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Introductory statement with Q&A

Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB
Frankfurt am Main, 5 June 2008

Jump to the transcript of the questions and answers

Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. This week we celebrated the tenth anniversary of the ECB, marking an important milestone in the development of this institution and of the single monetary policy. On that occasion I expressed my sincere thanks to all those who have helped to build a solid foundation for the euro. Let me also extend these thanks to you who play such an important role in transmitting our decisions and explanations to the financial markets and to the public at large.

We will now report on the outcome of today’s meeting of the Governing Council, which was also attended by the President of the Eurogroup, Prime Minister Juncker.

On the basis of our regular economic and monetary analyses, we decided at today’s meeting to leave the key ECB interest rates unchanged. At the same time, we noted that risks to price stability over the medium term have increased further. Inflation rates have risen significantly since the autumn of last year, owing mainly to strong increases in energy and food prices. HICP inflation is now expected to remain high for a more protracted period than previously thought. Upside risks to price stability over the medium term are also confirmed by the continuing very vigorous money and credit growth and the absence of significant constraints on bank loan supply up to now. At the same time, the economic fundamentals of the euro area are sound. Against this background, we emphasise that maintaining price stability in the medium term is our primary objective in accordance with our mandate. The Governing Council is monitoring very closely all developments. It is in a state of heightened alertness. By acting in a firm and timely manner, we will prevent second-round effects and ensure that risks to price stability over the medium term do not materialise. It is our strong determination to secure a firm anchoring of medium and long-term inflation expectations in line with price stability.

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

At a quarter-on-quarter rate of 0.8%, real GDP growth in the first quarter of 2008 was well above expectations. In part, this strength reflected temporary factors, notably the unusually mild winter in many parts of Europe, which appears to have boosted construction activity. However, the high growth rate in the first quarter might be partly offset in the second. It is therefore more appropriate, in order to avoid being misguided by highly volatile quarterly results, to evaluate the first two quarters of 2008 together.

In line with available forecasts, both domestic and foreign demand are expected to support ongoing real GDP growth in the euro area in 2008, albeit to a lesser extent than during 2007. While moderating, growth in the world economy is expected to remain resilient, benefiting in particular from continued robust growth in emerging economies. This should support euro area external demand. The fundamentals of the euro area economy remain sound, and the euro area does not suffer from major imbalances. Against this background, we expect investment growth in the euro area to provide ongoing support to economic activity, as capacity utilisation remains solid and profitability in the non-financial corporate sector has been sustained. Moreover, employment and labour force participation have increased significantly, and unemployment rates have fallen to levels not seen for 25 years. These developments support disposable income, although purchasing power is being dampened by the impact of higher energy and food prices.

This outlook is also reflected in the June 2008 Eurosystem staff macroeconomic projections. The projections foresee average annual real GDP growth in a range between 1.5% and 2.1% in 2008 and between 1.0% and 2.0% in 2009. In comparison with the March ECB staff projections, the current range projected for real GDP growth in 2008 is within the upper part of the range published in March 2008, mainly as a consequence of the better than expected outcome in the first quarter. For 2009, the range has been adjusted downwards, following the increase in commodity prices over recent months. The year-on-year growth rates which I have just mentioned need to be interpreted with particular caution on this occasion. While the annual rates suggest that growth may be weaker in 2009 than in 2008, they mask the fact that on a quarterly basis real GDP growth is projected to reach a trough in 2008, before gradually recovering thereafter. In order not to draw the wrong conclusions about the growth dynamics implied in the staff projections it is important to keep this distinction in mind.

In the Governing Council’s view, the uncertainty surrounding this outlook for economic growth remains high, and downside risks prevail. In particular, risks continue to relate to the potential for the financial market turbulence to have a more negative impact on the real economy than anticipated. Moreover, downside risks stem from the dampening impact on consumption and investment of further unanticipated increases in energy and food prices. Risks also arise from concerns about the emergence of protectionist pressures and the possibility of disorderly developments owing to global imbalances.

With regard to price developments, annual HICP inflation has remained above 3% for the past seven months. According to Eurostat’s flash estimate, it was 3.6% in May 2008. This confirms the more persistent current upward pressures on euro area inflation, resulting largely from sharp increases in energy and food prices at the global level in recent months.

