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Introductory statement with Q&A

Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB
Vienna, 4 October 2007

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 here in Vienna. I would like to thank Governor Liebscher for his kind hospitality and to express our special gratitude to his staff for the excellent organisation of today’s meeting of the Governing Council.

Let me now report on the outcome of our meeting, which was also attended by Commissioner Almunia.

On the basis of our regular economic and monetary analyses, we decided at today’s meeting to leave the key ECB interest rates unchanged. The information that has become available since our previous meeting has confirmed that the outlook for price stability over the medium term is subject to upside risks. Against this background, and with money and credit growth vigorous in the euro area, our monetary policy stands ready to counter upside risks to price stability, as required by our primary objective. The fundamentals of the euro area economy support a favourable medium-term outlook for economic activity. In particular, corporate earnings and profitability have been sustained, employment growth has been robust and unemployment has fallen. However, given the financial market volatility and the reappraisal of risk seen in recent weeks, this assessment is surrounded by heightened uncertainty. In view of the only limited range of new economic data that have become available since our meeting in early September, particular caution needs to be exercised when assessing any potential impact of the financial market developments on the real economy. Hence, it remains necessary to gather additional information and examine new data before drawing further conclusions for monetary policy in the context of our medium-term-oriented monetary policy strategy focused on maintaining price stability. Accordingly, the Governing Council will monitor very closely all developments. On the basis of our assessment, and by acting in a firm and timely manner, we will ensure that risks to price stability over the medium term do not materialise and that medium and long-term inflation expectations remain firmly anchored in line with price stability, thereby favouring an environment conducive to sustained economic growth, well-functioning markets and job creation. Providing such an anchor for medium and long-term inflation expectations is all the more important at times of financial market volatility and increased uncertainty. As regards the financial markets, we will continue to pay great attention to developments over the period to come.

Allow me to explain our assessment in greater detail, starting with the economic analysis. On the basis of the available data, it appears that the sustained real economic growth experienced in the euro area in the first half of 2007 has continued through the summer. This is also reflected in available forecasts for real GDP growth for the third and fourth quarters of 2007. While financial market volatility appears to have contributed to a decline in euro area consumer and business confidence indicators in September, these indicators remain above their historical averages and continue to point to ongoing sustained growth during the second half of 2007.

Looking further ahead, available forecasts for 2008 continue to confirm our main scenario of real GDP growing at around trend potential. This scenario is based on the expectation that global economic activity will remain robust, with the moderation of economic growth in the United States largely offset by the continued strength of emerging market economies. This will provide ongoing support to euro area exports and investment. Consumption growth in the euro area should also contribute to economic growth, in line with developments in real disposable income, as employment conditions remain supportive. That said, in view of the potential impact of increased financial market volatility and the re-pricing of risk on the real economy, the uncertainties surrounding this broadly favourable outlook for economic activity have increased.

On balance, risks to the outlook for growth are judged to lie on the downside. These downside risks relate mainly to the potential for a broader impact from the ongoing reappraisal of risk in financial markets on confidence and financing conditions, concerns about protectionist pressures and possible disorderly developments owing to global imbalances, as well as further oil and commodity price rises.

As regards price developments, according to Eurostat’s flash estimate, the annual HICP inflation rate increased strongly to 2.1% in September 2007, from 1.7% in August. As we have already indicated on previous occasions, we are now entering a period during which unfavourable effects from energy prices will have a strong impact on annual HICP inflation rates. Owing mainly to such effects, as a result of the marked decline in energy prices a year ago combined with the recent substantial increase in oil prices, we expect the inflation rate to remain significantly above 2% in the remaining months of 2007 and in early 2008, before moderating again. Largely as a consequence of capacity constraints and relatively tight labour market conditions, inflation is expected to be around 2% on average in 2008.

Risks to the outlook for price developments remain on the upside. They continue to include the possibility of further increases in the prices of oil and agricultural products as well as additional increases in administered prices and indirect taxes beyond those announced thus far. Taking into account the existence of capacity constraints, the favourable momentum of real GDP growth observed over the past few quarters and the positive signs from labour markets, stronger than currently expected wage developments may occur, and an increase in the pricing power in market segments with low competition could materialise. Such developments would pose upward risks to price stability. It is therefore crucial that all parties concerned meet their responsibilities.

