Introductory statement with Q&A

Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB, and
Gertrude Tumpel-Gugerell, Member of the ECB’s Executive Board
(for the Q&A on TARGET2-Securities),
Frankfurt am Main, 8 March 2007

Jump to the transcript of the questions and answers

Q&A on TARGET2-Securities

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 Mr Steinbrück, President of the ECOFIN Council, and Commissioner Almunia.

At today’s meeting, we decided to raise the key ECB interest rates by 25 basis points. This decision was taken in view of 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 fostering sustainable economic growth and job creation in the euro area. After today’s increase, given the favourable economic environment, our monetary policy continues to be on the accommodative side, with the key ECB interest rates moderate, money and credit growth vigorous, 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 fourth quarter of 2006 was 0.9%, which was above previous expectations. Our current assessment is that the quarterly profile of real GDP growth is likely to be somewhat smoother in response to the impact of indirect tax changes in one large euro area country than had originally been anticipated. The strength of real GDP growth in the fourth quarter is thus indicative of ongoing robust growth in the euro area. Both domestic demand and exports made significant contributions to real GDP growth, confirming the sustained and broad-based nature of the current expansion. The information on economic activity from various confidence surveys and indicator-based estimates supports the assessment that robust economic growth has continued into 2007.

Looking ahead, the medium-term outlook for economic activity remains favourable. The conditions are in place for the euro area economy to grow solidly. As regards the external environment, global economic growth has become more balanced across regions and, while moderating somewhat, remains robust, supported in part by lower oil prices. External conditions thus provide support for euro area exports. Domestic demand in the euro area is also 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 corporate 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 ECB staff macroeconomic projections. The projections foresee average annual real GDP growth in a range between 2.1% and 2.9% in 2007 and between 1.9% and 2.9% in 2008. In comparison with the December Eurosystem staff projections, the ranges projected for real GDP growth in 2007 and 2008 have been revised upwards, largely reflecting the strength of GDP growth in the second half of 2006 and the lower energy prices, which, if sustained, would have a positive impact on real disposable income.

In the Governing Council’s view, the risks surrounding this favourable outlook for economic growth are broadly balanced over the shorter term. At longer horizons, risks lie mainly on the downside. The main risks relate to the possibility of a renewed increase in oil prices, fears of a rise in protectionist pressures and concerns about possible disorderly developments owing to global imbalances.

As regards price developments, according to Eurostat’s flash estimate, annual HICP inflation was 1.8% in February 2007, unchanged from January 2007. The fall in headline inflation rates since the summer of 2006 has been predominantly due to lower energy prices. Looking ahead, last year’s volatility in energy prices will lead to significant base effects, affecting the profile of annual inflation rates this year. On the basis of the current level of oil prices and oil price futures, annual inflation rates are likely to fall during the spring and summer before rising again towards the end of the year and then most likely hovering again at around 2%.

The new ECB staff macroeconomic projections foresee annual HICP inflation averaging between 1.5% and 2.1% in 2007 and between 1.4% and 2.6% in 2008. Compared with the December 2006 Eurosystem staff projections, the upper bound of the range projected for inflation in 2007 is somewhat lower, largely reflecting the fall in oil prices. By contrast, the projected range for inflation in 2008 is slightly higher, largely on account of the anticipated stronger economic growth, which could exert more intense pressure on factor utilisation and factor costs. 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 future short and long-term interest rates as well as for oil and non-energy commodity prices.

At the policy-relevant medium-term horizon, the outlook for price developments remains, in the Governing Council’s view, subject to upside risks. These relate to 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, stronger than currently expected wage developments would pose significant upward risks to price stability, not least in view of the favourable momentum of real GDP growth observed over the past few quarters. It is therefore crucial that the social partners continue to meet their responsibilities. In this context, wage agreements should take into account price competitiveness positions, the still high level of unemployment in many economies, as well as productivity developments. The Governing Council will monitor the upcoming wage negotiations in the euro area countries very carefully.

The monetary analysis confirms the prevailing upside risks to price stability at medium to longer horizons. Annual M3 growth was unchanged at 9.8% in January, thus remaining at the highest rate observed since the introduction of the euro.