Looking ahead, on the basis of current futures prices for these commodities, the annual HICP inflation rate is likely to remain above 3% for some time to come, before moderating only gradually in 2009. We are thus currently experiencing a protracted period of high annual rates of inflation, which is likely to be more persistent than previously anticipated.

Consistent with this view, the Eurosystem staff projections foresee average annual HICP inflation at between 3.2% and 3.6% in 2008 and between 1.8% and 3.0% in 2009. Compared with the March 2008 ECB staff projections, the ranges projected for inflation in 2008 and 2009 are markedly higher, reflecting mainly higher oil and food prices and increasingly inflationary pressures in the services sector.

In this context, it is important to recall the conditional nature of the Eurosystem staff projections. They are based on a number of assumptions which are of a purely technical nature and unrelated to policy intentions. In particular, the technical assumptions for short-term interest rates are taken from market expectations as at mid-May. Moreover, it should be noted that the projections are based on the assumption that the recent dynamism in oil and non-oil commodity prices will diminish over the projection horizon, in line with futures prices. A further crucial assumption is that there will be no broad-based second-round effects on wages.

In the Governing Council’s view, at the policy-relevant medium-term horizon risks to the outlook for prices remain clearly on the upside and have increased further These risks include notably the possibility of further increases in energy and food prices, as well as of increases in administered prices and indirect taxes beyond those foreseen thus far. It is also a strong concern that price and wage-setting behaviour could add to inflationary pressures. The pricing power of firms, particularly in market segments with low competition, such as parts of the services sector, may prove stronger than currently expected. Moreover, higher than expected wage growth may emerge, taking into account high capacity utilisation, tight labour market conditions and the risk of second-round effects. The Governing Council is monitoring wage negotiations and price-setting behaviour in the euro area with particular attention.

Against this background, it is imperative to secure that medium to longer-term inflation expectations remain firmly anchored in line with price stability. All parties concerned, in both the private and the public sector, must meet their responsibilities. Wage-setting needs to take into account productivity developments, the still high level of unemployment in many economies, and price competitiveness positions. Moderate labour cost increases are particularly necessary in countries which have lost price competitiveness in recent years. Broadly based second-round effects stemming from the impact of higher energy and food prices on price and wage-setting behaviour must be avoided. In this context, the Governing Council is concerned about the existence of schemes in which nominal wages are indexed to consumer prices. Such schemes involve the risk of upward shocks in inflation leading to a wage-price spiral, which would be detrimental to employment and competitiveness in the countries concerned. The Governing Council therefore calls for such schemes to be avoided.

The monetary analysis confirms the prevailing upside risks to price stability at medium to longer-term horizons. Annual M3 growth remained very vigorous in April, supported by the continued strong growth of MFI loans to the private sector. While the impact of the flat yield curve and other temporary factors suggest that annual M3 growth continues to overstate the underlying pace of monetary expansion, nonetheless, even after taking such effects into account, a broad-based assessment of the latest data confirms that the underlying rate of money and credit growth remains strong.

Annual M1 growth has continued to moderate in recent months, reflecting higher short-term interest rates which have encouraged further shifts from overnight into time deposits. The moderation in the growth of household borrowing also reflects the dampening impact of higher short-term interest rates, as well as cooling housing markets in several parts of the euro area. However, the growth of loans to non-financial corporations has remained very robust. While some moderation can be expected in the future in the light of tightening financing conditions and slower economic growth, bank borrowing by euro area non-financial corporations grew at an annual rate of 14.9% in April 2008, and the flow of loans in recent months has been strong.

The monetary analysis has helped to support the necessary medium-term orientation of monetary policy in the face of the ongoing financial turmoil. From this perspective, the monetary analysis points to upside risks to price stability at longer horizons. Moreover, a thorough assessment of the monetary counterparts suggests that, as yet, the availability of bank credit to households and non-financial corporations has not been significantly affected by the turmoil.

To sum up, a cross-check of the outcome of the economic analysis with that of the monetary analysis clearly confirms the assessment that upside risks to price stability prevail over the medium term, in a context of very vigorous money and credit growth and the absence of significant constraints on bank loan supply up to now. In fact, we noted that risks to price stability over the medium term have increased further. The economic fundamentals of the euro area are sound, and incoming macroeconomic data continue to point to moderate but ongoing real GDP growth. Against this background, the Governing Council is monitoring very closely all developments. It is in a state of heightened alertness. By acting in a firm and timely manner, we will prevent second-round effects and ensure that risks to price stability over the medium term do not materialise. Securing a firm anchoring of medium and long-term inflation expectations in line with price stability is of the essence.