The monetary analysis confirms the prevailing upside risks to price stability at medium to longer-term horizons. A broad assessment of the monetary data supports the view that the underlying rate of money and credit growth remains strong. However, the August annual growth rate of close to 12% in the monetary aggregate M3 as well as the annual growth rate of loans to non-financial corporations, which reached a record level of more than 14% in August, may have been influenced by a number of temporary or special factors, such as the flattening of the yield curve and the recent financial market volatility, and may therefore overstate the underlying rate of money and credit expansion.

A broad assessment of underlying trends in money and credit growth is particularly important during the current period of financial market volatility, as the latter may influence the short-term behaviour of private agents and thereby affect monetary developments. Thus, monetary and credit data can offer an important insight into how financial institutions, households and firms have responded to the financial market volatility. Indeed, previous episodes of heightened financial market uncertainty have been associated with large portfolio shifts into safe and liquid monetary assets. For the time being, however, there is still little evidence in the monetary data for such shifts since the rise in financial market volatility in early August, while it cannot be excluded that the flow of bank loans to the non-financial corporate sector in August partly reflects the re-intermediation of some financing onto bank balance sheets. Further data will be required to develop a more complete view of the impact of the financial market volatility on bank balance sheets, financing conditions and money and credit growth.

Overall, the continued vigour of underlying monetary and credit expansion points to upside risks to price stability over the medium to longer term. Monetary developments therefore continue to require very careful monitoring so as to detect underlying trends on the one hand and to better understand shorter-term dynamics on the other. This will provide a more complete picture of the response of the private sector to the increased volatility in financial markets.

To sum up, a cross-check of the information identified under the economic analysis with the outcome of the monetary analysis has confirmed the existence of upside risks to price stability over the medium term, against the background of good economic fundamentals in the euro area. Accordingly, and with money and credit growth vigorous in the euro area, our monetary policy stands ready to counter upside risks to price stability, as required by our primary objective. At the same time, given the heightened level of uncertainty, additional information is needed before further conclusions for monetary policy can be drawn. Consequently, the Governing Council will monitor very closely all developments. On the basis of our assessment, and by acting in a firm and timely manner, we will ensure that risks to price stability over the medium term do not materialise and that medium and long-term inflation expectations remain firmly anchored in line with price stability, which is all the more important in the current context. As regards the financial markets, we will continue to pay great attention to developments over the period to come.

Turning to fiscal policy, the Governing Council is increasingly concerned about a weakening in structural fiscal consolidation efforts and the delaying of decisive action to address fiscal imbalances. Against this background, all euro area countries concerned are urged to meet the commitments made in the context of the Stability and Growth Pact to structurally improve their fiscal balances. The commitment made in the Eurogroup to reach medium-term budgetary objectives in 2008 or 2009, and by 2010 at the latest, must also be respected by all euro area countries. Those countries that have already achieved sound fiscal positions need to abstain from pro-cyclical fiscal policies. Sound fiscal policies will also make an important contribution to maintaining confidence at a time of heightened uncertainty in financial markets.

With regard to structural reforms, the Governing Council fully supports efforts to enhance competition, increase productivity and foster market flexibility. While the services sector is a particularly important area for reform, further efforts are also needed to improve the functioning of the agricultural markets. Against the background of a marked increase in international food commodity prices, further liberalisation and reforms in the EU agricultural markets would help to enhance their efficiency and benefit European consumers through lower prices. The successful conclusion of the Doha round of world trade negotiations should also help to improve the functioning of global trade in general and of agricultural markets in Europe and worldwide in particular.

We are now at your disposal for questions.

* * *

Transcript of the questions asked and the answers given by Jean-Claude Trichet, President of the ECB, Lucas Papademos, Vice-President of the ECB and Klaus Liebscher, Governor of the Oesterreichische Nationalbank

Question: Mr Trichet, I have two questions. One on the euro: we have been talking a lot about the strength of the euro recently; we won’t want to go into a political discussion right now, but even though we know you don’t have any exchange rate targets, are you more concerned by the strength of the euro, or more pleased by the strength of the euro because it helps to dampen inflationary pressure? And question number 2: as far as interest rates are concerned, we all know that you are never pre-committed, and if anything this summer has taught us that yet again, but there are some hopefuls who even talk about a discussion that sooner or later, or rather sooner, the ECB should think about easing monetary policy. Has that come up at all in your discussion today?