At 10.6%, the annual growth rate of loans to the private sector also remained strong in January. Strong growth in private sector credit reflects the continuation of the upward trend in the growth of borrowing by non-financial corporations seen since mid-2004. Meanwhile, in the context of rising mortgage rates throughout the euro area and a slowing increase in house prices in some regions, the growth of household borrowing has shown some further signs of moderation in recent months, albeit remaining at still high rates.

Taking the appropriate medium to longer-term perspective for assessing trends in money and credit growth, the latest developments confirm the continuation of a persistent upward trend in the underlying rate of monetary expansion. Following several years of robust monetary growth, the liquidity situation in the euro area is ample by all plausible measures.

The robust expansion of money and credit reflects the accommodative monetary policy stance over a prolonged period of time and the strengthening of economic activity in the euro area. In an environment of ample liquidity, it points 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 a solid expansion in economic activity and continued strong property market developments in many parts of the euro area.

To sum up, in assessing price trends it is important to look through any short-term volatility in inflation rates. The relevant horizon for monetary policy is the medium term. Risks to the medium-term outlook for price stability remain on the upside, relating in particular to stronger than currently expected wage developments in a context of robust ongoing growth in employment and economic activity. Given the vigorous monetary and credit growth in an environment of already 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 longer term. The Governing Council will continue to monitor very closely all developments so that risks to price stability over the medium term do not materialise. This will support the solid anchoring of medium to longer-term inflation expectations in the euro area at levels consistent with price stability. Therefore, looking ahead, acting in a firm and timely manner to ensure price stability in the medium term remains warranted.

As regards fiscal policy, there is growing confirmation that the favourable cyclical developments led to better than expected budgetary outcomes in 2006 in a number of countries and in the euro area as a whole. However, updated stability programmes foresee only moderate progress with fiscal consolidation in the coming years. In this respect, some countries’ consolidation targets appear not fully in line with the requirements of the revised Stability and Growth Pact. Risks stem in particular from a lack of well-specified and credible measures, notably on the expenditure side of budgets.

Given the favourable economic environment, the Governing Council considers it essential that pro-cyclical policies are avoided in all euro area countries and that sufficiently ambitious fiscal consolidation efforts are made in the countries with remaining budgetary imbalances and/or high public debt outstanding. The opportunity should be seized to attain sound public finances within the programme horizons and by 2010 at the latest in all euro area countries. Fiscal consolidation that is part of a medium-term-oriented, credible and expenditure-based reform strategy would support longer-term output and employment growth and help prepare for the fiscal impact of population ageing.

As regards structural reforms, the European Council will discuss the current state of, and future progress in, the implementation of the Lisbon strategy at its meeting which starts today. It is positive to see that reforms and moderate increases in labour costs have helped to bring about higher employment and lower unemployment in recent years, although progress has been uneven across EU Member States. We encourage action to create incentives and structures which support the integration of all groups into the labour market, including those for which employment rates have been relatively low in the past. Reforms of tax and benefit systems should enhance incentives to work and to create jobs. Reducing labour taxes (including social security contributions) and thereby labour costs would support employment, while setting minimum wages at a level not in line with productivity reduces the employment chances of less skilled workers. We fully support policies to improve education and the adoption of technological innovations in order to raise productivity growth. Coupled with initiatives to create a business-friendly environment, such policies would broaden the opportunities of all to participate in an enhanced growth process.

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, and Gertrude Tumpel-Gugerell, Member of the ECB’s Executive Board

Question: Just a routine question about whether today’s decision to raise rates was unanimous, and then, secondly, whether there was any consensus about the direction of ECB rates going further forward, because we’ve got a new set of ECB projections and, as you said yourself, over the policy-relevant horizon inflation is seen at 2%, and so I was wondering if that means that there is now a clear consensus that European Central Bank interest rates will need to rise further if the economy develops as is foreseen in the staff forecasts.

