Introductory statement with Q&A

Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB
Frankfurt am Main, 5 February 2009

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. We will now report on the outcome of today’s meeting of the Governing Council, which was also attended by Commissioner Almunia.

On the basis of its regular economic and monetary analyses, at today’s meeting the Governing Council decided to leave the key ECB interest rates unchanged. As anticipated in our interest rate decision of 15 January 2009, the latest economic data and survey information confirm that the euro area and its major trading partners are undergoing an extended period of significant economic downturn, and that accordingly both external and domestic inflationary pressures are diminishing. We continue to expect inflation rates in the euro area to be in line with price stability over the policy-relevant medium-term horizon, thereby supporting the purchasing power of euro area households. This assessment is supported by available indicators of inflation expectations for the medium term. It is also confirmed by the further deceleration in monetary and credit growth in the euro area. Fully in line with its primary objective, the Governing Council will continue to keep inflation expectations firmly anchored in accordance with its definition of price stability, that is inflation rates of below, but close to, 2% over the medium term. This supports sustainable growth and employment and contributes to financial stability. Overall, the level of uncertainty remains exceptionally high. Accordingly, we will continue to monitor very closely all developments over the period ahead.

Allow me to explain our assessment in greater detail, starting with the economic analysis. Reflecting the impact of the intensified and broadened financial market turmoil, economic activity throughout the world, including in the euro area, has weakened substantially. Foreign demand for euro area exports has declined, and domestic factors, notably very low confidence and tight financing conditions, have adversely affected domestic demand. Taken together with other available economic data for the euro area, this points to very negative quarter-on-quarter real GDP growth in the last quarter of 2008.

This information is in line with our current analysis and forward-looking assessment. We continue to see persistent weakness in economic activity in the euro area over the coming quarters, as the financial market tensions have a further impact on the global and domestic economy. At the same time, the very substantial fall in commodity prices seen since the middle of 2008 should support real disposable income, and thus consumption, in the period ahead. Most recently, there have been tentative signs of stabilisation in some survey data, albeit at historically low levels. These indications, however, require confirmation on a broader basis.

In the view of the Governing Council, the outlook for the economy remains surrounded by an exceptionally high degree of uncertainty. Overall, risks to economic growth remain clearly on the downside. They relate mainly to the potential for a stronger impact on the real economy of the turmoil in financial markets, as well as to concerns about the emergence and intensification of protectionist pressures and to possible adverse developments in the world economy stemming from a disorderly correction of global imbalances.

Over time, the euro area should reap the benefit of the effects of significant policy measures that have been decided upon over recent months to deal with the financial turmoil. They should help to restore trust in the financial system and to ease constraints on credit supply to companies and households. In order to ensure that such measures effectively support a sustainable recovery, it is of the utmost importance that they remain focused and temporary in nature so as to maintain a stability-oriented and medium-term perspective in macroeconomic policy-making.

With regard to price developments, annual HICP inflation continued to decline in January 2009, falling to 1.1%, according to Eurostat’s flash estimate, from 1.6% in December 2008. While no detailed breakdown for HICP developments in January is available as yet, the decline in headline inflation observed since the middle of 2008 primarily reflects the sharp falls in global commodity prices over this period, owing mainly to weak global demand.

Looking ahead, lower commodity prices and the prospect of weak demand confirm our assessment of mid-January that inflationary pressures in the euro area are diminishing. Owing mainly to base effects stemming from the past behaviour of energy prices, headline annual inflation rates are projected to decline further in the coming months, possibly reaching very low levels at mid-year. However, also owing to base effects stemming from past energy price developments, inflation rates are expected to increase again in the second half of the year. Accordingly, it is likely that HICP inflation rates will fluctuate sharply during 2009. Such short-term volatility is, however, not relevant from a monetary policy perspective. Looking over the policy-relevant medium-term horizon, annual HICP inflation is expected to be in line with price stability. This assessment is supported by available indicators of inflation expectations for the medium term.

