Introductory statement with Q&A

Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB,
Frankfurt am Main, 7 December 2006

Jump to the transcript of the questions and answers

Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to today’s press conference. Let me report on the outcome of our meeting, which 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 over the medium term that we have identified through both our economic and monetary analyses. Today’s decision will contribute to ensuring that medium to longer-term inflation expectations in the euro area remain solidly anchored at levels consistent with price stability. Such anchoring is a prerequisite for monetary policy to make an ongoing contribution towards supporting sustainable economic growth and job creation in the euro area. After today’s increase, our monetary policy continues to be accommodative, with the key ECB interest rates remaining at low levels, money and credit growth strong, and liquidity in the euro area ample by all plausible measures. Therefore, looking ahead, acting in a firm and timely manner to ensure price stability in the medium term is warranted. The Governing Council will monitor very closely all developments so that risks to price stability over the medium term do not materialise.

Turning first to the economic analysis, according to Eurostat’s first estimate, the quarter-on-quarter growth rate of real GDP in the euro area for the third quarter of 2006 was 0.5%. The data thus confirm our assessment that economic activity continued to expand robustly, while moderating from the very strong rates seen in the first half of the year. Domestic demand remained the main driver of economic growth in the third quarter, confirming the anticipated broadening of the recovery and pointing to the increasingly self-sustaining nature of economic expansion in the euro area. The information on economic activity from various confidence surveys and indicator-based estimates supports the assessment that robust economic growth has continued in the fourth quarter of this year.

Looking ahead, the conditions remain in place for the euro area economy to grow at solid rates around potential. While some volatility in the quarterly growth rates is likely to emerge around the turn of the year, associated with the impact of changes in indirect taxes in a large euro area country, the medium-term outlook for economic activity remains favourable. As regards the external environment, economic growth has become more balanced across regions. Helped in part by lower oil prices, global growth is robust, thereby providing support for euro area exports. Domestic demand in the euro area is expected to maintain its relatively strong momentum. Investment should remain dynamic, benefiting from an extended period of very favourable financing conditions, balance sheet restructuring, accumulated and ongoing strong earnings, and gains in business efficiency. Consumption should also strengthen further over time, in line with developments in real disposable income, as employment conditions continue to improve.

This outlook is also reflected in the new Eurosystem staff macroeconomic projections. The projections foresee average annual real GDP growth in a range between 2.5% and 2.9% in 2006, between 1.7% and 2.7% in 2007 and between 1.8% and 2.8% in 2008. Most recent forecasts by international organisations give a broadly similar picture. In comparison with the September ECB staff projections, the ranges projected for real GDP growth in 2006 and 2007 have been revised upwards, largely reflecting the assumption of lower energy prices and their impact on real disposable income.

In the Governing Council’s view, the risks surrounding this broadly favourable outlook for economic growth over the projection horizon lie on the downside. The main risks relate to the possibility of a renewed increase in oil prices, fears of a rise in protectionist pressures, especially after the suspension of the Doha round of trade talks, and concerns about possible disorderly developments owing to global imbalances.

As regards price developments, according to Eurostat’s flash estimate, annual HICP inflation rose to 1.8% in November 2006, from 1.6% in October and 1.7% in September. While no detailed breakdown of the November HICP data is available as of yet, the lower annual HICP inflation rates recorded in the two previous months reflected mainly the significant declines in crude oil prices from August onwards, as well as base effects. While the outlook for energy prices remains uncertain, on the basis of the oil prices currently implied by the futures market overall inflation rates are likely to increase again in early 2007 and then hover around 2% in the course of that year, also reflecting the impact of higher indirect taxes.

The December Eurosystem staff projections see annual HICP inflation at between 2.1% and 2.3% in 2006, between 1.5% and 2.5% in 2007 and between 1.3% and 2.5% in 2008. Most recent forecasts by international organisations give a broadly similar picture. Compared with the September 2006 ECB staff projections, the ranges for 2006 and 2007 are somewhat lower, largely reflecting the assumption of lower energy prices. In this context, let me remind you of the conditional nature of these projections, which are based on a series of technical assumptions, including market expectations for short and long-term interest rates as well as for oil and non-energy commodity prices.

In the Governing Council’s view, the outlook for price developments remains subject to upside risks, stemming in particular from a pass-through of previous oil price increases which is stronger than assumed in the baseline scenario, the possibility of renewed oil price increases and additional increases in administered prices and indirect taxes beyond those announced and decided thus far. More fundamentally, given the favourable momentum of real GDP growth observed over the past few quarters and the positive signs from labour markets, wage developments could be stronger than currently expected. Therefore, it is crucial that the social partners continue to meet their responsibilities. Wage agreements should take into account productivity developments in connection with the still high level of unemployment and positions in price competitiveness. It is also important that wage settlements move away from automatic, backward-looking indexation mechanisms.