Trichet: On the first question, I would say that we were unanimous in taking the decision to increase rates today. On the second question, in the introductory remarks I said very clearly that, looking ahead, acting in a firm and timely manner is warranted in order to ensure price stability. I said that we will monitor all developments very carefully so that risks to price stability do not materialise. You might also have noted that I said that we continue to be on the accommodative side and that interest rates are moderate. Last time I said that they were low. There is a nuance there which speaks for itself. In any case, you know that we are constantly alert. Credible alertness is the essence of what we are doing, because we know that is the reason why our inflationary expectations are very solidly anchored, as everybody can see. So, market participants, investors and savers – all over the world, as well as in Europe – know that we will do everything that is necessary to continue delivering price stability and to be credible in that delivery – and the credibility of that delivery is crystallised in inflation expectations.

Question: You said that monetary policy is on the accommodative side. Could you define that a little bit? Does that actually mean that at this particular point in time the economy still needs support from interest rates? And secondly, rates are moderate, signalling that they are probably edging towards more neutral levels, yet at the same time you are highlighting the risks to price stability. Would you consider raising rates to a level that might be slightly restrictive for growth if the inflation outlook were to warrant it?

Trichet: First of all, what I said speaks for itself. Second, our approach to monetary policy does not operate through some kind of mechanistic approach relying on a concept like neutral rate, output gap or NAIRU. We look, as you know, at absolutely all information, all modelling and all concepts. What we do is, we assess the situation, we make a judgement on the inflationary risks and we do exactly what we believe to be correct in order to counter those risks. We have to permanently make judgements on the inflationary risks in the medium term and we will do whatever we consider necessary to counter inflationary risks. At the present moment, we consider that we continue to be on the accommodative side and that interest rates are moderate.

Question: Mr Trichet, clearly headline inflation is coming down but you have mentioned two other aspects. One is monetary growth – we still see strong credit demand but is it at least heading in the direction where you feel a bit more comfortable about it? And, secondly, you mentioned the present wage demands that are on the horizon, especially in Germany. Is there any level where you say our monetary or inflation alarm bells would be ringing and are you prepared to tell us where the levels would be?

Trichet: On you last question, no, I am not ready to tell you.

On your question about the credit side, we still have very dynamic growth of M3, as we had before. As regards M1 within M3, we see the continuation of a relative moderation, but this is offset by the dynamism of M3 minus M1. So, all things taken into account, we have very high growth of M3. As regards the counterparts, I will only draw your attention to the fact that loans to non-financial corporations are still extraordinarily dynamic at 13.2%, which is even a little bit higher than a month ago. So, we continue to see very strong dynamism. It is in the area of loans to households where we see a slight moderation.

As regards your question on wages, you have noted that the sentiment of the Governing Council is that we have to be particularly attentive in this area. Wages are very important for us, as always, because of the risk of second-round effects and, also, because we have to take into account different situations. The situations in the various economies of the euro area are not the same, the present levels of cost competitiveness on the basis of unit labour costs are not the same, the levels of unemployment are not the same and the levels of labour productivity increases are also not the same, not only at the level of the various economies but also at the level of the various sectors. All these parameters have to be taken into account in order to work out, through responsible social partners, an appropriate wage and salary formation that would permit continued reduction of unemployment where mass unemployment is still observed – as we explicitly mentioned – and would be fully in line with what would be appropriate in terms of overall euro area monetary stability.

Again, I have already stated regarding your last question that what I said speaks for itself.

Question: Two questions, Mr Trichet. If we were to write that today the ECB began to prepare financial markets and indeed the citizens of the euro area for a monetary policy stance in the future that might be restrictive, would that be a fair interpretation of the message you are trying to convey?

And my second question is that when we were all in Madrid last year and the financial markets were doing their gymnastics then, you stressed that an appropriate assessment of risk was not the worst thing in the world and that perhaps some valuable lessons were being learnt. We have a similar situation now, albeit with different kinds of contours, and I wanted to see if you might be of a similar sentiment today?

Trichet: I am not sure that I pick up all the subtlety of the second part of your question.

Question: In Madrid, you basically told us that financial markets were experiencing some turbulence – some dropping – and this reflects a realistic re-pricing of risk and perhaps that is the same thing going on now?

