on the upside. Given the strength of monetary growth and the ample liquidity situation, cross-checking the outcome of the economic analysis with that of the monetary analysis confirms that upside risks to price stability prevail. An adjustment of interest rates was therefore warranted. By acting in a timely fashion, the Governing Council is helping to keep medium and long-term inflation expectations in line with price stability and thereby making an ongoing contribution to sustainable economic growth and job creation. The Governing Council will continue to monitor closely all developments to ensure that risks to price stability do not materialise.
As regards fiscal policies, while some countries plan to maintain or attain budgetary positions close to balance or in surplus over the horizon of their stability programmes, progress towards sound public finances in the euro area as a whole remains slow. A number of countries continue to report severe imbalances, and in some of them consolidation efforts barely attain the minimum required by the revised Stability and Growth Pact, despite the improving growth outlook. At the same time, the fiscal costs of population ageing cast a shadow over the long-term fiscal outlook for most euro area countries. It is therefore essential that countries pursue a more determined consolidation, introducing concrete and effective measures where needed. These consolidation efforts will more easily succeed if they are embedded in a comprehensive reform programme that adequately prepares for the long-term fiscal challenges. This will enhance the credibility of the revised Pact and create confidence in a sound and growth-friendly fiscal environment.
The broader implications of population ageing also require attention in other fields of economic policy. Comprehensive structural reforms in labour and product markets and the creation of a favourable and competitive environment for firms are vital to support potential growth and raise employment rates as the demographic effects materialise. Completing the EU internal market – including the market for services – should be a key priority. On the labour supply side, tax and benefit system reforms are essential to provide stronger incentives for people to stay in or enter the labour market. On the labour demand side, there is a need to promote wage flexibility and address labour market rigidities. Moreover, better education and training are important for the development of human capital. The forthcoming meeting of the European Council on 23-24 March 2006 will review progress made with the Lisbon strategy, which was relaunched last year. We strongly support the initiatives taken by the European Commission and the European Council to revive this reform process. A full and effective realisation of the necessary reforms is the key to the long-term economic success of the European Union.
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: Mr President, you mentioned several times that there are upside risks to price stability. Does that mean that there will be further tightening by the ECB? And the second question: there were reports in the media that Mr Papademos will follow Mr Issing. Can you comment on that?
Trichet: First of all, we have increased rates today. Our monetary policy stance today, after this increase, reflects our current assessment. We will continue to monitor closely all developments with respect to risks to price stability. It is the state of mind that we have. As regards the future, we will decide to move on the basis of the facts, figures and data, and on our future assessment of the risks to price stability. As you know, we never pre-commit ourselves unconditionally. So we will do what is required of us to ensure price stability, to be credible in ensuring price stability and to continue anchoring inflationary expectations – as we have done up till now. That is a major contribution for a very favourable financial environment. The market participants, observers, savers and investors can see what we have been doing; they know what our monetary policy concept is; and they know how we implement this monetary concept.
Question: Mr Papademos, should you be asked by the central bank, would you be willing to take the position of chief economist after Mr Issing’s departure?
Papademos: I have to pass the question to the President.
Trichet: We have already been very clear on that point. We will decide in the Executive Board with Lucas and all our colleagues including our new colleague when he is appointed. It is a collegial decision. And we will of course communicate immediately our decision.
Question: With a 25 basis point rate hike today, do you assess that liquidity levels in the market will remain at the current levels or do you estimate that the levels will retreat?
Trichet: Today’s decision is in our opinion the right decision in line with our present analysis and our assessment of the risks to price stability. We will see how the situation develops and whether the new assessments of risks to price stability lead us to take new decisions. In order to complete the previous response to the previous such question, we are very much in the same state of mind as we were after the December decision. There are two messages: first we did not decide today ex ante on a series of monthly increases, as other central banks might have done; at the same time, we stand ready to do whatever is necessary and appropriate to ensure price stability and anchor inflationary expectations and to continue to contribute, through that anchoring of inflationary expectations, to a favourable financial environment.