Regarding risks to price stability over the medium term, unexpected further declines in commodity prices or a stronger than expected slowdown in the economy could put downward pressure on inflation, while upside risks to price stability could materialise, particularly if the recent fall in commodity prices were to reverse or if domestic price pressures turn out to be stronger than assumed. It is therefore crucial that price and wage-setters fully live up to their responsibilities.

Turning to the monetary analysis, the latest evidence confirms a continued deceleration in the underlying pace of monetary expansion in the euro area, supporting the view that inflationary pressures are diminishing.

In analysing monetary developments it should be recognised that the intensification and broadening of the financial turmoil since September 2008 has the potential to affect the evolution of monetary aggregates significantly. It has already had a substantial impact on the behaviour of market participants, as indicated by recent money and credit data. Both the broad aggregate M3 and, in particular, the components of M3 that are most closely related to the ongoing financial tensions – such as holdings of money market funds – have shown high month-to-month volatility of late. Overall, looking to the extent possible through this volatility, the underlying pace of broad money expansion continues to decelerate gradually from the peak seen in early 2007. However, the intensification of financial tensions since September 2008 is leading to significant substitution among the components of M3.

Turning to the evolution of bank credit, the flow of MFI loans to the private sector moderated in the course of 2008, largely on account of weakness in loans to households, especially for house purchase. In December, however, outstanding MFI loans to non-financial corporations contracted for the first time since the onset of the financial turmoil, confirming the significant weakening of corporate credit at the end of the year after a long period of dynamic growth. At the same time, the substantial reduction in key ECB interest rates since October 2008 appears to have been passed through to lower bank lending rates, thereby easing financing conditions for companies and households. Moreover, there are some indications that the pace of tightening of bank credit standards is stabilising, albeit at high levels by historical standards. Overall, the incoming information on financing conditions requires continuous close monitoring.

To sum up, as anticipated in our interest rate decision of 15 January 2009, the latest economic data and survey information confirm that the euro area and its major trading partners are undergoing a period of significant economic downturn, and that accordingly both external and domestic inflationary pressures are diminishing. We continue to expect inflation rates in the euro area to be in line with price stability over the policy-relevant medium-term horizon, thereby supporting the purchasing power of euro area households. This assessment is supported by available indicators of inflation expectations for the medium term. It is also confirmed by a cross-check of the outcome of the economic analysis with that of the monetary analysis, against the background of a further deceleration in monetary and credit growth in the euro area. Fully in line with its primary objective, the Governing Council will continue to keep inflation expectations firmly anchored in accordance with its definition of price stability, that is inflation rates of below, but close to, 2% over the medium term. This supports sustainable growth and employment and contributes to financial stability. Overall, the level of uncertainty remains exceptionally high. Accordingly, we will continue to monitor very closely all developments over the period ahead.

Turning to fiscal policy, the European Commission projects in its January 2009 interim forecast a substantial rise in the average euro area government budget deficit, to 4.0% of GDP this year, from 1.7% in 2008. This rapid deterioration of the fiscal position is broad-based among euro area countries and is due to the economic downturn, additional revenue shortfalls and the fiscal stimulus measures adopted by many governments. In 2009 seven euro area countries are currently expected by the Commission to exceed the 3% of GDP reference value for the budget deficit. In addition, many governments have assumed large contingent liabilities in connection with the guarantees provided to banks and will need to finance the capital injections in support of the financial sector. To support the public’s confidence in the sustainability of public finances, it is therefore essential that governments return to a credible commitment to medium-term budgetary objectives as soon as possible.

As regards structural policies, it is important to continue on the long-term reform path foreseen by the Lisbon agenda. At the current juncture, it is essential to pursue economic policies in line with the principle of an open market economy with free competition, resisting any protectionist pressure. Moreover, product and services market reforms should foster competition and help to speed up effective restructuring. Labour market reforms should help to facilitate appropriate wage-setting, as well as labour mobility across sectors and regions. This will be particularly important for those areas and sectors hit strongly by the negative demand shock. In several countries, it is also crucial to take measures with a view to addressing competitiveness losses accumulated over recent years.

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: You have said multiple times that the next important meeting will be in March. Did you today discuss the possibility of a rate cut in March and, if so, how much do you expect to lower interest rates?