Trichet: Regarding the first question, if I was preparing the market for restrictive moves on our part, I would have said that. I didn’t say that. What I said, again, speaks for itself. It clearly says that we will continue to monitor developments very closely and it also says very clearly that we are inflexible in terms of maintaining credibility in the delivery of price stability. Not only because it is our mandate, not only because it is what the people of Europe demand of us, but also because it is the best way to ensure the sustainability of the present level of growth and job creation. As I said on behalf of the Governing Council, what we do today, what we did yesterday and what we will do tomorrow is to ensure the sustainability of growth and job creation. If we were not in a position to continue to be credible in the delivery of price stability we would hamper growth, we would not contribute to it.

Concerning the recent events that we have observed, it is true that the Governing Council of the ECB widely felt – and I would say that it was very largely a consensus, a consensus that I myself have expressed on a number of occasions as the chairman of the G10 group of central bank governors – that we were perhaps in a phase in global finance where risks in general were not necessarily assessed at their real price. This was materialising in the levels of spreads and risk premia and in a number of other considerations, perhaps including low real interest rates. This was our diagnosis. What we have been observing for a number of days has been a certain re-assessment of risks on the upside and across the board and a higher level of volatility. This is a phenomenon that we are following very carefully. It has positive aspects, obviously. It represents a more realistic appreciation of risks in general. It must also of course be monitored very carefully because what is of the essence in our view is that such corrections are orderly and smooth and are not abrupt. All that we do is aimed at having moves that are not abrupt but orderly. Let us not forget that all this takes place in the environment of a global economy that is extraordinarily favourable, as we have already noted. There is a global consensus that world economic growth will continue to be at a very high level, around 5%. This has been the case in recent years, and all the indications that we have – and again I am voicing a global consensus here – are that it continues to be very favourable. In the context of this favourable environment, orderly phenomena of the type I have mentioned could be observed in the period to come. That said, I am not making any prognosis or projections myself and I would say, again, that we have to preserve financial stability in all circumstances, as this is one of our major responsibilities as a central bank.

Question: To follow up on what you just said. I just want to be clear: would you characterise what happened last week and the ongoing market turbulence as an abrupt movement and therefore as an appropriate reassessment of risk?

Secondly, you have said that the move from low to moderate and also from “accommodative” to “on the accommodative side” speaks for itself – you’ll have to forgive me if it is not speaking to me – if I took from that that the Governing Council had a consensus that interest rates might be reaching a peak, which is what it does say to me, would I be wrong in that interpretation?

Thirdly, we had unions yesterday saying that the ECB’s rate rises and any further rate rises would hamper the development of wage growth – you have said that that is a priority for you. Their claim seems to be that it would dampen consumption growth, which has long been the euro zone’s weak spot. Do you have a response to that?

Trichet: On the first question, what happened was, in some respects, very rapid. I would not say abrupt, but very rapid. You had, in particular, some parameters that were moved in one day, whereas in the previous episode – when you had some kind of re-appreciation of risks and volatility in 2006 – the same levels of corrections took much more time. So, clearly, it tells us that we have to monitor, extremely carefully, what happens. Again, some re-appreciation of risks is welcome; abrupt moves are not welcome. And, again, let us not forget that all this takes place within the framework of a very favourable situation of the global economy. I would echo, on that point, what was said by the US Secretary of the Treasury and by Ben Bernanke, recently.

As regards whether or not we are at a peak, I did not say we were at a peak.

Concerning your third question, I have already said that by caring for credibility and the delivery of price stability we permit growth to be sustainable. Again, you know that we are the master of the short-term interest rates. The other interest rates – medium and long-term market interest rates – incorporate inflation expectations. If, by any means, we are not credible, higher inflation expectations are immediately incorporated in medium and long-term rates, to the extent that this would reflect our lack of credibility, which is not favourable to long-term sustainable growth and job creation. So, again, we see absolutely no contradiction between price stability and sustainable growth.

Question: I have a question regarding your yardstick for assessing money growth, the reference value. It has been fixed at 4.5% for eight years now and a number of knowledgeable people – even within the ECB and the Eurosystem – have concluded that the assumptions do not hold anymore. Might that be a reason for the Governing Council to reassess this value or has it maybe already become defunct and we just did not notice?