Question: You did not decide ex ante but this is my evaluation, not yours. Maybe other steps like this will follow. What messages do you have for families who have loans or difficulties getting to the end of the month? Will they have to pay much more each month? Will they have stable prices, but also a bigger burden for each month? And the second question, about the general situation in Europe, about the takeovers of companies and banks. In recent months there was the problem with Italy. It was said that Italy’s market was too closed. Now, when Italy tries to go abroad, it is difficult for them. The example is Suez and Enel. It is difficult for them to do a cross-border takeover. Is this the normal situation or should Europe do something about that?
Trichet: On the first question, the clear message we received from families, from households, from our 313 million fellow citizens is to ensure price stability. They are saying that in all surveys that we can observe. The message is very strong. They are not necessarily fully satisfied with the present level of inflation, as appears in a lot of surveys, and they are calling upon us to meet our responsibilities, which are given to us by the Treaty. As you know, it is an immense responsibility, and we will continue to be faithful to our mandate, because it is essential. Not only in the view of the market anchoring of inflationary expectations, but also, because it is a major contribution to the overall confidence of consumers and households. On to of that because we are credible, we incorporate, in medium and long-term market rates, a low level of inflationary expectations, which is obviously good for the families you were talking about.
On the second question, I would say that we did not discuss any particular dossier. I will only refer to the constant position expressed already by the Governing Council, which is strongly in favour of the completion of the Single Market. I said that a number of times: we are expecting all rules of the European Single Market to be respected. That is the constant sentiment of the Governing Council.
Question: Mr Trichet, you said that markets understand your monetary policy very well. Markets are pricing in another rate hike by June. Would you describe that as a sensible or reasonable position for them to take? My second question is about the language which you have used in your statement today. You appear to have dropped the word ‘vigilant’. Could you perhaps explain what that might mean? Are you less vigilant on the inflation outlook, or are you still vigilant?
Trichet: I told you that we will continue to monitor closely all developments that could modify our assessment of the risks to price stability. We do not engage a priori in a series of interest rate hikes, but we will do all that is necessary any time. And you know that we do not pre-commit ourselves unconditionally. And I am giving that information to the markets: again, I feel that we are very much in the same mood as we were in December.
Question: I have a question about these staff forecasts that came out today. I know that they do not necessarily represent the view of members of the Executive Board because they are produced internally within the European Central Bank and, also, the forecasts are based on the assumption that interest rates remain constant which, when these forecasts were calculated, would have been at 2.25%. What is your view after raising interest rates today…whether you are confident that inflation in 2006 and 2007 will be below 2% or not – and if inflation is not going to be below 2%, with rates at their current level, and whether you think that there is strong pressure on the ECB to raise rates now – given the lag time for monetary policy to take effect?
Trichet: First we consider that there was good reason to increase rates and the present level reflects our assessment of the situation at the present moment. Second, as regards the projections, as you know, the Governing Council does not underwrite the projections. Both the projections of the staff of the ECB and the projections of the staff of the Eurosystem are made by our experts. We have a lot of trust in them – in their professionalism and in their excellent work – but we do not underwrite this information and we look also at all other pertinent information. I confirm that the methodology you mentioned as regards interest rates is the present methodology for the staff projections. Our aim is to be as certain as possible, with the best analysis possible, that we are at any given moment in time putting our monetary policy stance in line with what we feel the risks are for future inflation. We trust that, at the present time, today’s decision is the good one. And again, we will what will be necessary in the future depending on the data, facts and figures.
Question: You say that the ECB is expecting that all rules of the single market will be respected. I wonder if you could say that circumstances now in several European countries that are trying to protect national industries mean that these rules are not fully respected. My second question: after two interest rate increases, what is the likely outcome for the housing market, in particular in countries in southern Europe which have experienced a very strong price increase?
Trichet: I was expecting a number of questions relating to the question asked by an Italian journalist and I will tell you exactly the same. We did not discuss any particular dossier – I think you have in mind one particular dossier – and it is our previous constant position that the European rules of the Single Market have to be respected. This is our long standing position already expressed today. In advance not only to Italian and Spanish journalists but also to the Luxembourg journalists, French journalists, German journalists I will give the same response to all such questions. Turning to the question on the interest rate differentials that you asked….