Trichet: On your first question, I would say that firstly – as you know – when we take monetary policy decisions and when we meditate on the monetary policy stance, we take all parameters into account. I have always said that, so there is nothing new – we take into account all parameters. Exchange rates are one of the parameters to the extent that they influence risks to price stability. Secondly, exchange rates are a very important question which calls, in the opinion of the Governing Council, for verbal discipline, precisely because this is a very important question. And we have a methodology to address such a question. That methodology exists in Europe, and that methodology exists in the world. In Europe, we have the methodology of governments and executive branches having only one voice, otherwise there is total disorder. And we have a methodology as regards the world, which is the G7, where the meditation crystallises in a message and that message is signed by the central banks and executive branches concerned. So, again, verbal discipline for all parties concerned is a very important issue and we have the appropriate methodology. As I have said already on a number of occasions, we consider excessive volatility very counterproductive from the standpoint of global growth and for the growth of all components of the global economy. And I have already qualified what I could say on the dollar, on the yen and on the yuan, and I stick to what I have said. When I say that we appreciate what the Secretary of the Treasury and colleagues in the United States say about the strong dollar being important and favourable to the US economy, it means something. And, as you know, on the yen, I have already mentioned that the markets should progressively take into account the better fundamentals of the Japanese economy. And as far as the yuan and other currencies of emerging markets in Asia are concerned, the fact that more flexibility would be appropriate, both in their interest and in the interest of the global economy, is also something which is in our own message.

And on the second point, I would say that I was clear in the diagnosis of the Governing Council that we consider that upside risks to price stability are on our radar screen. This is very important. I also mentioned that with money and credit growth vigorous in the euro area, monetary policy stands ready to counter upside risks to price stability. So it is clear that we have to continue to solidly anchor inflationary expectations. This is extremely important for the European economy. It is all the more important, as I have said on behalf of the Governing Council, as regards the present episode of market volatility. And by doing this, we are paving the way for price stability and therefore for growth and job creation.

Question: On the euro’s recent movements against these major currencies, would you describe them as smooth and orderly and do they reflect economic fundamentals? And the second question: is there a risk of overshooting on the foreign exchange markets and, indeed, has the euro overshot in your opinion?

Trichet: I have already responded to the question on the euro. So I stick to what I just said.

Question: A couple of words were missing from the statement, if I may put it that way “that rates are on the accommodative side”. Can we say that these have been replaced by your new phrase “that you are ready to counter price upside risks”? Secondly, can you give us more of an indication of what is meant by “ready to counter”? Is the ECB in a wait-and-see mode? One final part: three month rates are still rather elevated. Can you tell us how the bank expects the rate to evolve over the coming months?

Trichet: I will take your last point first. We are observing on the money markets – and I would say that it is also a phenomenon very much in evidence across the Atlantic – that the three-month money market rates and the term money market interest rates in general are signalling tensions due to the preference for very short-term liquidity. This is the characteristic of the present market and we have seen that since the beginning of the tensions that occurred in August. It is also due to the clear wish of a number of commercial banks and financial institutions to retain their liquidity and not to embark on term lending. As you know, we have taken that into account ourselves through our own instruments in the recent past. Not only have we embarked on providing liquidity when needed in order to maintain rates in line with our decision on the interest rate for the main refinancing operation, namely 4%, but we have also embarked on additional tranches of long-term refinancing operations - in our jargon LTROs - in order to refinance on a three-months basis a more significant part of euro refinancing. We consider this to be the appropriate way to respond to the tensions that you mention, even if these tensions do not emanate from the money market itself. What I mean is that they are triggered by phenomena that are associated with corrections in a number of other markets in particular in the ABCP market.

As regards your remark on some changes in the wording of the introductory statement, you know that no introductory statement reads exactly like the previous one. Otherwise, we would not be doing our job of capturing all the elements that appear to be important. We are very insistent on the fact that against this background our monetary policy stance is weighted to counter upside risks to price stability as it is required by our primary objective. I think it is important. We underline the fact, that we stand ready to counter the risks. We think that the risks are on the upside at the present moment, while, as I have already said, there are also uncertainties and we believe that we need more information to further analyse the situation.