Trichet: You give me the opportunity to mention the fact that it is not correct that the Banque de France has said that they would not be in agreement with this reference value. This is not true. There was a research paper with the usual disclaimer saying precisely that it was not the position of the Banque de France. So, I mention that, en passant, because I read, very carefully, an article this morning.

Question: It was mentioned in the article that this disclaimer was on there, but also that Mr Noyer has presented these results and referred to them as research of the Banque de France. So that gave the impression that he does not regard it as something that is very far away from what he thinks.

Trichet: Again, it is not true that the Banque de France is behind this so-called criticism. Now, I do not want to add anything to what I have already said on the reference value. You remember that we had a communication when we established the monetary strategy, even before the setting-up of the euro, in 1998. And we had a clarification in 2003. I stick to that, personally. I would not suggest that we would change anything at this stage. Of course the reference value is not an intermediate target, everybody knows that. The reference value is not an intermediate target that we would change regularly every year. We said that in the clarification. We are, of course, as you know – because we organised a colloquium – working a lot on a monetary pillar which has served us very well, as it served very well the central banks before the setting-up of the euro. I was myself the Governor of a central bank which had a monetary pillar and it served us very well because we came after an extremely stimulating period of time, at the highest level of credibility in Europe, as the Bundesbank was and a number of other central banks were. One of the questions I would suggest that you ask yourself is, how is it the case that this monetary pillar served the central banks so well that they delivered price stability and that they were credible in the delivery of price stability? I said myself, on the occasion of the colloquium, to what extent I was attached to the monetary pillar. The Vice-President did that in a very eloquent fashion. Jürgen Stark did that in a very eloquent fashion and I think that this is the response that I will give you.

Vice-President: It served us very well

Trichet: The Vice-President said that it served us very well

Question: If you look at the risks to the economic outlook now and a month ago, would you say that risks have increased, especially if you take into consideration what is going on in the United States especially in the subprime real estate markets, and also again looking at what is happening in the global markets?

And my second question would be, if interest rates were to be increased once more by 25 basis points, would you characterise the level we would reach then as still accommodative? And a last question, if markets were to price in another rate hike after that press conference, which is very likely, would you be happy with such an outcome?

Trichet: Let me stick to what I have said already. It is not new: since we have been responsible for the currency for now 317 million people – with Slovenia – we have never pre-committed to any kind of medium-term moves. We have never said in advance that we will increase rates every two months, every three months or every four months. We have had no ex ante concept, but we have always said that at any time we will do what is necessary to counter inflationary risks. This was pretty well understood by the market, it was pretty well understood by investors and savers. When we extract information from the financial markets, we have a level of break-even for inflation expectations that is in line with our definition of price stability when you deduct the appropriate risk premia, and it is the same with the surveys that are done. “In line” meaning below or close to 2%, and I won’t clarify more than that. Below and close to 2% is our definition of price stability. So, we are well understood and we are happy with the way we proceed. We believe that we are very transparent. I always make that point known. We display our definition, and we will be judged on the basis of this yardstick. We will continue to operate the way we have done, and it has served us pretty well up to now. But again, there is nothing new in what I have just said. I repeat what I have already said and what has always been understood.

On the US economy – I agree of course that it is an important parameter. As I have already said several times when I have had this question, I consider that the diagnosis of the Federal Reserve is a pertinent one, and I would confirm that the present diagnosis of the Federal Reserve is a pertinent one in our eyes. We don’t pretend that we have a better analysis than the Federal Reserve.

Question: You said that on the market there has been a realistic re-appreciation of the risks. I wonder if you will say that on the exchange rate of the euro against the yen there has been a realistic re-appreciation of the risks and particularly on the carry trade?

Trichet: You know to what extent I consider verbal discipline as absolutely of the essence as regards exchange markets. And so I will refer to what we said after the G7 meeting in Essen. We said – and that is something which I consider has of course been noted by markets in general – that we re-affirmed that exchange rates should reflect economic fundamentals. We also – including myself – were referring to what Minister Omi and Governor Fukui had said; I said that I had noted myself that they said “that they believed that the Japanese economy is on a sustainable recovery path and that the exchange rates should reflect these economic fundamentals”. It was what they had said themselves in commenting on the communiqué of the G7 and I referred to what they had said. I will stick to that to respond to your question.