Question: …no, the impact of the increase of interest rates on the housing market…?
Trichet: Again, we have a single currency area, we have a single monetary policy, we have the same interest rates and we have to make up our minds on the basis of all 313 million people in the euro area. It is a very heavy responsibility and we have to look at the full picture. We cannot concentrate on any particular country, Spain for instance. We also know how different the situation is between Germany and other economies. When we took today’s decision we considered all the information contained in the monetary analysis – not only in the evolution of M3 but also in the evolution of the counterpart of M3 – such as loans including loans for housing. Clearly we have a number of indications that require careful monitoring and are, among many other considerations, explaining today’s decision. In the case of Spain it seems to me that we are observing today a certain appeasement vis-à-vis the previous evolution. Again, we look at the full picture for the euro area.
Question: First of all, I wonder if you could tell us whether anyone on the Governing Council was arguing in favour of a 50 basis point increase today? Secondly, what is different today from this time last month? The only substantial difference I can see is that the data has turned up pretty much as you predicted last month. It seems to be that your inflation forecasts are much higher. Can we therefore assume that if inflation turns out to be maybe slightly better than you are anticipating that there will be no need for further increases in interest rates? And you did not answer the earlier question about vigilance. Maybe I might repeat that one and see if we are going to elicit some sort of indication of how vigilant you are feeling today? And maybe an English journalist may get a different answer on the issue of protectionism. Mario Monti in the paper this morning was writing that adherence to the single currency but not really to the Single Market is a recipe for poor economic performance domestically and may pave the way to problems for the euro. Would you agree with Mr Monti on this point?
Trichet: On the first point, we weighed the assets and liabilities, the pros and cons, associated with various possibilities: zero increase, 25 basis points and 50 basis points. We were unanimous that 25 basis points was the appropriate decision to take today. As regards vigilance, I already responded clearly and I will not elaborate more on that. As regards the position that we have on the Single Market, the constant position of the Governing Council is that it is important for all the European rules of the Single Market to be respected. But again, we did not discuss any particular dossier and we did not discuss either today’s Financial Times.
As regards the reason why we increase rates today, it reflects our assessment of all the risks to price stability that we see. We are doing it to counter these inflationary risks. The economic evolution is for us pertinent to the extent that it modifies the risks for inflation. Do not forget that there is a needle in our compass, and it is price stability. We will see what happens; we take no a priori commitment. We are reasoning over the medium term and we have to be sure that we are countering these risks. The economic analysis is very important. The monetary analysis is also important particularly for the medium to longer-term perspective. This monetary analysis gives information which we consider pertinent and which is also pointing in the direction of risks to price stability in a somewhat longer term perspective. You mentioned the possibility that our own assessment of future inflation could be lower. We will see, but do not forget that we have an economic analysis and a cross-checking with a monetary analysis.
Question: It seems that one of the things we have been missing for a sustained economic recovery thus far is hard evidence of private consumption. And up to now expectations are based on the idea that consumption growth will follow on the coattails of stronger investment. So I am just wondering after the strong retail sales data today that we saw in Germany for January – just wondering if you think we have turned the corner on that and, if not, when you think this might happen. And I would also appreciate it if you could comment briefly on the record high producer prices for the euro zone which we have in January and if you feel that this is appropriately calculated into the ECB staff projections today and if this is a matter of concern?
Trichet: First of all, as I say very often, we look at trends and it is absolutely normal that we have had a good deal of volatility in the day-to-day figures concerning soft data and hard data. What is important for us is our assessment of the trends evolution. I will not comment too much on what we have been observing in one particular, very important euro area economy recently because what counts for us is the full body of the euro area. But some German figures are clearly a good sign, there is no doubt. We will see whether it corresponds to an “inflection” point. What is absolutely clear is that in our analysis, which is shared by economists and observers particularly in international institutions, after having had a clear driving force coming from the external side, then having seen perhaps since the middle of last year, an important contribution to growth coming from investment and gross capital formation, it would be in line with the normal sequencing to have now a significant contribution coming from consumption. I would say particularly in Germany, where the situation has been very depressed for a very long period of time for reasons that are very well known. Again it is a working assumption that we will have a significant contribution to growth coming through that channel. I will not say that we have already seen the “inflection” point. It is clear that it is our sentiment that it should materialise at some point in the present episode of the recovery. You had another question, Madam?