Turning to the monetary analysis, annual M3 growth was unchanged at 8.5% in October, remaining close to the highest rates observed since the introduction of the euro, which points to inflationary risks at medium to longer horizons. Increasing interest rates have exerted some influence over monetary developments in recent months, although as yet mainly by triggering shifts among the components of M3 rather than constraining the expansion of M3 itself. In particular, the annual growth rate of M1 has moderated somewhat, reflecting shifts from overnight deposits into other components of M3 which offer more market-related returns.

More generally, the rate of monetary and credit expansion remains rapid, reflecting the low level of interest rates and the strengthening of economic activity in the euro area. In particular, loans to the private sector continue to grow at double-digit rates on an annual basis, their dynamism remaining broadly based across the household and corporate sectors. In the context of rising interest rates, the growth of household borrowing has shown signs of stabilisation in recent months, albeit at very high growth rates. By contrast, the growth of borrowing by non-financial corporations continues to trend upwards and has now reached rates of over 12% on an annual basis, the highest seen since the early 1990s. Thus, when the counterparts of M3 are considered, the main driver of strong monetary growth remains the expansion of credit to the private sector.

Taking a medium to longer-term perspective, the latest developments are consistent with a continuation of the persistent upward trend in the underlying rate of monetary expansion, identified by the ECB’s monetary analysis since mid-2004. Furthermore, following several years of robust monetary growth, the liquidity situation in the euro area is ample by all plausible measures. Continued strong monetary and credit growth in an environment of ample liquidity point to upside risks to price stability over the medium to longer term. Monetary developments therefore continue to require very careful monitoring, particularly against the background of improved economic conditions and continued strong property market developments in many parts of the euro area.

To sum up, annual inflation rates are projected to hover around 2% in the coming two years, with risks to this outlook remaining on the upside. In addition, given the ongoing marked dynamism of monetary and credit growth in an environment of ample liquidity, a cross-check of the outcome of the economic analysis with that of the monetary analysis supports the assessment that upside risks to price stability prevail over the medium to long term. It is essential that inflation expectations remain firmly anchored at levels consistent with price stability. Indeed, acting in a firm and timely manner to ensure price stability in the medium term is warranted. The Governing Council will therefore monitor very closely all developments so that risks to price stability over the medium term do not materialise.

As regards fiscal policy, the European Commission’s autumn forecasts suggest that deficits will fall below 3% of GDP in most euro area countries by 2007. This is welcome. However, the projected improvements in fiscal balances can only partly be attributed to substantial progress in structural consolidation, as higher economic growth and revenue windfalls are playing an important role. Moreover, in a number of countries with fiscal imbalances, adjustment efforts still fall short of what is needed to meet their respective medium-term objectives in a timely manner and thus fulfil the requirements of the revised Stability and Growth Pact. This is of major concern. It is therefore crucial that forthcoming updates of the stability programmes not only envisage significant progress towards the correction of excessive deficits in a sustainable manner but also make sufficient headway towards safe budgetary positions in the countries concerned. For all countries it is paramount that pro-cyclical policies be avoided in the current economic upswing. More progress is also needed with fiscal structural reform as part of a comprehensive medium-term strategy to improve economic incentives and the soundness of social security systems. This would be a crucial contribution of fiscal policies to economic growth and fiscal sustainability as well as to confidence in the revised Stability and Growth Pact.

As regards structural reforms, the Governing Council welcomed the 2006 progress reports submitted by EU Member States on their 2005-08 national reform programmes, in line with the renewed Lisbon Strategy. Although it is encouraging that many concrete reform steps are being taken or are planned, there is still a considerable way to go to make the euro area a more dynamic economy, which is crucial to meeting the challenges of globalisation, population ageing and rapid technological change. Reform measures should foster more integrated, flexible and competitive economies in the euro area, thus allowing more efficient adjustment processes and a stronger resilience to shocks. These are essential conditions for the substantial benefits of the single currency to be better exploited and for the economic performance to improve in both the euro area as a whole and in each member state.

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: Three questions. First of all, in the medium term what does the Governing Council believe is greater, the risks of higher inflation, or the risks of lower growth? My second question is about the “monitoring very closely” phrase you used in the opening statement. This is strongly, although not exclusively, associated with a certain time frame for adjusting borrowing costs, so I was wondering if you could comment on that. And my third question was whether the Governing Council believes that the risks from wage-driven inflation have risen in, say, the last six months?