Question: A two-part question. First one, was there a discussion of a 50-basis point hike at the meeting today? Secondly, your comment that rates are moderate rather than low is being interpreted as meaning that we are near a peak or near a neutral rate, even though you won't use these phrases. With that in mind, is it going to be harder now for the ECB to reach consensus? Are the next few meetings going to be more difficult?

Trichet: First of all, there has always been discussion among us on the assets and liabilities of all possibilities but there was no discussion of any 50-basis point interest rate increase. So the response to your question is “no”.

As regards the overall situation, I have responded to a large number of questions already, as you know. I think the words I have used speak for themselves. Moderate doesn't mean appropriate, moderate doesn't mean equal to something which would not be moderate, and so forth. So take moderate at its face value. Interest rates are, in our view, moderate.

Question: Have we reached what we would interpret as rates are near a peak or near neutral?

Trichet: I said no.

Question: Will consensus be more difficult in future meetings as we near this peak?

Trichet: No. You know what counts is the college, the Governing Council. I would draw your attention to the fact that, from time to time, I read analyses that do not at all reflect our own mood. We exchange all possible views. We have a totally frank and open way of discussing. None of us is “blocked” ex ante. We know that the essence of a college like ours is precisely that you exchange views, you compare notes, you compare analyses and you draw out what is the collegial wisdom. I have a profound trust in collegial wisdom. I do not expect that we will have any difficulties at any future meetings. We will reflect very profoundly on the situation. We will continue to be constantly alert. We know what our duty is, and we know that we have to work out a correct assessment of a situation which is, and always is, very complex. I do not foresee any major difficulty to be surmounted in the future. I am absolutely confident.

Question: I have a question about the US economy. You said it is an important parameter and that you trust the diagnosis of the Fed, which is a pertinent one. Do you consider Mr Greenspan to still be a member of the Federal Reserve, because he said, in fact, that the US economy is going into recession? Is this, in your view, pertinent?

Trichet: He did not say that. If I read the report correctly, he referred to a probability. But I do not consider Alan to still be a member of the Fed. I think that legally it is not the case! So I stick to what I said. I trust the Fed.

Question: You are talking about there having been a frank discussion and collegial wisdom on the Board of the Governing Council, and I was wondering if there had been any occasion for some collegial wisdom for the benefit of Mr Wellink from the Dutch Central Bank, because recently he has been expressing a degree of concern about investors saying that ABN Amro should consider a take-over or being broken up, or something like that. And I was wondering, really, whether you are confident that Mr Wellink will prioritise the European interest in free financial markets ahead of any Dutch national interest in keeping a national banking champion.

Trichet: We did not discuss this question at all and the Governing Council has full confidence in Nout Wellink. Nout holds a position which he expressed considering his own responsibility at the banking surveillance authority of the Netherlands. I have full confidence in Nout and we will see that this confidence is certainly well-founded.

Question: I have two questions, first on the economic analysis and second on the monetary analysis. In the projections, you have a growth rate for this year of 2.5% on average and for next year 2.4%. What is the potential growth rate you have underlying in your policy? Last year it was quoted as 1.9 % – can we have a higher growth rate now thanks to structural reforms or is it an indication of the next interest rate hikes? The second question: we have world-wide liquidity-driven asset price bubbles, especially in emerging markets. Can you see in your monetary analysis this risk to financial stability coming from the carry trades and so on – we are connected world-wide with this risk?

Trichet: On the first point, we publish ranges; we do not publish mid-points, and you refer to mid-points. It is your own responsibility to extract a mid-point. But we publish ranges and the ranges also capture the uncertainty which characterises all projections. Second, these are not our own projections but the staff projections. They are an important input in our considerations, but they are not the only input and, in any case, we do not underwrite the staff projections. Let me also say that at this stage – at this very moment, speaking on behalf of the Governing Council – we do not consider that we have either sufficient or sufficiently convincing elements to change our previous assessment of growth potential, which is based largely but not exclusively on productivity considerations. We would at this stage not suggest that we consider our growth potential for the euro area to have changed significantly upwards. We expect, of course, in the medium and long run that, if we continue to be steady on structural reforms, we will observe – progressively – something of that sort, but so far, we do not consider it to be documented or substantiated and that we could retain it.