My second question is: will next month be the last important meeting, or do you see scope that there are more important meetings to come?

And the final question is: you have ruled out taking interest rates to zero. What do you consider to be the floor for ECB interest rates? Would 1% be appropriate and what then would happen to the deposit rate?

Trichet: I will only confirm what I have said, namely that 2% is not the lowest level that we would have decided ex ante, second, that zero interest rates at the present time is not something that we would consider appropriate. It remains to be seen what we will do in our next meeting. We will have a lot of new data and we will have our new staff projections, which are an important input, but we will also have projections that will have been updated by a number of private and public institutions and, of course, we will do whatever we judge necessary to maintain the solid anchoring of inflation expectations in line with our definition of less than, but close to, 2%.

Question: Did you discuss cutting rates in March?

Trichet: I will talk about that at our next meeting in a month’s time.

Question: When you say you don’t think zero rates are appropriate, are you referring to official ECB rates, or overnight rates?

Would the ECB consider embarking on additional alternative measures, such as quantitative easing, before official rates have dropped to zero?

Trichet: On your first question, I have nothing further to add to what I have said: a zero rate does not seem to us to be appropriate at this stage.

On the non-standard action, we are in a non-standard mode at the present time since we are engaged in the unlimited supply of liquidity with maturities of from one week to six months. We are in a non-standard mode when we see that the balance sheet of the ECB and the Eurosystem has augmented significantly. None of this was considered at all likely before the intensification of the crisis that we have experienced since mid-September and the beginning of October last year. So, we have not pre-decided anything additional at this stage, and we have not ruled anything out, in terms of non-standard activity. And, of course, it means implicitly that we could continue to engage in non-standard operations without having decided to set a zero rate.

Question: When you say you expect the previous measures to show an effect, when do you expect that to happen?

Trichet: As you have observed, we have reduced our rates by 225 basis points in the recent period. This was decided over a time span of approximately three months, which is absolutely exceptional and without any precedent. If I look at the short-term rates, for example the three-month EURIBOR, which is an important index, from the peak which was attained at the moment of the intensification of the crisis, to the present level, taking into account not only the reduction of our policy rate but also the reduction of abnormal spreads that had developed at the time, I see a reduction which is in the order of magnitude of three hundred basis points or even a little bit more. But that being said we are in a multi-dimensional and very complex situation and the real economy also has to cope with a number of other issues and constraints.

Question: Core inflation is reasonably stable in the euro zone at around 2%. This presumably backs up your statement that inflation is in line with price stability. If that continues in March, will that be the dominant factor in whatever decision the Council takes? That is my first question.

My second question is: is it time to evaluate the level of long-term real interest rates, which have been substantially lower in the last decade than in the preceding four decades? And is it time to perhaps consider the fact that the levels of output and confidence to which the global economy is now returning are perhaps consistent with post-war real interest rate levels which may well have been more stable?

Trichet: On the first point, I have said already that 2% was not considered by the Governing Council to be a lower limit and that we would examine the situation at our next meeting on the basis of our monetary policy strategy and the information we will have. We have a needle in our compass which is very clear: less than 2%, but close to 2%, and we will take the appropriate decisions. I do not exclude that we could decrease rates in our next meeting. But again, we will see then exactly what we have to do, taking everything into account.

As regards your second point, I will not embark on reflections about long-term interest rates or the accumulation of imbalances that we have observed in the global economy. I will only say that it is clear that we were not in a sustainable mode, at a sustainable pace, at the level of the global economy during the last years. And this is not something new because we had said it a number of times, including here on the occasion of these press conferences, the disorderly unwinding of global imbalances having been noted as a major risk in particular in the G7 communiqué and by us of course.

Question: I have a question on the definition of a liquidity trap. You know there is a debate going on among economists who seem to understand your remarks in last month’s meeting as suggesting that you can avoid a liquidity trap by not cutting rates and arguing that this is probably not true because a liquidity trap is a condition of the economy and not a result of your monetary policy. I was wondering what your position in this debate might be?

Trichet: I will not embark on further discussions of the inconveniences and drawbacks when you have a zero interest rate. But there are a number of drawbacks and we feel that we should avoid them.