Trichet: On your first question, I would say we do not have two needles in our compass, we have one. We are not arbitrating between the risks of inflation and the risks for growth. We take growth into account to the extent that it augments or diminishes the risks of inflation – an inflation which would not be in line with our definition of price stability. So I was very clear on the risks for growth, which we see as being on the downside. The projections themselves are made by our Eurosystem staff and under their responsibility. We ourselves exercise judgement on this input as well as on a number of other inputs. I made that point very clearly and you know that this is our position. So, as regards our own assessment on inflation, we are here to ensure price stability, deliver price stability and be credible in that delivery over time in line with our definition of price stability. It is as simple as that, there is no ambiguity regarding our own monetary policy concept. As regards your second question, the sentences I use speak for themselves. I could repeat it if you wish: “after today’s increase, our monetary policy continues to be accommodative with the key ECB interest rates remaining at low levels”. I also said, “therefore, looking ahead, acting in a firm and timely manner to ensure price stability in the medium term is warranted”. And I concluded, we “will monitor very closely all developments” in risks to price stability. I will not comment on any particular meaning that the last sentence might have but it has no other meaning besides what it says: “the Governing Council will monitor very closely all developments”. And as you know our permanent posture, our reference posture, is that we are constantly alert, we look at developments and data, we embark on deep analyses and we make our judgement to take the decision when we judge that it is necessary to act to deliver price stability and be credible in the delivery of price stability. I have already said in the introductory that this permits – and is the only way to permit – the anchoring of inflationary expectations in the medium and long term – and even in the very long term. I was checking the present level of fifty-year rates in the euro area, which are around 3.85%. These rates are incorporating our credibility in delivering, over the next fifty years, inflation in line with the definition of price stability of less than 2% but close to 2%. Of course, there are other elements which can explain this very low level, but the anchoring of inflation expectations is one of the elements that explain this level. As regards you last question on wages I think it is a risk which we do consider to be on the upside. Again, there is no materialisation as yet of this risk at the level of the euro area as a whole. But our message today is particularly clear on that point because we think that there are temptations which in our view would not be appropriate. We trust, for reasons that I have explained, particularly the level of unemployment and the need to maintain price stability, that social partners have to be responsible in that area. So, yes, there is a message there that the risks in that area might be on the upside and, as you know, once the risks have materialised, it is too late.

Question: The Eurosystem projections foreseeing inflation hovering around 2% which is overshooting the ECB Governing Council’s stability definition, and given robust growth, would you still be able to say that if the scenario unfolds as anticipated or if it’s confirmed, that a further reduction of monetary accommodation would be warranted? Number two, was the decision today unanimous? And number three, on private-sector loan growth: could you explain to us whether corporate borrowing is less of a concern from an inflationary standpoint than household borrowing, please?

Trichet: On the first point, again, what I said speaks for itself. I said: “Therefore, looking ahead, acting in a firm and timely manner to ensure price stability in the medium term is warranted.” I said also that we would monitor developments “very closely”, I stick to that. On the second point, yes, we were unanimous. On the third point, it is clear that we have an element of dynamism in the counterparts to the monetary aggregates M3, which is very impressive as I have already told you that on these occasions. But again it is good to go to the figures themselves. When I look at the loans to the non-financial corporate sector, if I go a little bit back, in August we were at 12%, in September at 12.7%, in October at 12.9%. So for a number of very complex reasons, the growth of loans to the non-financial corporate sector, which is an important segment of the private sector, is very dynamic and has to be carefully considered. It is approximately 2.5 times the growth of the GDP in value terms. Our monetary analysis concentrates on the aggregate itself and the components, and we try to understand exactly what is happening. We have M1, which is decelerating as expected since we have been increasing rates starting in December last year, now altogether by 150 basis points. Offsetting this diminishing growth rate of M1, you have M3 minus M1 which continues to be dynamic. So you have a large shift between the components of M3. And the overall result is that the M3 remains very dynamic.

Question: I think that markets will have noticed that you have not talked about “further withdrawal” of monetary accommodation, but also your comment that you are “very closely monitoring”, I guess, will increase expectations that you might raise rates as early as next February once more.

Trichet: It would be a wrong interpretation.

Question: Does that mean that maybe we should not be drawing from the fact that a certain set of words in previous months has led to a certain action a few months later, that maybe this relationship could be broken down over the coming months?

Trichet: Again, we have to be as clear as possible: that particular interpretation would not be correct. What is correct is that, as always, we reserve the possibility to act any time, as I said, we do not pre-commit for two, three, four, five, six months later. But we can, and I have always said that, take the decision which is appropriate, taking into account the conditions in which we would be and the absolute necessity to deliver price stability and be credible in that delivery.