As regards your consideration on financial stability at a global level, I have already mentioned that we considered that there were a number of elements at the level of global finance that could progressively be corrected and, in particular, the under-pricing of certain risks I have mentioned. But these corrections should be orderly and not abrupt, which is a permanent concern for those who are responsible for financial stability. I trust the Governing Council of the ECB and other colleagues the world over to take the appropriate decisions, as regards their own responsibility – which is what we all have been doing over the recent period – to maintain the appropriate financial stability to the extent that our monetary policy has an impact on financial stability.

That was the last question on the part of the press conference on monetary policy. We will now turn to the part on our decision on TARGET2 Securities.

TARGET2 Securities

The Governing Council of the ECB has decided today to move to the next phase in the TARGET2-Securities project, or as we also call it: "T2S". We are publishing a press release and the documentation we have considered. There are two main reasons behind our decision. First, we are convinced that the project is feasible. Second, we believe that T2S can be extremely positive for achieving financial integration in the field of securities settlement. This is good news for investors and issuers as it should help to introduce competition across national borders and to reduce settlement fees.

This is not a final go-decision. Like in other projects of this kind, at the end of each phase, the decision will be taken whether to move to the next phase. We are now entering a phase called “definition of the user requirements”. In non-technical terms, this is equivalent to the plans an architect would make before building a house. The intention is to draw as much as possible on the market expertise to draw these plans and to have them finalised by the end of this year. We would then hold a public consultation on these user requirements before deciding whether to move to the next phase by early 2008.

The Governing Council has also decided on the “piece of land” where the “house” would be built, if I may express it in this way. T2S would be implemented on the TARGET2 platform for real-time gross payments in central bank money. We have taken this decision because we believe that it will allow us to exploit synergies and to deliver the service at a lower cost: up to 20% when compared with building T2S from scratch.

The banking industry has indicated to us their “strong support” for us to proceed with this project. European public authorities (ECOFIN, the Parliament, the Commission) have also appreciated that we are undertaking this project. The finalisation of the documents benefited from very useful interactions with CSDs, market participants and public authorities. We have sometimes revised our views as a result. We will continue working in a very open manner trying to make the best out of the valuable knowledge and expertise that exists in the marketplace.

Questions and answers on the TARGET2-Securities

Question:I have a quick question. Did I hear correctly you saying that you were going to launch Target2 Securities on the Target2 platform? Does that also mean that the current operators, i.e. the three large central banks: the Bundesbank, the Banque de France and, I think, the Banca d’Italia – will operate this as well? Am I correct in assuming that?

Trichet: I would say that they would, certainly, because the platform itself would be the land, as I said, on which we will construct T2S. We will reflect, of course, on the precise governance. Yes, it means that the new system would be based upon exactly the same platform and the same central banks, but I would not say only the three. Gertrude, could you be more precise?

Tumpel-Gugerell: The development team has been joined by the Banco de España. There are four central banks which are ready to develop the platform.

Question: Do you not envisage that there might be some criticism that it did not go out to public tender? And while you may say that there may be additional savings of something like 20% if the current Target2 operators operate this and if it is operated on that platform, do you not envisage that there might be a further hold-up by people trying to challenge that assumption and people coming in saying that they could have provided – say – 50% savings or something like that.

Tumpel-Gugerell: We are in a much earlier phase of this project. We are not yet in the development phase, we are in the phase where we have to define the scope of the project and the content of the project, and only then the development will start. We have now offered the feasibility study to the public, and you can see how we have derived the prices, and we think that we can offer competitive prices.

Trichet: Let me also mention the following, because it was said by us to ECOFIN in particular and noted by ECOFIN in the Council conclusions. They noted that the scope of the T2S project is restricted only to the settlement layer of the post-trading activity regarding securities settled in central bank money and that we do not involve custody services, we do not involve asset servicing, we do not involve corporate actions and all other activities which are and remain separate economic activities performed by the CSDs. We are clear on that

Question: Just a question first about the nature of the public consultation. Is the aim of this public consultation really to get detailed specifics about what system users want, or is it rather broader than that? Is it possible that, if there are strong objections from incumbents or banks about the principle of the project, the project as a whole could be scrapped as a result of this public consultation? And then a second question: has there been any report done by independent bodies or independent consultants not linked to the ECB or to any specific market players at the moment which has established that there has been a big enough market failure within the euro zone’s share settlement system, that there needs to be some sort of state intervention of the sort now being done by the European Central Bank?

