Introductory statement with Q&A
Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB
Frankfurt am Main, 2 April 2009
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.
On the basis of its regular economic and monetary analyses, the Governing Council decided to reduce the key ECB interest rates by a further 25 basis points. This decision brings the total reduction in the interest rate on the main refinancing operations of the Eurosystem since 8 October 2008 to 300 basis points.
Today’s decision takes into account the expectation that price pressures will remain subdued, reflecting the substantial past fall in commodity prices and the marked weakening of economic activity in the euro area and globally. The latest economic data and survey information confirm that the world economy, including the euro area, is undergoing a severe downturn. Both global and euro area demand are likely to remain very weak over 2009, before gradually recovering in the course of 2010. Available indicators of inflation expectations over the medium to longer term remain firmly anchored in line with the Governing Council’s aim of keeping inflation rates at levels below, but close to, 2% over the medium term. A cross-check with the outcome of the monetary analysis confirms that inflationary pressure has been diminishing. After today’s decision we expect price stability to be maintained over the medium term, thereby supporting the purchasing power of euro area households. The Governing Council will continue to ensure a firm anchoring of medium-term inflation expectations. Such anchoring is indispensable to supporting sustainable growth and employment and contributes to financial stability. Accordingly, we will continue to monitor very closely all developments over the period ahead.
Let me now explain our assessment in greater detail, starting with the economic analysis. Reflecting the impact of the financial market turmoil, economic activity has weakened markedly in the euro area, as domestic demand has contracted in parallel with the downturn in the world economy. Available data and survey indicators suggest that economic activity in the euro area has remained very weak in early 2009. It is likely to remain very subdued for the remainder of the year but is expected to gradually recover in 2010. The substantial fall in commodity prices since the summer of 2008 is supporting real disposable income and thus consumption. In addition, external as well as domestic demand should increasingly benefit from the effects of the significant macroeconomic stimulus under way as well as from measures taken to restore the functioning of the financial system both inside and outside the euro area.
Taking these effects into account, we see the risks to this outlook for economic activity as being broadly balanced. On the one hand, there may be stronger than anticipated positive effects due to the decrease in commodity prices and to policy measures taken. On the other hand, there are concerns that the turmoil in financial markets could have a stronger impact on the real economy, as well as that protectionist pressures could intensify and that there could be adverse developments in the world economy stemming from a disorderly correction of global imbalances.
Annual HICP inflation has fallen further, from 1.2% in February to 0.6% in March, according to Eurostat’s flash estimate As explained on earlier occasions, the decline in inflation since last summer primarily reflects the sharp fall in global commodity prices over this period. Moreover, signs of a more broad-based reduction in inflationary pressure are increasingly emerging. Looking ahead, base effects stemming from past energy price effects will play a significant role in the shorter-term dynamics of the HICP. Accordingly, we expect to see headline annual inflation rates declining further in the coming months and temporarily reaching negative levels around mid-year. Thereafter, annual inflation rates should increase again. Such short-term movements are, however, not relevant from a monetary policy perspective. Looking further ahead, over the policy-relevant horizon, annual HICP inflation is expected to remain below 2% in 2010, reflecting mainly ongoing sluggish demand in the euro area and elsewhere. Available indicators of inflation expectations over the medium to longer term remain firmly anchored in line with the Governing Council’s aim of keeping inflation rates at levels below, but close to, 2% over the medium term.
The risks surrounding this outlook are broadly balanced. They relate in particular to the risks to the outlook for economic activity as well as to risks to commodity prices.
Turning to the monetary analysis, the latest data confirm the high month-to-month volatility of developments in M3 and its components observed since the intensification of the financial turmoil in September 2008. Looking through this volatility, the pace of monetary expansion in the euro area has continued to decelerate markedly and supports the assessment of diminishing risks to price stability in the medium term.
Developments within M3 clearly reflect market participants’ specific investment responses to the intensification of the financial turmoil, but increasingly also the impact of the past reduction in the key ECB interest rates. As this reduction has narrowed the gaps between the interest rates paid on the different categories of short-term deposits, it has fostered shifts in the allocation of funds. For example, the demand for overnight deposits further strengthened in February and contributed to the rise in the annual growth rate of M1 to 6.3%, while the demand for short-term time deposits weakened considerably.