Question: Can I just press though, would you repeat the statement today that if your baseline scenario is confirmed, a further withdrawal of monetary accommodation would be warranted?

Trichet: We do not say that.

Question: The other question is when you list the risks to growth, you don’t mention the euro, would you see the euro’s strength as a risk to growth going forward?

Trichet: I did not mention that, and on the exchange rates, which are, as you know, a very important issue, my terms of reference are very simple. I stick to what, on behalf of the Governing Council, I have signed a few sentences with the colleagues of the G7, including the sentence “Excess volatility and disorderly movements in exchange rates are undesirable for economic growth.”

Question: At what point, if any, would you possibly rethink the policy of not encouraging or discouraging third-party use of the euro if a possible disorderly development owing to global imbalances suddenly occurs? And by that I honestly mean a run on the US dollar.

Trichet: As I have always said, our position – which has been our position since the very beginning of the euro, and is the firm position of the ECB – is that we do not encourage the use of the euro. We let the operators, markets participants, investors and savers judge the various financial and monetary instruments – tradable or not – and it is up to them to make their judgements. We do not encourage the international use of the euro.

Question: I know that you think that your comments on ‘monitoring very closely’ are clear enough as they are, but something that you do comment on as well is market expectations for interest rates. I recall a little earlier today, markets certainly were not fully priced in for an interest rate rise to 3.75% in the first three months of next year, and I was wondering whether you thought that markets’ interest rate expectations are appropriate at the moment or whether possibly some revision in the light of your latest words might be needed. And then, secondly, just going back to the euro, I was wondering whether you thought that the euro’s recent strength is justified by the healthy economic fundamentals in the euro zone and whether in fact, it is a welcome part of global balancing.

Trichet: On the first question, I would say that, for us, things are very clear. The market, yourselves, all observers, savers and market participants the world over know our monetary policy concept. They know that we are committed to delivering price stability. They know our arithmetic definition of price stability. This is not necessarily the case elsewhere, as you know, but we have full transparency in our own monetary policy concept and in our definition of price stability. Everybody could see what we did in the past and make a judgement. The new information, the data, are fully open, everybody has access to all the data. Our contribution is the judgement we make on the basis of a deep analysis of all the facts. But this is also done by the markets. The markets have all the information and can draw the appropriate conclusions from that information. I will not comment further. Of course, I know that we influence them through our own decisions, but it is their responsibility to match their judgement on the basis of all the information. And as you know better than anybody, not all market people have the same opinion. I am very interested to see the wide range of opinions existing at the level of major financial institutions. I believe that in your articles, editorials and judgement, you also have a wide range of views. I have nothing to add to that. As regards the euro, I stick to what I said before: “excess volatility and disorderly movements in exchange rates are undesirable for economic growth”.

Question: Mr Trichet, can I ask you how much weight you attach to the German VAT increase, in the sense of the risk it imposes to price stability? Because in terms of the language you have used, you are going to closely monitor price stability in the first quarter of the year, maybe inclined to move very soon after the introduction of the VAT increase. Can I ask you how much weight you attach to it and whether the weight of the risks - or the risk portfolio – may have slightly changed in the last couple of weeks? Do you maybe attach more risks to the monetary pillar, to credit growth, to wage developments or possible wage developments in large economies in the euro zone?

Trichet: As regards the VAT increase, it has been known for a very long period of time, so we incorporated the VAT decision in our analysis as well as in our projections a long time ago. There is nothing new there. What is unknown, obviously, is exactly the impact it will have; the part of it which will be cushioned by some diminution of margins, the part of it which materialise in the prices. We will see. But there is presently a mainstream analysis and we do not depart from it.

When I mention the risks of further inflation that would be due to indirect taxes or administrative taxes, I am not thinking about VAT. I am thinking about what would or could come in all countries in Europe on top of what has already been decided and taken into account today. And I have to say, when I look at the past, the annual level of the impact of these public decisions on annual inflation – yearly price increases – has been significant, year after year, for reasons that are very complex. As regards the changes in the risks concerning inflation, I mentioned traditional risks but, in the case of wages, we have the sentiment that we have to be particularly attentive to this element of risk. Even if those risks did not materialise, but when they materialise– it is too late.

Question: Slovenia will be the 13th member of the euro area. This is a symbolic number also. What will be the financial and economical implications?