Regarding fiscal policy, the Governing Council welcomes the spring 2008 orientations for euro area fiscal policies agreed by the Eurogroup ministers on 13 May 2008. Many euro area governments still need to implement much more ambitious policies to ensure that their country-specific medium-term budgetary objectives are attained by 2010 at the latest, as agreed in Berlin in April 2007. Achieving and maintaining sound structural fiscal positions is imperative to create scope for the free working of automatic stabilisers in all euro area countries and will help to prepare for the budgetary costs of population ageing. The steady pursuit of prudent and efficient fiscal policies would also help to limit current inflationary pressures and would increase potential growth and employment.

As regards structural reforms, the Governing Council reiterates its full support for all efforts to enhance competition, increase productivity and foster market flexibility. Against the background of a marked increase in international food commodity prices, removing impediments to competition at the various stages of the food supply chain in the retail and distribution sectors would benefit European consumers through lower prices. The ongoing “health check” of the EU common agricultural policy is welcomed, as are the efforts to limit upward pressure on agricultural prices through biofuels policies. A 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. Tax policies are not an appropriate means to counter commodity price increases, be it oil or non-oil commodities, as this would send wrong signals to producers and consumers alike and would distort markets.

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: I have a few short questions. Your remarks and the projections, certainly on inflation and growth as well, would have entrenched market expectations for the ECB to raise interest rates in the course of this year. Could you comment on that? I have also noted you said twice that the Governing Council is in a state of heightened alertness. Could you explain whether that is sort of a signal to the market, and would that even precede something along the lines of “vigilance”, could we expect “vigilance” in the coming months?

And my final question is, could you comment on Federal Reserve chairman Ben Bernanke’s remarks that he supports a strong dollar which I think also followed the same remarks by treasury officials?

Trichet: As I said on behalf of the Governing Council in the introductory remarks, the Governing Council is in a state of heightened alertness. We had a very good and in-depth discussion, as always, in the Governing Council. We took into account all the information that we had; the projections of the staff of the Eurosystem and the risks to price stability based on both the economic and the monetary analysis. And, all things being taken into account, I would sum up our state of mind by saying that we exchanged many opinions and views around the table, as always, with a very candid exposition of our analysis. A number of us thought that, all things being taken into account, all information and analysis of risks, we had a case for increasing rates. A number of us considered that there was a case for increasing rates, but at a later date, and some amongst us considered that there was not necessarily a case for doing so. After an in-depth exchange of views, we decided by consensus to take today’s decision, which means that we maintain rates and that we will monitor all developments very closely. We are in a state of heightened alertness. We consider that the possibility is not excluded that, after having carefully examined the situation, we could decide to move our rates by a small amount in our next meeting in order to secure the solid anchoring of inflation expectations, taking into account the situation. I don’t say it is certain, I say it is possible.

As regards the US dollar and what Ben said, I have always appreciated what has been said by Ben, and particularly what he said last Monday about what he considered opportune from the US standpoint. It has been noted by markets as something important and I have frequently told you that I consider what has been said by Ben and by Hank Paulson, as regards the fact that a strong dollar was in the interests of the United States, to be very important.

Question: First, I have a clarification question. If I understood what you have just said correctly, you said that there were a number of voices on the Governing Council who voiced the opinion that there was a reason to raise rates later this year. Why not today? I mean, you have just told us that risks to price stability are on the upside and have increased further, your projections forecast inflation above your definition of price stability within your medium-term time frame? Why not today?

Trichet: What counts is what the college decides and what the college thinks, not any individual, but the full body of the Governing Council. We had no unanimous views on the analysis and on what would be the best decision to take. As always, we exchanged all views, we compared our positions and finally we decided, by consensus, both to maintain rates as they are and, taking into account all the information we had, to put ourselves in the state of “heightened alertness”, which is the term of the Governing Council to characterise our situation. We will examine the situation very carefully and we will, in our next meeting, not exclude the possibility of increasing rates by a small amount. That is the situation which we are in: it is not certain, it is possible.