Question: I have two questions, one for Mr Trichet and one for Mr Liebscher. First, for Mr Trichet, I would like to know what you will discuss at the coming G7 meeting in Washington. Will the state of the world economy and volatility in financial markets be the main issues at the meeting? Second, for Mr Liebscher, could you tell me what you think about the regulation of hedge funds? During the German presidency of the European Union, there were many discussions regarding this problem, but so far I have not seen any concrete results. Don't you think that hedge fund regulation helps to stabilise the market and financial markets?

Trichet: We look at the overall situation of the European economy and we analyse the risks to price stability, as well as the repercussions of the turbulence at global level on our own economy. So all of this will be discussed at the level of the G7, and we will make our own contribution to this discussion as usual. I never say in advance what the outcome of the G7 will be. The G7 is precisely there for us to discuss issues at a very high level, because it consists of the top levels of the executive branches, and the central bank governors, in order to be sure that we work out an appropriate diagnosis of the situation. That does not mean that we are not in touch permanently and certainly that we are not in touch in the constituency of central bankers. I understand that the question for Klaus was on hedge funds?

Liebscher: I would like to stress that, as this is a press conference of the President of the ECB and the hedge fund issue is not really and purely an Austrian issue, I should like to hand over this question to him, because it is his press conference, and not mine.

Trichet: Let me just say that, with regard to hedge funds in particular and highly-leveraged institutions in general, a lot of very good work has been done by the Financial Stability Forum, in which Europeans are actively participating, in particular, the Vice-President, Lucas Papademos, and Mario Draghi, who holds the Chair of the Financial Stability Forum. A number of orientations have been worked out. As you might recall, these do not all assume that we would embark on the administrative regulation of these particular highly-leveraged institutions, but rather on a number of very important indirect moves with the full involvement of the core intermediaries, namely the prime brokers that are themselves under the jurisdiction of the banking surveillance authorities. It also calls specifically on the banking surveillance authorities to exercise maximum alertness as to whether or not the core intermediaries are doing their job correctly. It also calls for benchmarks for best behaviour to be set by the industry itself in order for the risk management of these institutions to be optimal and the transparency of the hedge funds and highly-leveraged institutions vis-à-vis both their core intermediaries and vis-à-vis their investors to follow best practices. The Governing Council of the ECB has always said that this was certainly very important. Now, taking into account all the new elements that have been observed in this recent period, I would say that we also need to reflect on the so-called conduits and so-called special vehicles, which are also non-regulated entities that might prove to be the source of risks. The lessons to be drawn from what has happened have yet to be worked out, but we can see a number of avenues where work should be done. I have to say that the work that has been done, in particular, by the ECB in the Financial Stability Review, but also by all the members of the Eurosystem and, at a global level, by other institutions contains a lot of very good orientations in this respect. Nevertheless, this work is in progress, and we have a lot to work on.

Question: I have a couple of questions. It has already been mentioned that three-month rates in the euro zone remain high. I wonder whether or not the Governing Council has seen signs that euro zone banks are also reluctant to lend to non-financial institutions, and whether there is any estimate of how lending rates in that aspect could change. You mentioned inflation expectations as something very important to the Governing Council. If I have got this right, inflation expectations in a number of countries are actually quite high, higher than they have been or at levels around at the time of the euro changeover. Can you talk a little bit about how that is figuring into your expectations and into your calculations? And then finally, you have commented in the past sometimes on market expectations – market expectations at the moment for the European Central Bank’s interest rate going forward appear to be that the rate will remain where it is for several months, perhaps till the year-end, and then perhaps go down earlier next year. Could you comment on those expectations?

Trichet: First of all, the question on bank lending: please be informed that we will publish tomorrow – at 10 o’ clock – our report on the results of the October 2007 bank lending survey for the euro area. We have sped up the process considering that it was very useful in the present period of time. But I cannot provide you already now what will be published tomorrow. Nevertheless, at the present moment I can tell you that the results of this bank lending survey for October point to some net tightening of the credit standards on loans to households for house purchase and also, in particular, on loans to large enterprises in the third quarter of 2007. The tightening seems mainly to affect large transactions, such as loans granted to finance mergers and acquisitions. The net tightening follows a prolonged period where credit standards were either basically unchanged or eased. Looking forward, banks expect to tighten credit standards further in the fourth quarter of 2007. You will see that tomorrow, but I think it was useful for me to give you this information already now.