Question: A couple of questions. You said that you have not excluded, and that you would cut rates at the next meeting. Can we expect you to continue with your general recent trend of 50 basis points, or you are thinking that maybe a smaller, more traditional 25 would be the way forward?

A second one, could you give us more of a preview of the Bank Lending Survey, which is out fairly soon?

Would you also comment on whether it’s valid to argue that it’s a fallacy that reducing rates to zero means monetary policy becomes ineffective?

Trichet: First, on our attitude as regards the next meeting, we will look at the next meeting into facts and figures and will take the appropriate decision according to our own monetary policy strategy. We will take the decision that we will judge appropriate. I’m not embarking on qualifying the amplitude. But I have noted that what is - at the moment I’m speaking- present in the market would probably be more the first figure that you have mentioned. I don’t qualify what is presently embedded in the market.

As regards your second question, as you know, we will publish the Bank Lending Survey tomorrow on our website. And we have decided – starting from April 2009 – that the results of the survey will be published around one week ahead of the respective Governing Council meeting, so the next one ahead of the meeting on 7 May 2009. On the present results let me only say that at this stage for the first quarter of 2008 the net tightening of credit standards for loans to enterprises remained broadly at the high level of the previous quarter. And the most important driving forces behind the net tightening continued to be expectations about future economic activity and the industry or the firm-specific outlook. For the fourth quarter of 2008 we have a reporting of a further tightening in net terms of credit standards for loans to households, and for the first quarter of 2009 the banks expected a decline in the net tightening for all categories in comparison with the actual tightening in the fourth quarter of 2008. So some kind of stabilisation at the very high level of net tightening that we observed in the fourth quarter of 2008. That would be a summing-up of what I can say at this stage. But again we will publish the results tomorrow.

As regards your third question I have no other comment on interest rates at zero. There are a significant number of drawbacks. I will not elaborate on that.

Question: Apparently you have less sympathy for quantitative easing than other banks. Some observers, central banks, think there might be political reasons, like you do not have the opportunity like the Fed to buy bonds from the Treasury, or the Bank of England from their finance ministry. So, if you buy more government bonds, you face the problem that there are different countries, and if you buy government bonds, you take risks, and it is not clear who would face losses if there were some losses. How is your judgement on this?

A second question is, some countries, especially in Eastern Europe, are suffering severely from the global crisis. Some are part of the European Union but not of the eurozone, and they would be happy if they had support from the ECB. What is your judgement on this? In the future, can they hope for some help from the ECB in terms of liquidity provision and so on?

Trichet: On your first question, let me remind all of us that when we started to cope with the tensions on the markets in general – and it is already some time ago, in August 2007 – we were the central bank in the world that was the most open to eligibility of collateral in the form of private paper. And you know that other major central banks had to considerably change their own frameworks in order to be able to do more or less the same. But I would say, in this respect, that what we have been doing in being extraordinarily open to such paper is, in many respects, something which would have been described in other environments and other economies as close to non-standard easing. Or close to, I would say, credit easing perhaps, as you know is the term used on the other side of the Atlantic. And I would again mention the fact that we have to day the combination of, first, our unlimited supply of liquidity; second, very broad eligibility of collateral; and third, the fact that our balance sheet has considerably augmented in size. This is something which I could describe as a non-standard set of decisions that have augmented considerably, to say the least, our own risk-taking, because of the increase in the size of the balance sheet. Again, we are not in the same universe as the other central banks, and each of us does what we judge appropriate in our own universe. I said already that I did not exclude other possible non-standard measures. I would not say that we have constraints that explain why we could not introduce other non-standard measures. But at this stage I don’t want to elaborate more on that. When and if we have a decision I will explain that decision.

As regards Eastern Europe we have looked at the situation. We have taken a number of decisions already, in particular repo agreements with certain central banks. At this stage, I consider that we have our own way of looking at it that has already been implemented in terms of effective decisions. I can only say that we will continue to follow the situation very closely.

Question: I have a couple of questions. Today’s statement doesn’t repeat the sentence from last month that inflation risks are broadly balanced. Is that because they are not? And if they are not, are they on the downside? And if they are not broadly balanced and you are prepared to lower your rate next month, then why not simply do it today?