Question: Some of your colleagues have expressed concern recently about the quality of the collateral deposited with the ECB. One colleague went so far as to suggest the collateral framework might need some tweaking. Would you care to comment on whether or not you share these concerns?

Secondly, demand for your dollar-denominated auctions continues rising and on Tuesday hit another record, with the highest bid-cover rate of any auction since the inception of these dollar-denominated auctions. Are there considerations about further boosting the amount available? And similarly, we are approaching the end of the quarter and in the past the ECB Governing Council has decided that it was in their interests to offer market participants extra funding over these tense periods, would you consider that again?

Trichet: As regards the first question, we have had a collateral framework since the setting-up of the ECB which was more comprehensive and more complete, perhaps, than others. We introduced a number of improvements in the course of our early years, including the fact that we generalised this framework fully for the whole of the euro area – we started with quite different traditions. And we have not changed anything since the beginning of the financial turbulence. We consider that this framework has served us very well and, of course, we apply this collateral framework as efficiently and effectively as possible.

As regards the Term Auction Facility, we are very happy with this very close cooperation with the Federal Reserve System. It would have to be carefully checked in historical terms, but it seems to me that it is a “ première”, this cooperation with the Federal Reserve System for delivering liquidity in dollars on this side of the Atlantic – involving not only us, but also the Swiss National Bank – and we are satisfied with the present way it functions.

Question: We are approaching the quarter-end, and three-month EURIBOR rates today hit yet another year high, are there considerations about addressing those tensions?

Trichet: I will not comment now. We will certainly have occasions to restate to market participants how we will deal with this situation, which is a situation we have already encountered at the end of the year and at the end of the first quarter. We observed this behaviour and these tensions before. We will continue to operate fully in line with what we have done earlier.

Question: I have two questions. You generally say that you do not underwrite the projections of the staff and also the value for inflation, for example, is an average value for next year.

My question is: the position of the Governing Council, do you expect that the inflation rate will diminish to below 2% at the end of 2009?

And the second question is: there were quite some discussions on the process of how LIBOR and EURIBOR rate settings were calculated. There were also some suggestions on how to tackle the problem, like with a focus on overnight index swaps. What is the position of the Governing Council on that?

Trichet: On the first question, we do not underwrite the staff projections. We take the staff projections as always – the Eurosystem staff projections at the present moment – as a very important input for us, but they should not be seen as the analysis of the Governing Council. We look at other projections and we could observe that the most recent surveys of other institutions, including the OECD, are very close to what our staff are saying. But that being said, it is an important input but it is not our position. Our position, I said it in the introductory remarks, is that the risks for price stability have further increased. As regards the primary mandate of the ECB and its Governing Council, it is to deliver price stability over the medium term. It is our duty to be able to tell our fellow citizens that we take at any moment the decisions that would permit the delivery of price stability over the medium term, and the medium term for a central bank is a period of 18 months to two years. So in that medium-term period at any moment we have to secure price stability. We would be, in our own analysis, at the level which is in line with our definition of price stability in the medium term, namely less than two, but close to two percent. And we have to be credible in this delivery of price stability and that is the reason why we insist so strongly on inflationary expectations remaining well anchored, in line with our definition of price stability.

As regards your second question I will not engage in a discussion on LIBOR, EURIBOR and so forth. As far as EURIBOR is concerned, we have the feeling that the methodology which is utilised is correct and we do not dispute the quality of the figures that are produced. We observe, of course, that we have spreads in the money market and this is something that we have to look at carefully.

Question: Just an understanding question: you were speaking of keeping price stability in the medium term, which means for you 18 months to two years. If we count from now, 18 months to two years is 2010. So do you have the projections already for 2010 and could you tell us something already please?

Trichet: At this stage all I can tell you is that all decisions we take will be designed to permit us to affirm that we will maintain price stability over that period. But I don’t give you a precise number of months. I give you a range from 18 months to two years. I don’t dispute that it would mean the beginning of 2010.

Question: Markets are now, after your comments, pricing in a 65% chance of an increase in July, next month; maybe that’s what you intended. What I’d be interested to know is what we need to watch out for in the next month. You say an increase is possible, but what will determine whether or not you increase interest rates next month?