The flow of MFI loans to non-financial corporations and households has remained very subdued. The slightly negative flow of lending to non-financial corporations in February reflects a decline in the outstanding amount of loans with a shorter maturity, while the net flow in loans with longer maturities remained positive. The decline in short-term lending may be indicative of a reduction in loan demand related to the weakening of economic activity. However, supply effects have probably also affected loan developments. In this respect, developments over the past few months may in part reflect ongoing efforts of banks as well as the corporate and household sector to reduce the highly leveraged positions built up in past years.
To sum up, today’s decision takes into account the expectation that price pressures will remain subdued, reflecting the substantial past fall in commodity prices and the marked weakening of economic activity in the euro area and globally. The latest economic data and survey information confirm that the world economy, including the euro area, is undergoing a severe downturn. Both global and euro area demand are likely to remain very weak over 2009, before gradually recovering in the course of 2010. Available indicators of inflation expectations over the medium to longer term remain firmly anchored in line with the Governing Council’s aim of keeping inflation rates at levels below, but close to, 2% over the medium term. A cross-check with the outcome of the monetary analysis confirms that inflationary pressure has been diminishing. After today’s decision we expect price stability to be maintained over the medium term, thereby supporting the purchasing power of euro area households. The Governing Council will continue to ensure a firm anchoring of medium-term inflation expectations. Such anchoring is indispensable to supporting sustainable growth and employment and contributes to financial stability. Accordingly, we will continue to monitor very closely all developments over the period ahead.
Regarding fiscal policies, it is necessary that countries’ commitments to a path of consolidation in order to return to sound fiscal positions are credible, respecting fully the provisions of the Stability and Growth Pact. This is essential to maintain the public’s trust in the sustainability of public finances, which is important both for the economy to recover and for supporting long-term growth. Countries subject to the excessive deficit procedure need to comply strictly with the ECOFIN Council recommendations for correcting their deficits. Many countries will need to specify further credible consolidation measures for 2010 and beyond. Full and consistent implementation of the EU’s legal provisions for sound fiscal policies is a prerequisite for the maintenance of their credibility as one of the pillars of the institutional framework of Economic and Monetary Union.
Turning to structural reforms, the Governing Council welcomes the commitment of the spring European Council to make full use of the renewed Lisbon strategy for growth and jobs in the current situation. The updated recommendations for the euro area countries call for an accelerated implementation of reforms to support the economy, facilitate necessary adjustments and ensure a high level of growth potential. It remains essential that government support measures do not distort competition or delay necessary structural adjustment processes and that governments remain firmly committed to avoiding protectionism.
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, and Lucas Papademos, Vice-President of the ECB
Question: First, did you discuss any other options today, like lowering the benchmark by 50 basis points? Was your decision unanimous or is the Governing Council split right now regarding how to proceed with monetary policy in the future?
Second, do you regard the actual interest rate level as the lower limit mark, or do you still consider that there is room for manoeuvre, if needed?
Third, did you discuss, or were the extension of the refi operations’ maturities or purchases of corporate debt on your agenda today?
Trichet: In response to your first question, as always, we had a very in-depth discussion, we looked at the situation from every possible angle and we took our decision by consensus. We took the decision to lower all three interest rates by 25 basis points. This means that the deposit interest rate is at 0.25%, the main policy rate is at 1.25% and the Lombard rate is at 2.25%. These are the lowest interest rates ever observed since the creation of the euro and, to my knowledge, as far as the predecessor institutions of the ECB are concerned, the lowest since the Second World War. So these are extremely low levels by historical standards. Again, we looked at the situation from every possible angle and we decided by consensus.