Trichet: I would first like to say that we are all delighted that Slovenia is joining the euro area as soon as January next year. I am delighted myself to be going to Slovenia at the invitation of the Government and the central bank. It is very impressive to think that there will be 13 of us; that thanks to Slovenia there will be 315 million citizens in the euro area. As a comparison, the United States has 300 million citizens – so the populations are really of the same order of magnitude and it is impressive. It also shows that we are not a closed shop but an open area, provided of course that the Maastricht criteria are met – and they were met in the case of Slovenia. And that is the reason why we, as well as the European Commission, recommended the acceptance of the entry of Slovenia. As you know Governor Gaspari of the Bank of Slovenia has already joined us as an observer since the decision on Slovenia was taken. He also attended our meeting today and we are delighted to be able to welcome him soon as full member of the Governing Council

Question: Regarding Slovenia, what would you say that the greatest challenges are for the Slovenian government once in the euro area?

Trichet: I would say first of all that, the fact that you share a solid currency, a currency which maintains price stability, means a number of consequences on the fiscal side. With entry to the euro area the Stability and Growth Pact changes in nature, because there are sanctions for behaviour which is not in line with the overall superior interest of the euro area as a whole, while there are no sanctions associated with so-called “bad behaviour” when you are outside the euro area. This is an important change. Also having the single currency you have to pay special attention to the unit labour cost – the competitiveness indicators in general – because there is no way to reconstruct competitiveness through realignment, so you have to constantly keep an eye on competitiveness. These are my two main messages. Speaking of Slovenia let me mention a point which we have made already. In a single currency area, which is a single market with a single currency, absolute free circulation of men, women, capital, goods and services is of the essence. A real single market is necessary for the appropriate functioning of the area. It is abnormal that there are labour restrictions as regards Slovenian workers in a number of economies that are members of the euro area. I have already made that point, and I repeat it: it is not normal in a single currency area; it is contrary to good economics to keep these barriers.

Question: First I notice you don’t mention the US economy. I wonder whether or not your assessment of the US economy has changed or your assessment of the impact of the US economy on the euro area economy has changed. Secondly I wonder whether a continued depreciation of the US dollar and concomitant appreciation of the euro at its current pace would be considered a disorderly unwinding of global imbalances. And thirdly you have highlighted that risks to your inflation outlook are on the upside, would we be mistaken in focusing on a higher end of the ranges you have provided us with for 2007 and 2008?

Trichet: As regards the US economy, I would say that it gives new signals regularly. In the same week you may have a number of signals. There is an immediate market interpretation in one direction or another of each of these various signals. But all things being taken into account, I very much share the present views of the Federal Reserve System: I think that we are observing a smooth slowdown and we will very likely continue to observe it. So that is my synthetic assessment of what is going on.

As regards the exchange rate, I have already said what I have to say.

Concerning your third question, the ranges in our Eurosystem staff projections, as you see, are obviously quite large, not for 2006 but for 2007 and 2008, both for growth and for inflation. They capture uncertainties very well and there are a great number of uncertainties. My view, which is the view of the Governing Council and also a global view, is that in general we are in a period which is very favourable at a global level, and extremely flattering in terms of successive years of very robust growth. At the same time the uncertainties are probably more acute. So you have both: continued exceptional prosperity and more uncertainty at a global level. We have to take all that into account. We are speaking of risks. We think that there are more upside than downside risks for price stability. But I think it would be wrong to conclude that the implicit real number within the range is this or that, because we are speaking of risks and not already of materialisation of risks.

Question: I have a question on the accession countries and your Convergence Report that you have recently released. The EU Treaty stipulates that the three countries with the best performance in terms of price stability should set the benchmark for the inflation criteria, and you have chosen three countries with rates slightly above 1% as the best-performing. Now, how does that conform to your own definition of price stability, which is close to but below 2 %? It would seem that there are a couple of other countries that have rates of 1.7% to 1.9%, which might be better performing.

Trichet: It is an important question, but it is a question that has already been asked, discussed, reflected upon and resolved. So, I am referring to the past. Whatever pros and cons may have been put forward as arguments, the conclusion of the European Commission, the ECB and the European Council was that we had a Treaty and that we had to stick to the Treaty. And everybody knows what it is like to change the Treaty. We live in states that respect laws and the Treaties as they stand. In respecting the Treaty we had the same conclusions as the Commission, and this was accepted by the Council. It has been discussed even at the level of the European Council. Whatever the remarks made, but I will not discuss them – the conclusion was that we had to apply the Treaty as it stands.

Question: You have spoken of the impact of the increases in German VAT, but we will have two impacts as from next year, coming from two big countries, because Italy is going to raise the pressure of taxes. So, do you think that the effect of the increase in German VAT and the impact of the Italian tax rise have added to the uncertainties about growth that you have spoken of, because these countries make up almost half of the GDP in Europe.