As regards inflationary expectations: as you know we extract these inflationary expectations from a large number of tools – we utilise surveys, both our survey and the surveys done by outside institutions, and we also have the financial market’s information. I would say that, as far as the surveys are concerned, they are tilting a little to the upside, even if they remain in line with our definition of price stability – less than 2%. As regards the information that we extract from markets – and this is a phenomenon that we have now been observing for a little while – we see a tendency towards the upside. And this has to be well understood; to explain particularly these upside moves of the break even inflation, there are probably market elements, that are more or less associated with some kind of market corrections. But we have there information coming from the financial markets that we clearly have to take into account. As I said, the solid anchoring of inflation expectations is decisive: not only because it is our mandate, but also because it is essential for the prosperity of Europe. If market expectations weren’t correctly anchored, then all medium and long term market interest rates would go up, all things being equal, the financial environment of Europe would be less favourable, economic decisions would be less optimal and, taking everything into account, we would be in a less favourable situation as regards long-term sustainable growth and job creation. By the way, as far as job creation is concerned, let me tell you that the most current figures I have for the last eight and a half years since the setting up of the euro show that we have created close to 15 million jobs.

As regards market expectations, I will merely say that, at the moment and everything taken into account, risks for price stability are on the upside. Upside risks are on our radar screen and, as always, we confirm that we stand ready to act whenever it is necessary in order to solidly anchor these inflation expectations and be in line with our primary mandate.

Question: Two questions for Mr Trichet. First of all, regarding the formerly useful phrase “on the accommodative side”, would it be a fair interpretation that one of the reasons this is no longer in the statement is because there has been a de facto tightening of monetary policy via the re-pricing of risks in the markets? And my second question is, just so I am absolutely clear on this – because there has been some data, mostly confidence data, forward-looking data, that would suggest that there has been some loss of momentum in the eurozone economy, although these are unusual times – is it correct to say that at this point you do not see any reason why the financial market turbulence would necessarily, to use Secretary Paulson’s phrase, “extract a growth penalty on the eurozone”? For you, this is very much an outstanding question, as I understand it.

And a question to Mr Liebscher, if I may – I believe this is correctly placed, because Vienna takes a particular interest in what goes on in Central and Eastern Europe and how that affects business here in Austria and in the euro zone – could you give us a sense of whether you believe that the financial market turbulence could have an effect on the euro zone via the avenue of trade and investment and financial flows with the newer Member States of the EU?

Trichet: As regards your first question I would only say, as I have already said, that not all of our introductory remarks are alike. At the present time, we think it appropriate to concentrate on the upside risks to price stability that we see, and to concentrate on the fact that we stand ready to counter these risks at any time. It is something that we consider important and we do not want to enter into a debate on whether or not, given the increase that has been observed in the term money market rates or what has been observed on the exchange market, one could describe the monetary policy stance differently. In any case, when there are risks to price stability which would threaten our delivery of price stability, even if we are not accommodative at all we might increase rates, and if we are accommodative we might not increase rates, because, again, what we have to do is to deliver price stability and be absolutely credible in the delivery of price stability. So, take our message as: (i) we confirm our baseline scenario as regards growth, (ii) we say that we have downside risks for that baseline scenario, and (iii) I will go back because it is your second question, we mentioned that with all this taken into account, we see upside risks to price stability, and we stand ready to counter these upside risks to price stability. But uncertainties are such that we need more information and data to further reflect on what and when it would be appropriate to counter these risks.

As regards the real economy, again, we see downside risks, but at the present time we see uncertainties increasing. However, we confirm our baseline scenario. For all the reasons I have given it is true that we have had a relatively mixed indicator. In particular, for reasons that are obvious due to the turmoil, that a number of surveys are less flattering than they were before, but they are still relatively high, as I have mentioned. We have a labour market which has so far continued to be favourable – this is something very important and I have already mentioned some figures; we have, at the level of the euro area, retail sales that remain relatively favourable. Our staff projections are very close to what is being worked out by the other international institutions, having their own forecasts for the euro area economy. So, yes at this stage, our baseline scenario remains the main scenario whilst we fully accept that uncertainties have increased. But I would not say that we are certain that in all the cases currently observed we will have a significantly negative impact on the real economy. And, it is also very important for us to maintain confidence as much as possible, because confidence is the key ingredient at the moment. We are in a period of relative uncertainty. The European economy can count on us to maintain confidence. We will maintain the purchasing power of our fellow citizens, the 320 million fellow citizens that there will be as of 1 January next year. We will maintain confidence in the anchoring of inflation expectations. We will maintain confidence in the capacity to rely solidly on an economy which has anchors.