And a second question to follow up: you’ve made a few comments recently about not repeating the mistakes of the 1970s. Is one of the lessons that it’s essential that central banks act rapidly to head off inflation dangers even if growth is slowing?

Trichet: On the first point, I never comment. I have already answered some similar questions. I think it would be totally absurd for me to comment in real-time on market reactions. I will not comment on a day-to-day basis or a week-to-week basis, thus no comment on real-time market reaction. Again we will look at the situation. We will make our decision at the moment of the decision. As you know we are never pre-committed. We always analyse the exact situation on the basis of all information we have at the moment when we take the decision. I said it is not excluded that we will take that decision at our next decision-making meeting, namely at the beginning of July. It is not certain; it is possible.

As regards not repeating the mistakes of the past, it is, as you know, a general message that one has even if we are not in the situation of the first oil shock and not in the situation of the second oil shock. There are similarities. It’s not identical at all. But there are similarities and one of the major similarities of course is that we must avoid unanchoring inflation expectations, avoid putting economies in general in a situation where they are weakening their own growth potential, where they are observing slower growth and mass unemployment. And the lesson of the first oil shock was precisely that because there were a number of probable errors in the diagnosis of the situation, in Europe you can date from the first oil shock the start of much lower growth and mass unemployment. I already had occasions to explain that to you in this very room. But it is something which we are not alone in saying, of course. A large number of economists are also saying that, and I trust that governments that have the memory of these shocks are also very lucid as regards the dangers of the present situation. As far as we are concerned, things are for us simple: we have a mandate, we have the Treaty’s primary mandate, and the Governing Council has the mandate to act in order to be able to tell 320 million fellow citizens “We will deliver price stability over the medium term”. We have a protracted period with a high level of the Consumer Price Index for reasons that are obvious. It is up to us to take care that it goes down in the medium term to our definition of price stability. It’s very important for the confidence of our fellow citizens and the confidence of economic agents in general. And again, I repeat this because it’s the strong conviction of the Governing Council; those of our fellow citizens who are less able to protect themselves against inflation are the poorest and the most vulnerable.

Question: I have a few questions. The first is: Some people were calling for a rate hike and some people were saying to keep rates steady. Can you tell us how close this call was for you? How many people called for it?

Trichet: No.

Question: The second one is on the problems in the money markets. Do you think that market rates will realistically ever return to the levels seen a year ago?

Trichet: You said you had three questions.

Question: The third one is: The European Championships start on Saturday. Do you think France can win it? Or Mr Papademos, do you think Greece could retain the title?

Trichet: I am totally incompetent to answer the third question. I do not know whether Lucas…

Papademos: Equally so.

Trichet: Again, I will say nothing more on your first question. We had a deep discussion with an exchange of all views. I would say the synapses function very well in our collective brain, and after the discussions, we reached today’s decision by consensus.

As regards the money market, the tensions that we are observing are originating elsewhere. As you know, we have been extremely keen to do everything necessary to maintain policy rates close to those decided in our monetary policy stance. Since the very beginning of the turbulence, we have been, and will continue to be, very keen for our money market to function as well as possible, and with interest rates as close as possible, in the short term, to our policy rates. As far as the turbulence is concerned, it is ongoing, with episodes of high volatility, and of course we have to do everything necessary at the global level and the European level, according to the orientations which have already been approved by the international community, in particular the 67 recommendations of the Financial Stability Forum, which we have approved.

Questions: Two questions, first one: Going back to the 1970s again, when there was not only the high oil price but also a decline in productivity in the Western world, which economists say also contributed to the stagflationary period. Do you see similarities? And of course which were not seen by central banks and policy-makers: Would you say that we are in a similar situation with respect to this issue now?

And my second question is on the reasons for the high oil price. Do you think that this is just a real economic supply and demand phenomenon or did central banks probably contribute to the increases by leaving interest rates too low for too long? Thank you.

Trichet: On your first question, I have already said that there were similarities with the first oil shock. But, we were not in an identical situation in terms of the technological drive and the associated productivity progress that could be observed. We are not in the same situation at all. You are therefore absolutely right to underline that point. Let me only say that, as far as we are concerned at the ECB, the Governing Council considers that if we could continue to be active in implementing these structural reforms that we all agree to, we would certainly be able to much better exploit the potential for total factor productivity increases and labour productivity increases that are made possible in particular by technology. I would therefore say that one of the advantages of our present situation is that we have probably a large capacity to do much better in terms of productivity, which is one of the major goals of Europeans.