To answer your second question: Is it the lower limit? With regard to the main policy rate, I would say very candidly that it is not the lowest limit. I do not exclude that we could – in a very measured way – go down from the present level. As regards the deposit rate, I think it would be fair to say that, at 0.25%, it is at an extremely low level, and I do not expect that we will make any change to this level in the period to come. The advantage of having decreased both the level of the main refinancing operation and that of the deposit facility is that we still have the full corridor going down, without having to re-narrow immediately the present corridor for our very short-term rates, so that we can expect the very short term money market rates, particularly the overnight rate, to reflect fully this reduction. I have to remind you, because it is not as well-known as it should be, that at the time of speaking, after the last decrease of 50 basis points of our interest rates and, of course, before today’s decrease of 25 basis points, our six-month and twelve-month money market rates were lower than the US dollar money market rates. This is something which needs to be known and is probably due to a combination of lower risk premia and lower liquidity premia on our own money market rates. We will continue to look at the evolution of our money market rates with great attention. It is worth remembering that, a few months ago, I told you that we would make every effort to revive our money market and to allow it function as well as possible. Regarding the third question, the Governing Council intends to decide on further non-standard measures at our next monetary policy meeting. As you know, we have already taken what we deem to be highly non-standard measures as regards the refinancing operations to commercial banks: In particular the unlimited supply of liquidity at fixed rates and the very substantial expansion of the eligibility of collateral. We have, therefore, already taken decisions that are extraordinarily non-standard and which have, contributed to the above-mentioned better functioning of our money market and have also contributed decisively to the increase in the size of our own balance sheet. By the way, it is worth noting that, at the time of speaking, the size of our balance sheet is larger as a proportion of GDP than that of the Federal Reserve System, although, of course, the Federal Reserve has already decided to – and will continue to – expand the size of their balance sheet. I am mentioning this because it is not necessarily very well-known. Hence, we have already taken a number of decisions that are non-standard and we intend to take further non-standard decisions at our next meeting. I know that I will be asked a hundred questions of the kind “what will you decide: will it be this, or this, or that?”, so I will see you here in one month’s time at the next monetary policy meeting, and then I will stand ready to announce the decisions of the Governing Council in this regard. Now it is clear: I remember that, at the last meeting, I said “if and when we decide I will tell you”, and now I can tell you “when” that will be. We will see, and I should add that there is still an “if” in that we will see what we decide. I will give you all the details next time. But today, we took the decision once again to decide next time on this very important issue and, of course, as I have already explained, to decide on the interest rates.
Question: Do you see an increased risk of a credit crunch or of deflation in the euro zone, Mr Trichet? And I also have a question for Mr Papademos: when you said last week that purchases of private sector bonds may be necessary in the euro zone, a lot of us interpreted that as your trying to prepare the markets for such a programme in the near future. Did we entirely misinterpret you in that? Thank you
Trichet: On the question of the evolution of credit, I said what I had to say on behalf of the Governing Council. It is very clear. Obviously, we have facts and figures before us, and we have to understand better how to attribute what we are observing to the demand side and what we could attribute to the supply side. As regard supply, we are doing whatever we can to keep our banking system as active as possible. I would echo all that has been said in the run-up to the important meeting, the G20 which is taking place in London, namely that a great number of decisions have been taken by the authorities with respect to support in the financial sphere and that it is extremely important for all those measures to be implemented as soon as possible, measures that are very important for enabling the banking system to lend, which is the task of the banking system. And to the extent that moral suasion is important in the present circumstances in which we find a lack of confidence wherever we look, I would certainly echo what I have said before and what the Governing Council has said, namely that we call on our banks to be as active lenders as possible in the present circumstances. As regards deflation, we have not changed our diagnosis – we do not see any substantiation or materialisation of deflationary risk. We see ourselves in a disinflationary episode. At the moment, we continue to deem our medium-term inflation expectations to be soundly anchored. That, by the way, is one of the most important successes of this institution. When I look at the medium term, I am looking at the inflation expectations expressed in the Survey of Professional Forecasters, and we will have to see what it says in a month’s time, but thus far since the setting up of the euro these expectations have fluctuated between 1.7% and 2%. And the last reading that we had was 1.9%. When your definition of price stability over the medium term is less than 2%, close to 2%, it is difficult to find something that would be much better than this oscillation between 1.7% and 1.9%. I said on behalf of the Governing Council that the disinflationary process that we are facing and which is due predominantly to the prices of oil and commodities will continue to push the consumer price index downwards – we are currently at 0.6 %, and we are likely to see it go below zero. That, of course, depends on the price of oil, but I hope that the price of oil will not go up again. And all this is something that we should not confuse with deflation, because – on the contrary – it is a factor that is expansionary, because we are distributing purchasing power to our fellow citizens through lower prices of oil and commodities. That having been said, we will continue to be very alert and we look permanently at our inflation expectations. We constantly look at the various indicators that we have at hand and that could substantiate the deflationary risk, but we do not see materialisation of such a risk at the moment. Now I will hand over to the Vice-President.
Papademos: Very briefly, my remarks last week consisted of two parts. I mentioned potential further non-standard measures that may be taken. As the President has already emphasised, we have taken a number of non-standard measures in the past. Such measures aim at improving the functioning of credit markets and facilitating the financing of the economy. At the same time, I emphasised that the Governing Council has taken no decision concerning the need for or the nature of these measures. So the two statements together do not suggest that there was an intension to prepare the markets for an implementation of such measures.