That all belongs to one set of questions. You have been vehement about the fact that you think a zero policy rate is not appropriate, but we have all been trying to get you to talk a little bit more about the overnight rate: would you also think an overnight rate at zero would not be appropriate?

And thirdly, inflation expectations are sort of a hot topic because there is a question about whether or not the ECB wants its real rate to be negative. So, you have mentioned before that your favoured measure of inflation expectations is a five-year, five-year forward. Is there any reason now to be looking at shorter-term measures of inflation expectations? Those are far lower than the five-year rate.

Trichet: I do not want to repeat too lengthily what I have said, but I would say that, regarding risks to price stability over the medium term, unexpected further declines in commodity prices or a stronger than expected slowdown in the economy could put downward pressure on inflation, whilst upside risks to price stability could materialise if the falling commodity prices were to reverse and if domestic pressures turn out to be stronger. We are, in this domain, in a situation where uncertainty is high. We are benefiting now from the disinflationary process, which, as I said, is likely to be very strong mid-year, in particular as regards headline inflation, because of the previous prices of oil and commodities and the expectation that the future prices of oil and commodities will continue to be at a low level. I must confess that I hope that the price of oil and commodities will remain at a low level, because it is something which is expansionary and in many respects an automatic stabiliser at the level of a global economy which is in great difficulty. But I also see that some are saying that the appropriate level of the price of oil would be USD 75, others are saying that they lose money if it is below such and such level and so forth. So we will see. Nobody knows what is likely to be the evolution of the price of oil and commodities, and that is something that we have to take into account. But I will certainly not qualify the absence or presence of the sentence that you mentioned as having any meaning at this stage. As I said, we see risks downward and we see risks upward, and these are very clear.

I won’t comment any further on the zero. I will stick to what I said. Zero interest rates are not, in our opinion, at the current time, appropriate.

Now let me turn to the inflation expectations. We are looking at all possible views and angles of vision for inflation expectations. We have the Survey of Professional Forecasters, and we have the private and public surveys that we are not responsible for. We have the information that we are extracting from the financial markets. We have the swap market and we have the bond market. And they are not necessarily giving all the same information. But I would say that, at the policy-relevant horizon, we see inflation expectations at present as being anchored in line with our definition of price stability. We are considerably helped by our precise definition of price stability. That is absolutely clear. As regards the Survey of Professional Forecasters, I can confirm to you – because we have advance figures which will be published later – that in the medium term they see inflation still at the level of 1.9%. A little bit lower than before, but at the level of 1.9%. This is a further indication of this medium-term anchoring. And I could say the same for what we are extracting from markets, even if, of course, the break-even on the basis of a very short number of years is influenced by what is expected in the present year. But if you are at the level of the five years forward, yes, you see that we have the desired anchoring of inflation expectations. I have to say at this stage that we remain prudent and cautious because, again, these are facts and figures and we have to look at it and to be permanently alert. But this is, in my opinion, proving that by being as explicit as possible on our definition of price stability, we are helping the anchoring of inflation expectations in the medium term. Also, when I compare some expectations on either side of the Atlantic, I see a big difference, obviously, between those expectations, and I take it that this is probably partially due to the fact that we ourselves are very clear on what our definition is.

Question: Could you imagine a country of the euro area, and I am particularly thinking of Greece, asking the IMF for support? Mr Strauss-Kahn has not excluded help to euro area countries just recently if they would apply for help.

The other question, which is closely related to this, is: we all heard Mr Tremonti’s suggestion to have the EU issue a euro bond; would you think that this is a good idea? And what changes would be necessary to make this possible?

Trichet: On the first question, I must confess I do not see such a situation personally. I don’t remember having seen the IMF’s Managing Director mentioning that. I will look into it. But I can say that I do not see it myself.

On the second point, in the ECB Governing Council we trust that it is good that each government is responsible for its fiscal policy: it is in line with the Treaty, it is in line with what we decided when setting up the euro area, and it is something which is of course fully in line with the Stability and Growth Pact and the appropriate rules that we considered part of the overall framework of EMU – Economic and Monetary Union. There are three words: “Union” speaks for itself, as does “Monetary”, and “Economic” refers particularly to the Stability and Growth Pact.