As regards the oil price, I will not embark on a long exposition. It is a very complex phenomenon. It was obviously driven by demand at the beginning, and it is absolutely clear that the very rapid development of emerging countries is one of the main drivers. Supply is also playing a role and there are a number of reasons to think that there are also anomalies of a different nature on the supply side, including perhaps geo-strategic elements. But all that being said, it is a de facto situation that we have to cope with. We ourselves would call for all possible measures to be taken to save energy. We believe that we still have a lot to do at the global level. We would call for an as-good-as-possible functioning of the oil and energy market in general, as in all domains. It remains very important for all producers and consumers to take all their responsibilities in these difficult circumstances.

Question: In your speech you changed a little the way you talk about second-round effects. I would like to know if you have already noticed some second-round effects in Europe.

Trichet: I said that the projections of the Eurosystem staff are making the working assumption that we do not have broad-based second-round effects. That is the working assumption. We also have quite a diverse set-up, in this respect, with economies where we have some kind of indexation, and you know what our position is as regards indexation. Full indexation is a good way of having second-round effects! So, again, we have to remain very alert in this domain. Our message is clear and we have to be conscious of the fact that the enemy is the second-round effects in a situation such as this – this is clear and it is what we have said since the very beginning.

Question: My question is related to the projections. A simple conclusion of the Eurosystem staff macroeconomic projections is that you are behind the curve in monetary policy. The growth rate is increasingly below the potential rate and inflation is increasingly above the definition of price stability. Is this correct?

And my second question is: what is the role of the monetary analysis in the monthly monetary policy decisions?

Trichet: First of all we are not behind the curve! We are, in the view of the Governing Council, at the appropriate position. We are very keen on being correctly positioned as regards our primary mandate and I am very strong on that. It does not seem to me that our reputation is that we are behind the curve, at least when I read various articles. As regards the staff projections the figures are the figures, and we have in front of us the figures that are the projections of our Eurosystem staff – not only the ECB staff but the whole of the Eurosystem staff – and they are, as I said, quite in line with the most recent other projections that I could see.

As regards your second question on the monetary analysis, we consider the monetary analysis a very important pillar in our own monetary policy concept. I elaborated on the economic analysis and on the monetary analysis a moment ago, and I do not want to repeat what I already said – that we consider that the monetary analysis gives us very pertinent information. In the past, a number of decisions we took were inspired not only by the economic analysis but by the monetary analysis: in December 2005 in particular, when we increased rates and also at the beginning of 2004, when we did not decrease rates. In those two cases we were vindicated, even if the economic analysis did not necessarily suggest to do what we did. So, again, there are two complementary analyses that are for us very important, and in a world where we see the importance of financial matters, monetary analysis, with all its components and counterparts, is important.

Question: The first question is about, again, second-round effects. Concerning the recent wage negotiations, is the risk of second-round effects increasing or decreasing?

The second one is about the independence of central banks. Every time the economy slows down, there is big pressure on central banks to cut interest rates to support the economy in the short term certainly in Europe and we always have in Japan too. Do you think such a situation is improving facing the higher level of inflation?

Trichet: On second-round effects, again, our message is clear. We consider it is of the essence that we do not have those phenomena. I would also stress the fact that I’m not addressing only wage-price spiralling. I’m also addressing the issue of price setting. We have a number of sectors in which we could have abnormal price setting – and particularly those sectors where you do not have the level of competition that would permit the avoidance of such behaviour. I mention, in particular, the services sector, where we have to be particularly alert to avoid abnormal price setting. It would be abnormal precisely to take into account inflation today as if it was a good predictor of inflation tomorrow. It is not a good predictor for inflation tomorrow. A good predictor of inflation tomorrow is what our definition of price stability is.