Question: Producer prices, record high producer prices for January…
Trichet: Same thing, it is not a reason for us to change our present assessment, certainly not to change the projections which have just been made, but we will see whether beyond the inevitable volatility of these figures there is something more permanent. I have mentioned the risks to price stability coming from the delay in incorporating in non oil prices the previous oil prices increases. It is clearly one of the risks that we have to be fully aware of.
Question: Coming back to this dossier, do you see EON, Endesa and Suez, Gaz de France, Mittal and Arcelor as isolated cases? Or do you see a trend of more protectionism in Europe?
Trichet: We consider a priori that there is an opportunity cost which is significant not to complete the Single Market in a convincing manner. But again we have not discussed any of these particular dossiers.
Question: One question. I did not understand if, in your projections, you have already incorporated the rate increase that you had today or not.
Trichet: Certainly not. This is not the present methodology.
Question: I have three short questions. I know you do not have a pre-commitment to do anything with the interest rates, but perhaps you have developed some kind of bias towards higher rates? The second question is, most economic data we have received from the euro zone so far are soft data coming from your asking businesses and consumers about what might happen. What are the hard data you see, and are the hard data coming in underlining your case of an ongoing economic recovery? Are there any hard data coming in that are stronger than you had expected? And the third question concerns the deficit procedure going on in Germany. I suppose you are aware of the proposal by the Commission about what should happen with Germany. Do you think that this proposal fulfils the needs of the revised Stability and Growth Pact? Or is there anything which is already starting to weaken the revised Stability and Growth Pact?
Trichet: Regarding the first question, I said that we were in the same state of mind as we were in following December’s decision. You can draw the conclusion that you will judge appropriate for that observation. As regards the soft versus hard data, it is clear that until now in a number of economies, and therefore at the level of the euro area as a whole, we have a number of so-called soft data that are very good, obviously even historically good in some very important economies, including the German economy. At the same time, we have maybe not yet seen the following hard data confirming the soft data. But historically, we always observed in the past that the hard data followed suit soft data. There was a strong correlation. As I said, we are very pragmatic, we depend on the information that we receive and we will examine all new information as it comes in each month or each quarter. What is important for us is to eliminate the noise from the data and filter out the pertinent information which for us, of course, taking into account our medium-term reasoning, is the trend. As regards the Stability and Growth Pact, we have always said that, first of all, the new Pact, as amended unanimously by all governments, had to be rigorously implemented. This is the first observation. The second observation is that we always said that we expected each partner to fulfil its responsibility. So I will tell you what our position will be when we see exactly what the Commission the German Government and the Council positions are.
Question: I have two questions for you. One is your comment in the statement that the 2.5 % interest rate remains at a very low level, in both nominal and real terms. Does that mean that 2.5% is still stimulating economic growth in the euro area? And my second question is about Japan. As you know, the Bank of Japan is trying to get out of a quantitative easing of monetary policy, although there are a lot of discussions with policy-makers. What do you think of it?
Trichet: On the first question, I would say the following. First of all, 2.5% is, in nominal terms, the lowest level ever attained by the Bundesbank, since the creation of the Bundesbank. That is just to give you an order of magnitude and the possibility to make a comparison. It is a stimulative monetary policy – there is no doubt about that. As regards the monetary policy of Japan, I have said in the past that central bankers have created a strong brotherhood of mutual admiration! So, what the Bank of Japan does is good and what the Bank of Japan will do will be good. I will not make any further comments on the monetary policy of Japan.