Question: There was a second part to my question: why are many people against the EU issuing a euro bond? What would be the problem? Why not do it, if it would help some southern European countries?

Trichet: There are two potential questions: one is: will the Treasuries issue joint bonds where they would be associated joint and severally or something like that. You mention the proposal of Mr Tremonti. It seems to me that it is something like that he might have had in mind. And then there is another issue which is whether it would be the Commission itself or the EU itself. I responded to the first concept namely that it is better that each Treasury is responsible for its own issuance. I did not have in mind the second one. It seems to me that you would have to ask governments the question. The governments are not in favour, and the Council is not in favour, to my knowledge up to now.

Question:Could the Commission itself issue the euro bonds, or who could in the EU?

Trichet: Again, this is a decision to be taken by governments first. Second, in the present framework I guess that the reasoning of the European executive branches – I take the Council as a college – would be that they have the European Investment Bank (EIB), which has its own capacity to finance the European economy, which has its own capacity to borrow on its own signature, which is a European signature, and that they probably consider that the instruments exist already. At this stage, I have no position of the Governing Council.

Question: Would you judge necessary the constitution of a “bad bank” for the whole of the European Union? Do you think that the banks should be obliged to pass their toxic assets to the bad bank in order to have more transparency and more trust in the banking system?

Trichet: I think one should not respond to such questions in general, because there are very important differences among market-places and among economies. I am speaking of the European Union as a whole, not only of the euro area. There are also big differences from bank to bank, so you cannot really give an across-the-board response to such questions. I see a “menu of options”: after the recapitalisations, after the guarantees, we now see the need in some circumstances for additional possible tools, namely the possibility of purchasing, or putting aside, toxic or vulnerable assets, and also this idea of having a “tail risk” guarantee for assets that would remain on the balance sheets of various banks. These are the ideas that have been floated. What I would say at this stage would be whatever you do, you have to fully respect the level playing-field of the European single market, of the single market for financial services and you have to be sure there is an appropriate pricing of whatever you do, as appropriate pricing is part of the level playing-field. This was the way it was addressed for the recapitalisations to avoid abnormal competition and abnormal situations. In case you are in a full individual rescue operation, you have also to respect very simply the European rules, for which the Commission is responsible.

Question: Wouldn’t you think it would be reasonable for the ECB to stop providing unlimited liquidity?

And second question is: Are you seeing any signs that the government stimulus packages are actually working and does this diminish the need for monetary policy action?

Trichet: Again, what you are asking for is the end of the current non-standard mode of, I would say, both central banks and governments. We have to consider that one of the main adverse factors that we have to cope with is the absence of confidence. It is because there is a general absence of sufficient confidence that we have to cope with this exceptional difficulty. Part of the confidence that we have to recreate depends on the sentiment that, in the medium to long term we will come back to a sustainable pace of policies. And I would say that we are reflecting on when we will see the end of our present non-standard actions. But at this stage I would also say that we consider such actions to be needed. And we will continue to do that for as long as this is necessary. But we know, of course, that we will have to return to a normal mode and the same holds true for the governments. This is what I said on behalf of the Governing Council a moment ago, when I addressed the fiscal policies.

As regards your second question we will see how things proceed. These were very important decisions that were taken by a large number of governments. Let me mention, en passant, that all governments do not have the same room for manoeuvre and that, in certain cases where you embark on exceptional action of that kind, but destroy confidence in the sustainability of your own position, you will not gain anything. But I trust really that what has been decided already is very substantial, and we will see how it is incorporated in the real economy. Equally substantial is the explicit expansionary effect that is embedded in the significant decline in the prices of oil and commodities. And that is the reason why I consider it to be so important that these energy prices remain at low levels and do not pick up again, because their present level is part of the overall stabilisation of the global economy.