Trichet: When making a judgement on growth, you can see that all institutions are predicting growth for next year that would obviously be quite flattering. The European Commission, the IMF and the OECD predict growth in the euro area at 2% or more. In our Eurosystem staff projections we have a large range which has been revised upwards. So, we are living in a euro area with quite robust growth and this is gratifying. Allow me to draw your attention to the press conference we held here in December last year, exactly one year ago. We increased rates in December last year. Since December last year we have increased our rates six times. At the time, there were a number of observers, economists and international institutions that had not all understood our decision – I would dare to say that there were some who questioned whether our judgement was good. Since then, you will note that we have been totally vindicated. Everybody has recognized that we were right in doing what we did in December last year and that we were right in doing what we have done since then. The very same economists, observers, international institutions are now all thinking, that we had a good judgement and that we analysed the situation correctly. I would mention this en passant. To go back to your remark when I speak of downside risks to growth, I am referring to the general downside risks that I have listed, namely the pressures of protectionism, the risk of further increases in the prices of oil and commodities – let us not forget that there are also all other commodities – and also other global threats that could hamper growth in the euro area, but I would not refer particularly to the Italian decision.

Question: I am wondering if the ECB is considering other measures to reduce high money and credit growth, for instance by increasing reserve requirements for the banks. So far this instrument has not been used. Is that a possible option?

Trichet: Thank you for your question. It is a technical question but a very good question. No, it is not an instrument that we have because we are remunerating these reserves. So it is not a present instrument of our monetary policy.

Question: I have two questions. One is related to the strength of the euro. Everybody knows that the euro is at a historically high level, especially against the Japanese yen and against the US dollar as well. But it seems to me that there is not so much pressure against an interest rate hike from the euro zone governments and the euro zone industries. Do you agree with me and if so what is the reason? And the second question is related to the standpoint of the ECB. I do not remember when it was exactly, but you had mentioned that the ECB is in a process of normalisation of interest rates or something like that. Today, are you still in the process of normalisation or is it already finished?

Trichet: I have already responded to the last question and I do not want to bore the journalists here by re-reading what I have already said or by stating it again. Let me only tell you, to sum up, that we are constantly alert and we will do everything that is necessary at any time to ensure price stability and to be credible in the delivery of price stability. That is essential for the prosperity of the euro area as well as a product of our being faithful to our mandate because we have a primary mandate and that mandate is very clear.

On the yen, I have nothing to add to or withdraw from what I already said in Singapore. And on the US dollar, I have already expressed myself.

As regards your question on the pressure from some euro zone governments I have no comment.

Question: The preparations for Slovenia are in the final stages. Are you satisfied or do you expect any difficulties and what would be your message to the Slovene people who are getting the euro in three weeks?

Trichet: First of all, to my knowledge, the preparation has been absolutely excellent. The central bank, the administration and the government had done a great job, a remarkable job. It seems to me that it has been an exemplary cooperation with us in particular and with the other European institutions to pave the way for the best transition possible. As I told you, I will be in Slovenia myself, together with colleagues and other responsible persons from the euro area, and I expect that we will of course have opportunities to deliver messages on this occasion. At this stage, I would say that we are all very happy, joyful as I said, and I think that you can be proud because you did what you wanted to do and you demonstrated that you had met the criteria through hard, successful and fruitful work, so bravo!

Question: I have two questions. The first is on your monetary analysis: you mention sometimes the upside risks to price stability, but you don’t mention financial stability. What are the risks to financial stability, I think of the bond market, emerging market bonds, of private equity, high-leveraged acquisitions, and I also mention the current exchange rates between yen, dollar, and euro. And the second question, I hope you allow it, I will slip into the role of Jean-Claude Juncker, maybe the question is allowed. If he makes a statement in the meeting, ‘Mr Trichet, congratulations you have reached price stability, close and near to 2% in the next year and 2008’, do you think it wise and necessary to make further interest rate hikes and make further monetary restrictions?