Question: I am sorry to be pedantic in coming back to a topic that you have been asked about, but you have been asked about five or six questions on this “nationalism/protectionism” issue and each time you said “we did not discuss it”. I would just like to ask, for the purposes of explaining how the meeting works, did you not discuss it because you decided that it was an interest rate meeting and it was not on the agenda or because no one thought to bring it up? I mean it is clearly a very “top-of-mind” issue in this room.
Trichet: First, it was not on the agenda. Second, it is not on our normal agenda. The responsible public entities in this respect, apart from the Governments involved, are the European Commission and the Council. I would add to what I have already said: each institution must meet its responsibilities, ours are already very heavy!
Question: I did not quite get what you said before, when you were answering my colleague from the “Financial Times” – that there are price stability risks on the upside in the medium and longer term. Should I assume that you have a preliminary assessment that inflation will move above 2% in 2008 as well?
Trichet: I mentioned that when I was referring to the monetary analysis. We consider monetary analysis to be important under our two pillar strategy not only because it permits us to cross-check the economic analysis but also because it gives us particular information on the risks from the medium to the longer-term horizons. That was why I mentioned that.
Question: I just wanted you to give us an assessment of the output gap in the euro area. Do you consider that there is a lot of spare capacity in the economy? Is it possible that the gap could turn positive anytime soon?
Trichet: As you know, the measurement of the output gap is not part of our monetary policy concept. We believe that when you look at the immediate, real-time estimate of the output gap, and then you look at the same analysis of the output gap one year afterwards, or two years afterwards, you see such huge differences that you have to be cautious. I fully understand that a number of observers and economists would look at it, but we are very cautious in this respect. It is not part of our own monetary policy concept. I would not embark on my present estimate of it, precisely for that reason. We trust that it is a concept which is extremely delicate to manipulate.
Question: You said that you are in a similar state of mind at the moment as you were in December, which would suggest possibly that there could be another rate increase in three months’ time.
Trichet : I said that there is certainly no such rule as increases every month! There is no rule to increase every three months! We increase rates if necessary when we judge it to be appropriate.
Questions: A few people in the financial markets have been observing that the European Central Bank seems not to have changed interest rates on occasions when it has been meeting outside of Frankfurt. In June it is going to be in Madrid. Would that be an inopportune time to be changing rates?
Trichet: You can draw any conclusion from past observations, of course, but I have always said that we could act whenever needed. Do not conclude that I am confirming anything! We will do whatever will be necessary when the time comes.
Question: A question which is not directly related to interest rates. I believe that the Prime Minister of Lithuania is coming to Frankfurt next week to meet with you to discuss convergence towards euro entry. I don’t know whether he might be concerned at all about whether his country is going to meet the requirements, but in 1998 when the decision was taken as to whether the original members of the euro should enter, both Belgium and Italy did not quite meet the criteria in terms of debt-to-GDP ratios. Indeed, at that time, the ECB expressed a little bit of concern about whether their budgets were on a sustainable convergence path to meet the debt-to-GDP ratio. In that case, I don’t know whether the ECB might be able to offer a little bit of comfort to the Prime Minister of Lithuania about inflation criteria, which the country might be having some trouble meeting.
Trichet: We have always said that we should make the future decision clearly, with a rigorous observation of the Maastricht criteria. Nothing more than the criteria and nothing less than the criteria. I will not comment in any other fashion. As regards the debt outstanding, I only remind you that the wording of the Treaty is not exactly the same in the case of the 3% threshold on the current deficit which I cherish personally because I introduced myself the 3% threshold when we negotiated the Maastricht Treaty and in the case of the 60% threshold for accumulated debt, which is of a different nature and is not qualified in the same fashion in the wording of the Treaty.
That was my response to the last question.
Now I have to mention that we did decide something else during our meeting and that information is being made public right now. I think that it is courteous for me to tell you that we have decided that Mr. Jürgen Stark is a person of recognised standing and professional experience in monetary or banking matters as required by the Treaty of Maastricht. So we have expressed our positive opinion and we are now communicating this positive opinion to the respective institutions of Europe.