On the last point, Klaus, maybe you would like to say a word?

Liebscher: First of all, according to my information and as a result of the recent discussions I have had with one or another counterpart from one or another new Member State, I do not have the impression that the financial market turbulences have spilled over. Second, in general, the economic development in most of the new Member States is very good and is in part also improving the forecasts for real GDP growth. And, thirdly, taking that into consideration, I think that there should be, as the President has said, no reason why we should have severe or strong effects on our trade relations because trade with most of the new Member States is primarily export-led and, therefore, if they have good economic development, then our export situation should not be hampered by that.

Trichet: Thank you very much indeed, Klaus.

Question: Mr Trichet, you said that not all introductory statements are the same, but actually, if I am correct, the word “accommodative” has been there since November 2005, so this is quite a change that you have dropped it. Would it now be fair if we wrote that the ECB saw monetary policy as appropriate or neutral? And my second question goes back to three-month interest rates. You have acknowledged that these still remain high. You said that you believe that the action the ECB had taken was the right reaction. But looking forwards is there more that the ECB could do to help relieve these tensions that you identified, particularly in the three-month money market? And following on from that, you talked about some tightening going on in your bank lending survey, which comes out tomorrow, if I understood correctly for households, but particularly for big company transactions. Do you therefore see a macroeconomic impact through these increased financing costs that will affect the euro zone?

Trichet: On the first point, I have already responded twice, so let me sum up. We have not mentioned “accommodative”. If we would have liked to mention “appropriate” we would have done so, but we did not. If we would have wanted to say “neutral” we would have done that, but we did not. Again, our message is that there are upside risks to price stability and we stand ready to counter these upside risks, to solidly anchor inflation expectations, to deliver price stability, and to be credible in the delivery of price stability. As regards the money market, we acted when needed to permit the money market to function as well as possible, in line with our decisions as regards the interest rates for which we are responsible. I have to say that until now what we have been doing has been fully vindicated. We utilised instruments that existed; we did not invent any instruments. At this stage, we will continue to do what is, in our opinion, necessary to help the money market. We know that the reason why the money market is under tension on both sides of the Atlantic is not in our own jurisdiction. The tensions of the money markets are very much coming from this functioning of asset-backed commercial paper (ABCP) and of the commercial paper itself in a number of circumstances and from problems of refinancing of a number of entities like conduits, special vehicles and money market funds. This is a very complex situation. I am confident that all these tensions will be progressively surmounted, but at this stage we will continue to do what is appropriate in our view to help markets and I think that is well understood by market participants. We currently have an interest rate for the main refinancing operations of 4%. It is absolutely clear that we consider it our duty to act in such a way that the very short term money market rates are close to the level of the interest rate that we have set for our main refinancing operations.

Question: Mr President, you mentioned again the term rate. You mentioned that the ECB rate is 4% but the three-month rate is something like 4.7-4.8% right now. Did you discuss additional measures like foreign exchange swaps, like giving one-month or two-month money into the market and such things? Did you discuss this at the Council?

Trichet: We constantly discuss such issues because they are very important. I would say that there is an ongoing meditation, not only at the level of the Governing Council, but also at the level of the staff of the Eurosystem, to see exactly what the situation is and to respond to a situation which is also objectively moving. So I will not mention any particular instrument that we might have discussed. I would only say that we continue to do what we believe is necessary in the circumstances. There was no particular discussion of the Governing Council on any particular point, although we are totally open in this meditation, which – as I said – is ongoing.

Question: You mentioned before tensions across the Atlantic and, regarding the sub-prime crisis, I would like to ask: do you foresee any more trouble for commercial banks? I might recall that Mr King, the Governor of the Bank of England, said that there would be no problem, and then people were lining up in front of the Northern Rock bank, trying to rescue their savings. Can you reassure the citizens of the euro zone that nothing is going to happen like happened in England recently?