On the independence of central banks: of course, I don’t elaborate on our own institution. I had an occasion, last Monday, to quote Jean Monnet when he referred to men and women being indispensable, but for sustainable progress you need institutions. And we are an institution with its mandate and its independence. It’s very important. But let me tell you that it would be a mistake to think that we are engaging in an arbitrage between growth and price stability. If we were not sufficiently alert, and if we had an unanchoring of inflation expectations, then we would have a financial environment which would be adverse to sustainable growth and job creation. Because we would immediately have these new expectations incorporated in the medium and long-term market interest rates and they would go up and up and up, all things being equal. So we are working simultaneously for price stability and for sustainable growth and job creation. And I have to say our people understand that. They are not ready to trade inflation in the hope that we will have more growth and more job creation. Their common judgement is very close to that of the mainstream of economists at the moment I am speaking.

Question: The subject of my question touches on the end of your introductory statement. When Mr Juncker was here three days ago, talking to journalists, he was also talking about possible government measures to alleviate the effects of rising prices. And when asked about the Manchester agreement, he said, “We have more poor people in Europe then we had three years ago.” I was actually wondering if you discussed the issue with him today and, even if not, I’d like to know your opinion on it.

Trichet: We did not comment in our discussion on that particular point. What I understand is that the position of the Eurogroup and ECOFIN has been expressed by the President of the Eurogroup and the President of ECOFIN. And we strongly encourage them not to embark on tax policies that would counter commodity price increases because we believe it could be counterproductive. That I said on behalf of the Governing Council.

Question: I just had a chance to have a proper read of the introductory statement, and there is something that just struck me here: “It is our strong determination to secure a firm anchoring of medium and long-term inflationary expectations”. Didn’t you say before that you were keen on maintaining or keeping inflationary expectations firmly anchored? Have they unanchored in your view?

And the other thing is, I did not take proper notes, did anyone actually call for rate increases today?

And my final question is: you said that if you were to raise interest rates next month, it would be by a “small amount”, does that mean anything, does that mean you might deviate from the path of the 25 basis points that you have basically raised by over the last cycle?

Trichet: First of all, we consider that inflationary expectations are anchored and that we have to secure this anchoring, this is absolutely clear.

When I said that a number of us were suggesting increases, it was for today.

And on your last point, I would say that "small" would mean something of the order of magnitude of what we have done for the last decisions.

Question: You mentioned that inflation has been up 3% for the last seven months and peaking at up to 3.6% in May. This stance of heightened alertness, is it a new phenomenon, or have you been in that stance for the last seven months?

Trichet: You mean the state of mind that we have. We are permanently alert, and I said that very often and I even say that credible alertness is the hallmark of the concept of the ECB. So, being alert is our spontaneous natural state of mind. But I have explained a number of things that perhaps clarify what we had said in saying that we were in a state of heightened alertness. It would be also the adjective, which would count, not the substantive alone.

Question: We ask the same questions, just to have more weight for your work.. Why did you not increase your interest rate today?

Trichet: Because it was our sentiment that we had to put ourselves in a state of “heightened alertness”, and we also had to monitor very closely all developments, that’s the reason.

Question: It was not all the parts of the question, part of the question is: “What should happen during one month that you decide, in one month, that you are increasing rates or not, because usually you say that one month, more or less, does not change much, in your long-term view?" Is it the dollar, which came down by the oil price…

Trichet: I will not elaborate more. Again, we decide when we have to decide, we take, as you know, at any moment the decision we judge as appropriate to counter inflationary risk. At the moment I am speaking, we consider that our decision today was a good decision to take and we consider it’s probably our duty to tell you in what state of mind we are, as regards the next meeting, but we will take our decision in the next meeting on the basis of all information we have at the moment of our decision. And again, taking stock of the collegial experience and wisdom that we have around the table – but I was sufficiently explicit on that, it seems to me.

Trichet: One more issue for your information: I would like to inform you on the procedure for the next meeting. We have decided that in the future, we would, as a rule, have our General Council meeting, which is every quarter the same day as the Governing Council, and we have decided that we would start– at five o’clock, say – with the Governing Council the day before, then we have the General Council on the morning of the second day, and then we will terminate our Governing Council. It will permit the Governing Council to have a little bit more time. So, for our next rendezvous, namely, 18 and 19 June, we will have a Governing Council, which will start on the Wednesday, then we will have the General Council on the Thursday morning, and then we will terminate the Governing Council on Thursday afternoon. We make our decisions at the end of the Governing Council meeting, and we will communicate upon completion of the meeting, all the decisions that will have been taken by the Governing Council via our usual channels. It is an optimisation of our organisation.

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