Trichet: On the first point, financial stability is one of the responsibilities of central banks. It is something which is extremely important at the level of the euro area. It is a responsibility of the euro system, we pay great attention to it and the Vice-President, in particular, is extraordinarily active in this domain. We have the Financial Stability Forum at a global level, which is also of extreme importance; financial stability is one of the issues that we always examine in the G10, when we are in Basel. So all that I can tell you is that in that domain, we believe that permanent alertness is absolutely essential. Of course, we consider that monetary stability is part of financial stability, it is a necessary condition for financial stability. It is not a sufficient condition per se, because there are permanent changes in the structure of the markets, in the substance of financial instruments, in the imagination and creativity of market participants. What we have been observing over the last years is tremendously stimulating for reflection; we see the hedge funds explosion, we see the derivatives explosion, we see major structural changes in several markets. Let’s say that it is work in progress, and we have to be sure that we can handle the permanent changes that we are observing, and we have to have a view based on a synthesis. That is the reason why in the Financial Stability Forum you have the central banks, the surveillance authorities, both on the banking side, on the insurance side, on the SEC, stock markets side. You also have the governments, the financial institutions and other partners. To conclude on that we have the sentiment at a global level; it is true of course in each particular vast economy like the US or us, or the UK or others, that there is presently some under-appreciation of risks in general. The issue is disputed, you have several schools, but there is a broad agreement that this under-appreciation of risks cannot last forever, and that we have to pave the way for an orderly adjustment of this situation at the global level, which might explain why real rates are low, spreads are low, insurance premia are low, volatility is relatively low, all this in historical terms, of course. As regards your second question, I would only say that Jean-Claude Juncker is a more than excellent president of the Eurogroup and that the Eurogroup is a very important, informal institution. The group has an enormous responsibility given that you have governments that are sharing the same currency, are in a single market with a single currency and are making up a set of 13 economies now, with 315 million people. They share a destiny in common – more, much more than is presently perceived. And so the responsibilities at stake are important and, again, it is important that the group functions well under an excellent chairmanship.

Question: I have a couple of questions: the first one, you have related that the credit for households purchase has peaked and is softening a bit, you are satisfied with the slowdown, and also home prices are slowing in several countries. Are you satisfied, do you think that this is enough, or would you like to see a gradual softening on credit growth, and also on prices? My second question is on international institutions: you said that your view has been vindicated, in respect of your assessment last December. Institutions like the IMF or the OECD are now talking about raising rates in the euro zone to around 4% in 2007 or maybe 2008. Do you think that this time the institutions are right in asking for higher interest rates? Would you say that this is appropriate? And very quickly on the euro, you said in Singapore, if I am not mistaken, that the agreement was that the Japanese currency with the euro should reflect the better fundamentals of the Japanese economy. So far the yen has moved to the other side, are you satisfied or would you like to see a reversal of that movement?

Trichet: I said in the introductory remarks that the two domains where we see an impact of our interest rate increases are, first, on the component analysis of M3: M1 decelerates and is less dynamic, and, second, some credits that are slightly slowing down. There we see an impact, but as I have already said, M3 minus M1 is very dynamic, and there are a number of reasons for that. On the other hand, the credit growth to the non-financial corporate sector in particular is very dynamic, so you have a mutual offsetting, and that explains why M3 itself remains unchanged at the present level. We are working a lot on that, we try to understand exactly what is behind it. As you know, our monetary analysis does not consist in looking at one monetary aggregate and conclude definitively from that. We analyse components and counterparts, work on the dynamics of the aggregates, it is work in progress. As for the IMF, OECD and other international institutions, I do not comment at all on their figures, if any. What I know and said is that these institutions are fully vindicating what we have done before and what we are doing today. Because do not forget that today we increased rates!

As regards the yen, I said I have nothing to add or to withdraw from what I said in Singapore.

Question: Just to come back to February briefly. I could imagine a lot of reasons that the Council would want to keep rates on hold in February, perhaps to signal a slowing pace in rate increase and so on?

Trichet: No, I will say nothing on February, absolutely nothing.

Question: But what I am wondering about: given growth, inflation and monetary aggregates, is there really a policy-rooted reason for keeping rates on hold in February? And related to that, it is a communication issue I have to ask, I understand when you say that monthly data does not steer policy decisions. And that we should even look beyond quarterly volatility for that. What then, and you did not say this today, what then does it mean when Council members say it is data-dependent? Because that would imply that it depends on a specific set of data. I would like clarification of that.

Trichet: I said myself it is data–dependent. Not only data of course: data plus deep analysis plus judgement are making up our decision. We are always “conditional” but that does not mean that we do not extract the trend from the data. For instance, when we increased rates in December last year, the data of the last quarter of last year were not that good, but we had the sentiment, which proved to be pertinent and well-founded, that the trend which was underlying was relatively dynamic. It appeared to be even more dynamic than all observers would think. Again, there is no contradiction. And I fully confirm we are conditional, we are depending on data, deep analysis and judgement. But we extract the medium-term trend.

Question: Mr Trichet, we are experiencing strong growth in the euro zone. How much, in your judgement, is just cyclical and how much do you think is due to structural reforms or other things? We see changes in growth trends. Do you think the upward potential in the euro zone has increased? And would that have some consequences, for example, for the reference value of the growth rate of M3?