Question: Two questions, if I may.
First about the May meeting: Is this going to be an important rate meeting as well? And do you think in general that it is important that when non-standard measures are announced they are accompanied by rate cuts, as some Governing Council members have said that this would increase their effectiveness?
And the second question is, the OECD has cut its estimate for euro area growth this year to -4.1%. Do you think that this is an overly pessimistic view of the economy?
Trichet: Regarding your first question, I said that 1.25% was not the lowest level that we have decided ex ante. And I have nothing to add to that. We are never pre-committed. As you know, we will do what we judge appropriate at any time. I said also that it would be a measured decision.
As regards the OECD, I make no judgement myself as to whether any projections are better or worse than others. As you know, we look at our own staff projections, but we do not underwrite them. We make a judgement on the basis of this very important input, but we look at all projections. When I look at all these projections, it seems to me that it is true that the OECD projections appear at this moment in time to be more negative than the private sector projections and the other public sector projections, including those of the IMF. We will see. We are in a world which is difficult and uncertain. I would just draw your attention to something I said a month ago. When we issued our last projections, I told you that of course they did not incorporate the 50 basis point decrease in interest rates that we had only just decided upon. They do not, by definition, incorporate the 25 basis point cut of today. So there has been a further 75 basis point reduction overall, for all three of our interest rates, that is now incorporated. This is one of the reasons why we said that we felt that the risks for inflation, in particular, were balanced, because we also take into account the decisions that have been taken since the last set of projections was issued. But we have to remain extraordinarily pragmatic and humble in the presence of facts and figures in a period in which uncertainty is greater than ever.
Question: The Spanish financial sector has been seen as one of the most resilient towards the crisis. As you know, the Spanish central bank has just intervened in the case of the Caja Castilla la Mancha. Are you as the European Central Bank more worried now about its instability? Do you see more banks or cajas having problems in the near future?
Trichet: No, we have certainly not changed our diagnosis at the level of the euro area as a whole and I will not comment on one particular event. I would say that it is a process. Everybody knows about the developments regarding real estate, not only in Spain but in a number of other countries also. So I have nothing particular to say and we certainly have not changed our diagnosis at all because of that event.
Question: The most likely option that financial markets were expecting today was a cut of 50 basis points but also only a 25 basis point cut in the deposit facility rate. Can you explain why you did not take that decision, particularly as you are saying that 1.25% is not the lower limit for main refinancing operations?
Secondly, am I correct in thinking now that basically what you are telling us today is that, as far as conventional steps go, you have reached the limit. There is not much more you can do and now the ECB is in effect switching mode and looking more exclusively at the non-standard measures. Is that the frame of the debate within the Governing Council at the moment? And on that specifically, you have made a lot of references in speeches recently to what you call enhanced credit support working within the banking system. Do you think that policy is continuing to work? Is the banking system continuing to improve? In other words, is it not going to be necessary to circumvent the banking system in the way that the FED and the Bank of England have done? In other words, is the need for outright purchases less in the euro area than elsewhere?
Trichet: I would say on the first point that my reading of the market rates and of the expectations that can be extracted from the money market was that they saw a probability of 50% for a decrease of 50 basis points and 100% for a decrease of at least 25 basis points. So I would not say that it is as simple as you said. I would certainly echo what you said about the deposit rate, although there was no real mathematical extraction of information from the market that would substantiate a 25 basis point decrease in only the deposit rate. It was more the reasoning of economists or specialist experts. They were not wrong on that particular point as we can see. And I can only tell you that we have judged that it was appropriate, taking all factors into account, to decrease the rate on the main refinancing operations by 25 basis points while, at the same time, we have not decided that this is the lowest point that could be attained. It is as simple as that. It is the result of a very in-depth discussion and weighing of the various arguments. I will only mention one of them, which is that we have been quite satisfied so far with our decision to widen the de facto corridor for the very short term money market rates between the rate on the main refinancing operations and the deposit rate. And with regard to maintaining the width of this corridor, which has served us very well in the recent past, there was no particular or decisive reason not to continue. But this may not be true in the future. So I do not rule out the possibility that we could reduce the width of the corridor.