Trichet: Gertrude, would you like to respond ?

Tumpel-Gugerell: Yes, on the second point – on the issue of market failure: today we have no cross-border market for securities settlement. This is stated by the Commission and this can also be seen in a Commission report. Therefore we think that our facility would open the market to competition – would increase competition – and this seems to be a reason to offer these services.

And on the point of consultancy services or independent assessment: the Commission has asked for a number of studies, and there are a number of private sector studies on the issue of lack of competition in these post-trading services.

Question: And the question of the nature of the public consultation: whether that is just looking for details or whether it could lead to a whole re-think of the project?

Tumpel-Gugerell: We have come to the conclusion that the project is feasible. We have had a number of contacts with market participants over the past five months, as you are well aware. We had intensive debates. So far the business case has not been challenged, and the task of the next few months is to go into deeper detail.

Trichet: I will also say that I did not see the reflection in the broader media of what was said by the Council itself. It is important to see exactly what was said. The Council recalls that the clearing and settlement of securities transactions is a key area for financial integration in the European Union, where substantial progress needs to be achieved. Second, it welcomes the fact that the Eurosystem shares this aim and has, to this effect, undertaken work on the Target2 Securities project with a view to providing a common settlement engine capable of settling securities in central bank money in euro, and it welcomes the information provided by the ECB on the functioning of T2S through published material and consultations with market participants. It refers to what we have done already. It welcomes, too, the Eurosystem’s intention to take a final decision on the launch of T2S after consideration of a number of issues and completion of feasibility study. Then I have to say that it is not the final decision, as we have said very clearly today that we will incorporate all remarks which are made before we take our decision to launch, which will be taken at the beginning of next year. We are totally open, we are totally transparent, and we firmly believe that something has to be done and that the present situation is not – as Gertrude said – optimal, neither from the competition standpoint nor from the financial integration standpoint, which is very important for us as well as for the Council and the Commission.

Question: You have to forgive me, but hasn’t there been a certain amount of criticism that, despite your claims that the system will promote competition, it will actually amount to a monopoly run by the ECB? Secondly, do you anticipate that competitors will arise in response to this system from the ECB? Thirdly, was Minister Steinbrück there today to discuss this system? And finally, how do you respond to criticisms of mission creep leveraged at the ECB because this does not fall within your monetary policy framework, as far as I understand it, but maybe I am wrong?

Trichet: I will respond to the question on Mr Steinbrück and Gertrude will respond to the other questions. If I remember correctly, Minister Steinbrück went out before we re-discussed this matter, but Minister Steinbrück was present at the ECOFIN Council, as the chair of ECOFIN, and I was also present myself. So, he examined this project on the basis of what we gave to ECOFIN. He was the chair when they drafted the Council conclusions which I quoted just a moment ago.

Tumpel-Gugerell: On the monopoly issue, central bank money is a product which can be offered by central banks only, but the possibility of providing the necessary securities for settlement will remain open in the future, because the T2S system will not be mandatory. This has been stated several times already. There is an alternative second channel to get liquidity from market participants, and that is commercial bank money. So, there is perfect competition between two different channels and this would also be the case in the future. Where we do not have competition at the moment is cross-border settlement. And the purpose of the system and the platform is to make cross-border settlement as cheap and efficient as domestic settlement.

Regarding the mission creep, most European central banks have performed settlement services in the past, or are still doing so today. Both the Fed and the Bank of Japan offer settlement services as well, so it is not something which is separate from central banking. It is also in line with the Treaty that the European Central Bank may provide facilities in this context.

Trichet: That concludes our press conference today. All the documents will be circulated: the press release on TARGET2 Securities and also the press release on the ECB’s Annual Accounts. Thank you very much indeed for your attention.

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