Question: Mr President, in the money markets, the overnight interest rate used to be very close to the official ECB interest rate, and it seemed to be the strategy of the ECB to keep it that close. But recently, in the past two weeks, this overnight rate has dropped to 1%. Is this a change of strategy on the part of the ECB?

Trichet: What we had decided, you might remember, was to broaden our corridor in order to help, on the basis of the analysis made, revive the money market. The argument was that if you are too forthcoming in remunerating the commercial banks, they will continue not to borrow and lend among themselves, but instead take the extra liquidity and place it in the deposit facility. So, we are at a stage where we see whether we are reviving the money market. That is the way we see it. We did not change anything, but lower the deposit facility rate, because we enlarged the corridor. And what happens is that we see that the EONIA has a tendency to hover over the deposit rate, wherever it may be. We will continue to look at this. We have a date at our next decision-making meeting to see exactly what has happened and to draw appropriate conclusions from our decision to enlarge the corridor. At the moment I am speaking, I would say that we have seen an improvement that is modest, but certainly an improvement, which we can measure – all other things being equal – when we look, for instance, at the level of the outstanding deposits we hold, which is a little bit lower, all things being equal, than the level we would have had if we had not enlarged the corridor. But I acknowledge that it is something which has remained modest.

Question: A few questions if I may. A quick one to start off with. First of all, just to clarify the answer you gave earlier when asked about the possible size of future moves: did I understand you correctly that you think you are more likely to favour 50 basis point moves than 25 basis point moves?

Trichet: I said absolutely nothing on the size of the future moves. We will do whatever is necessary taking into account facts, figures and our strategy.

Question: Did anyone discuss or were there any voices at today’s meeting asking for a cut today? That is my first question.

The second question, you say you do not exclude additional non-standard measures, by which most people would understand to mean outright purchases of government bonds or corporate bonds or commercial paper. Could you maybe give us some idea about the principles on which the ECB might go about such measures? I mean, for instance, would you continue to work with banks or is it possible you might seek to bypass the banking system and go directly to help corporates facing credit problems? Will the principle of no bail-outs within Europe apply, continue to apply?

And the third very general but important question: Mr Trichet, when you look at the world, do you think policy-makers around the globe have done enough to bring this global crisis under control and to restore that confidence that you think is so important?

Trichet: As for the size, I already responded. On today’s meeting, I will only say that it was a meeting as usual where we looked in-depth at all situations and we exchanged all possible views. It was certainly a very deep and profound meditation and discussion. We were unanimous in taking our decision, which does not mean that we all have the same view. We exchange very different viewpoints amongst us.

On the non-standard action, I would say we are already in a non-standard period and I will go into the details of the non-standard action when we decide. At this stage, I do not want to comment on or qualify what we could do or not do. What is sure is that we have to do something which would take into account the fact that we are very open and forthcoming as regards the eligibility of our collateral. This is part of our framework and we have to take that into account. It is not necessarily part of the framework of other central banks. We have to look, of course, at our own risks, taking into account that one characteristic of the set of non-standard decisions we took already was that it increased our own credit risk–taking.

As regards your last question, I would say we are in exceptional circumstances. That is absolutely clear. You know that we were one of the institutions, which was lucid in diagnosing even as soon as 9 August 2007 that something was happening which was exceptional, which was very abnormal, in terms of financial sphere’s behaviour. We have to cope with this exceptional intensification of the crisis which came in September 2008 At the moment I am speaking it seems to me that authorities, whether central banks or governments, have really taken decisions that are until now commensurate with the exceptional circumstances in which they were put very sharply, very abruptly, in mid–September. I have only to say that they have all, in my opinion, to remain alert because, as I said on behalf of the Governing Council, uncertainty remains of the essence: we are very much in a “Knightian” universe. We do not know what will be or is the law of probability of future events. So we have to be prepared for everything. And this is certainly the best way to sum up your pertinent question. Let us be alert. We are in an uncertain universe but, looking at what has been decided, I will not diagnose that either central banks or governments or authorities in general have been slow or shy or timid in their own reactions. Now, the private sector is decisive. It is the private sector which is reducing orders. It is the private sector which is reducing the pace of discretionary spending. It is the households that are saving more than we would suggest, particularly in a number of countries where savings are already very high. It is the corporate businesses that decide that they would diminish their investment programmes and so forth. So, what we have to do - and in that domain we have still a lot to do - would be to convince them that there are also two-way risks. There was a risk in being overconfident and that has proved to be a major risk that some of them were taking. But there is equally a risk of being over-pessimistic and of missing the moment when we will have the recovery, which will happen of course. I think the main issue at stake is how to re-establish an appropriate level of confidence on a medium-term basis in the private sector, among all decision-makers of the private sector. But it seems to me that one element of confidence they could have, would be to see precisely the rapidity and the boldness of the reaction that has taken place until now. But that being said let us not forget our permanent message in the ECB: if you want to consolidate confidence, be sure that what you do is credible as regards its sustainability in the medium-to-long run. Otherwise, you do not consolidate confidence.