On the non-standard measures, we are already fully engaged in non-standard measures. And we were the first, as perhaps you remember, to embark upon very audacious and bold measures, including the unlimited supply of liquidity at fixed rates. We did that to cover the end of the year in 2007, with very bold decisions at the time, and after the intensification of the crisis we were extremely prompt in embarking upon this unlimited supply of liquidity. We were also the first to supply liquidity at longer maturities – not only of one week but of three months and six months. And this confirms that the ECB has the capacity to adopt non-standard measures in the main area of the financing of our economy, namely the 70% of the financing of the economy which goes through commercial banks, according to the figures for outstanding financing. We will tell you at our next meeting how we intend to go further in terms of non-standard measures. I do not want to pre-empt in any respect what we may say then. Rest assured that we will ensure that, by so doing, we optimise the appropriate help that we can offer to our economy with regard to the enhanced credit support in particular.
Question: I also have a couple of questions. You have just said you don’t rule out that the corridor between the key and the deposit rate could be reduced further. Is there a limit to how narrow it can go?
Secondly, you’ve used this interesting word “measured”. I imagine you would call all the ECB’s decisions “measured”. So maybe you could help us to understand the difference between the kind of “measured” decision you took...
Trichet: Today’s decision was “measured” in this respect.
Question: Maybe you could tell us if there was a discussion of less measured options?
And then finally, you’ve given us the “when” on non-standard measures, but the “if” remains outstanding. Is that because you haven’t decided on how to implement such measures, or because you haven’t decided yet whether there is a need? And if you haven’t decided yet whether there is a need, what could change between now and next month to push you into deciding whether there is a need?
Trichet: We will meet next month as regards the non-standard measures. And as I have said, we are examining carefully all elements that would allow us to be convinced at the level of the Governing Council that we are optimising what could be done, and should be done, in our view, to enhance credit support and be sure that we have an optimised set of non-standard measures.
And let me just say – and this is not a comment on those particular future decisions; it’s also a general comment – that we are extremely keen on preserving what we consider essential in the present circumstances, namely the fact that this institution, the ECB, is an anchor of stability and confidence, and that all that we do must be understood and perceived as such by our fellow citizens. You know that the confidence of our fellow citizens is the most important thing today. We have many economic difficulties in particular because our fellow citizens have lost some of their confidence. So we have to continue to be able to tell them “you can trust us; we will do all that is necessary, as we have done in the past, we will do what is called for in the circumstances”. Remember that we were the first – and we were criticised for it – to diagnose that we were in a very difficult situation and that we had to take bold measures. It was 9 August 2007.
At the same time, it is essential that we preserve their confidence that we will continue to deliver price stability in line with our definition in the medium and long run. This is an essential component of their confidence today. I’m reading the papers, I’m reading articles, including the popular press, and I’m struck by the fact that the debate on what tomorrow and the day after tomorrow will bring for us and for our children is an open question. We have to be very careful in this respect. I say that just to give you an idea of our thinking when taking this decision. In any case, when we meet after the next monetary policy meeting, I will tell you what has been decided for the non-standard measures.
Question: Mr Trichet, of those non-standard measures that you are discussing, is the exchange rate one option? And are you concerned that other currencies might be devalued deliberately in order to fight deflation in their jurisdictions and foster exports in order to foster economic growth there?
Trichet: No. Exchange rate questions are not part of what we are presently discussing. And on exchange rates, as you know, I have a very clear message: I stick to the last G7 communiqué. And I also noted the – again, very important – statement made recently by the Secretary of the Treasury in the United States and the President of the United States. That’s not a scoop; I have said that already.
Question: At today’s meeting, was there also some position that was of the opinion to do nothing today, that is, not to cut and to remain with the old level of interest rates?
Trichet: Thank you for your question; it is a very simple one. I would say no. No, we considered that the situation was such that it was appropriate to decrease rates.
Question: Would you, Mr Trichet, be disappointed, if the G20 today in London passed up the chance to establish the new rules for the financial system like France and Germany proposed? What are you really expecting from that meeting in London, and in which way could it help to resolve or to avoid a financial crisis like you are dealing with now?
Trichet: Well, we are in real time, and I will wait until the communiqué is published and will not comment at this stage. I will only tell you, although you know that, already that I participated as actively as possible in the ministers and governors’ meeting that took place in Brighton. It was, in my opinion a very good meeting. It was a good preparation, and I was heartened to see that there was a good deal of consensus in particular between the emerging world and the industrialised world. Let us not forget that the G20 is this new informal institution where you have precisely both the emerging world and the developing world, and where you have all systemic economies. So, I was impressed by the degree of consensus that existed, at the level of ministers and governors, between all those which are instrumental and systemic in the present global economy. But again, let us wait for what is being decided in London. Personally, I am optimistic.