Trichet: At this stage our sentiment is that it is too early to say that we see sufficient accumulation of structural reforms to conclude that we have a significant change in the growth potential of Europe. I know that there are more optimistic schools that are thinking that we can see now the results of previous structural reforms and I do not dispute that it could be argued. But we have only very few data that are showing an increase in labour productivity progress. Let us see and wait a little bit to analyse that as closely as possible, see what is cyclical and what is structural in the recent evolutions. At this stage, I would say we do not change our sentiment on the underlying potential. And when I say that we are hovering over potential, it is the same potential, we do not change it. But we expect of course that the active pursuit of structural reforms, if they continue to be implemented as actively as possible, will permit us to have a better position as regards labour productivity and then, by way of consequence, as regards the growth potential.

Question: Just a question about the staff projections, because this was the reason for our rendez-vous in December, as you told us, and I sort of feel like we got Coca-Cola instead of Champagne here at this rendez-vous. I know it is a trivial question to ask how we should best weigh the projections. One could play a lot of number games about whether 2% falls exactly in the middle of your projection for 2007 and the meaning of that for 2008. You also seem to have gone out of your way to sort of talk down their importance for your projections. So, could you give us a better sense of how we should weigh the use of the projections in your policy-making for the future? And then just a quick question to follow up on your question on labour productivity. There is one school of thought out there that suggests that you can have a private sector-driven productivity increase, that it does not necessarily have to be policy-driven. Do you see signs of that in the euro zone?

Trichet: On the projections, you know it is a question which has a clear-cut response. It is important that every quarter we have projections that are made by staff under their own responsibility, either by our own staff at the ECB or by the full Eurosystem staff. There is a lot of information in such projections, which capture the modelling by our staff, the understanding of the interplay and interaction between all variables, and an element of judgement by staff. It is their responsibility, we do not underwrite these projections. It remains, of course, that it is done by our own staff. It has the credibility and the legitimacy of our own staff in the eyes of external observers. But our monetary policy concept is not an inflation-targeting concept where it is the monetary policy council itself that makes, after a lot of good work done by staff, the monetary policy projections. So again, there is a difference of nature which is very well-known. We take these Eurosystem staff projections as an important information, we consider it, then we make our own judgement and we take our decision.

As regards labour productivity, we believe that the labour productivity increases that we are aiming for depend on the dynamism of the private sector and on a number of phenomena that are very complex. We saw this in the United States, because the significant increase in labour productivity progress materialised a long time after the piling-up of investment in communication and computer technology. At the time you had what the great economist Solow qualified as a paradox. The Solow paradox was: we have a lot of investment in IT, but we do not see the productivity improvement. So why is all this investment being made if it does not produce the productivity improvement it is supposed to achieve? Then, after a long period of maturation, in 1995-96 we saw the end of the paradox, because we could see a significant change in labour productivity increases. That being said, we strongly believe that a very important factor in making productivity progress materialise is the flexibility of the economy. The flexibility of markets, of all markets, goods and services, flexibility of the labour market, and overall flexibility of the economy, including full integration of the financial services. And that is the reason why we are so determined to take any occasion to say: let’s embark resolutely on structural reform, let’s complete the Single Market, let’s have an integration of financial markets which would be as complete as possible, let’s let the workers of Slovenia go to the rest of the euro area…

Question: The first thing was that this morning I was somewhat surprised to note that there had been a report from Luxembourg overnight, in which Mr Juncker was quoted as saying that the ECB would indeed raise interest rates to 3.5%. And I was wondering whether this sort of comment was an example of the closer cooperation between the Eurogroup that you are looking forward to? And then second, slightly more seriously, I am looking again at this word “accommodative”, and it is a word that economists have mentioned to me a number of times as implying some concept of neutral interest rates, and that at some point ECB rates will be at a level that is no longer “accommodative”, they might even be tightened at one stage. I wondered whether there is any consensus, either in your own mind or in the Governing Council generally, as to how close the euro zone is to a level of interest rates that is no longer accommodative.

Trichet: On the first question, I must say I did not see the message that you mentioned. I will look carefully at this message…

As regards the so-called neutral rate, we do not guide our policy on the basis of neutral rates, we do not guide our policy on the basis of the output gap, we do not guide our policy on the basis of the NAIRU. It is not the way we operate. We embark on a large array of analyses and we do not exclude any concept but we do not take our decision on that basis. We take our decision on the basis of our risk analysis of threats to price stability on the medium run, and we decide accordingly to counter those risks in order to deliver price stability and be credible in this delivery over time on the medium, long and very long term.

Thank you very much.

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