As I have said since the very beginning, we have taken very seriously the tensions that have been observed. These tensions appeared in a very acute way on 9 August, and we acted immediately. Within an hour and a half, we had taken a decision. I will only say that we will continue to do what we consider important. To sum up again: our primary objective is price stability. We deliver and continue to deliver price stability and continue to solidly anchor inflation expectations. I explained in the introductory remarks that we would have a hump now in headline inflation. I have pre-announced that several times at such press briefings. You may remember that some were saying “you are at 1.7%, you are very low, you are below 2%”, but we have to look forward and looking forward, we knew that we would have a hump. We are now at the start of the hump. It will go up and then alleviate, even if for the full average of next year, we will be – according to our staff projections – at a level hovering around 2%. As regards the second responsibility that we have, independent of the first, it is to do whatever is necessary to keep our money market in good order. We know that the tensions are not coming from the money market itself. Otherwise we would have already solved all the problems on both sides of the Atlantic a number of weeks ago. We have to do whatever we judge necessary to continue to help the money market to function as well as possible.

Question: May I ask you a few questions, please? The first one is about the foreign exchange again. In the foreign exchange markets, there has been consistent speculation that the ECB may intervene at some point to maintain the value of the euro. Do you feel the necessity or possibility of that, or do you not feel any necessity at this moment? That is my first question. And the second question is: today the European Commission also published a quarterly document in which they stress the downward pressures to the European economy. So what I would like to hear from you is the atmosphere of the Governing Council, I mean the balance of views between the concerns for the downward pressures and the price concerns. Which is weighing at this moment? The price concerns or downward concerns or are you evenly concerned? And the third thing is that there have been several big financial institutions releasing quarterly results. So far, do you judge that the turmoil of the financial market is going towards a better direction? I mean, do you judge at this moment that the situation is getting better or not? These three questions, please.

Trichet: On the first question, on interventions, I never comment: so, no comment on your first question on interventions.

On the second question, we do not balance the risks to the real economy and the risks to price stability to make a judgement of which risk is more important. That is not the way we proceed. We analyse the real economy and, as I said, on balance, the risks to the outlook for growth are judged to lie on the downside. I do not want to repeat the reasons why we judge that the risks lie on the downside. I said that our baseline scenario was clearly in line with what we have already said, in line with the previous projections, but the risks are on the downside. But our decisions on monetary policy are based on the risks to price stability. As I have very often said, we have a needle in our compass, and it is indicating the risks to price stability, because our duty, our primary objective, is to deliver price stability. And from that standpoint, we see – in contrast to what we have seen in the real economy – risks on the upside. I do not say that these risks have materialised. I say risks are on the upside.

As regards your third question I will not comment on the quarterly results of various institutions. There are a number of them. If I may judge the reaction of the market, which of course has to be seen in a much longer perspective, some reactions were relatively positive. But again, I do not draw any conclusions from that. And it is an ongoing process: most European banks have not yet published their quarterly results. There is a slight difference of one month in the accounting procedures on both sides of the Atlantic for a number of institutions. So we will see. At this stage I will not comment further.

Questions: A very short question. And again, it is just a little bit of help with the language that you used today. Can you tell us the difference between “you stand ready to act” versus “vigilance” or “strong vigilance”? How are we to interpret this difference?

Trichet: It is up to you to interpret. What is clear is that we are always alert. And we are never pre-committed, because we can always move when we judge that the risks to price stability command a move from us. I fully accept the fact that a number of observers have attributed a great signalling value to vigilance. I accept that there is, de facto, a great signalling value in the word “ vigilance”, although I always said – and we proved it in the last months – that it did not mean that there was a probability of 100% that we would do something, because I always accompany these words with “we are not pre-committed”. But I would not give signalling value to any other words that we use. I urge you to look at the introductory remarks in their entirety. Consider that it is our best appreciation and judgement of the situation at the level of the collége taking absolutely everything into account. We do not want to signal very subtle messages for you to prejudge what we might do. It would be the wrong interpretation. I accept that the word “vigilance” is special in that respect, even if it does not mean a pre-commitment, but for the rest, please look at the entirety of what we say. Consider that it is the result of an assessment of the situation which is carried out in a collegial manner. We are living in a multi-dimensional world, and we try to capture the complexity of this multi-dimensional world. If we wanted to communicate more simply, I could say at the next meeting that the probability that we increase rates is x%, the probability that we leave rates unchanged is y% and so forth, but that is not the way we operate. Let’s say that you have there our best appreciation of a multi-dimensional, complex situation.

Question: Just in closing to maybe return to the euro, and I understand if you can’t comment – but at what point does the rising euro become too much to bear for European companies?

Trichet: I already said all I had to say about the euro.

Thank you for your attention.

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