Question: You mentioned in your speech about seven euro area countries currently expected to exceed or exceeding the 3% of GDP reference level, and also a return to a credible commitment to medium-term objectives as soon as possible. What time reference would be as soon as possible in your opinion?

And, secondly, you also mentioned protectionism as a risk in your speech – twice actually, I think. What exactly are you referring to, and does it have any reference to the US stimulus package and what has happened in relation to letters between the Commission and the US?

Trichet: First of all, as soon as possible means fixing, together with the Commission the appropriate medium-term target and a credible pace for reaching the medium-term target in order to restore confidence and to consolidate confidence. That is essential, particularly for countries which will have a large increase in their annual deficit. The stability and growth pact is there, it tells you what you have to do in such circumstances. We rely upon the alertness of the Commission and the determination of the governments in question to fully understand that they themselves must be credible in terms of this medium-term objective to get back to a normal situation in order to help households and economic agents to have a high level of confidence. Protectionism is something which is considered by the Governing Council to be a major threat. We see tendencies to embark upon extensive protectionism, and that is something which is exactly the opposite of what should be done in the present circumstances, and there is a very large consensus, certainly at the level of economists, and also of central banks, as well as governments, that it would be a great mistake to engage in this kind of nationalistic reaction that exacted a very high price in the previous century. We also see a tendency towards financial protectionism – spontaneous or organised financial protectionism – or financial mercantilism, and that is also something that we consider to be very unfavourable. And it is unfavourable at a global level. It is unfavourable at the level of Europe, and it would certainly be unfavourable if it were to manifest itself at the level of the euro area.

Question: Sorry I have to press you again on this issue, but the media reported it in this way, and the market seems to have understood it in the same way, do you favour a fifty basis point cut next month, or a twenty-five basis point cut?

Trichet: I have already responded to that question.

Question: What is the lesson to be learnt for the ECB in the financial crisis, for the monetary policy and also for the monetary strategy, focussing on the financial stability?

Trichet: First of all, we have to draw a lot of lessons, as one of the important institutions in the world in terms of preventing the situation which we find ourselves in, and this is being done in particular by the Financial Stability Forum in which we very actively participate, and also through various “G” groups at various levels, and we also participate in the Basel Committee. We know what the main avenues are where we have a large consensus of authorities and, fortunately, of market participants and private sector entities. We must also consider it extremely important to have effective peer surveillance and an effective international financial institutions’ surveillance of the global imbalances. And we know that what we are observing today is not exclusively, but in many respects, a price to be paid because we have let global imbalances grow for too long, and I don’t exclude any country or any economy from this. I think we all have to accept that we have responsibilities. As regards the monetary policy side, central banks have a position that is really unique: first, they are independent, second, they have no vested interests, and third, they are called upon to deliver stability in the medium and long run. They are not short-termists by definition. They have a medium and long-term vision. And it seems to me that in a world which has been marked by extreme volatility, extreme short-termism and extreme absence of consideration for long-term values, such as long-term price stability and financial stability. We have an important role to play – perhaps a more important role to play after this experience than was the case before, as an anchor of stability. But we have said that since this institution was set up, and we try to be faithful to what we are called upon to do, in all circumstances, whether easy circumstances – but we have not had many easy periods, obviously – or difficult circumstances, and this is a very difficult period.

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