Introductory statement with Q&A
Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB
Luxembourg, 2 July 2009
Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference here in Luxembourg. I would like to thank Governor Mersch for his kind hospitality and to express our special gratitude to his staff for the excellent organisation of the meeting of the Governing Council. 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, and Commissioner Almunia.
On the basis of its regular economic and monetary analyses, the Governing Council decided to leave the key ECB interest rates unchanged. The current rates remain appropriate taking into account all the information and analyses that have become available since our meeting on 4 June 2009. The fall of annual inflation rates into negative territory in June is in line with previous expectations and reflects mainly temporary effects. After a return to positive inflation rates, we expect price developments to remain dampened over the policy-relevant horizon. Recent data releases and survey information provide further indications that economic activity over the remainder of this year is likely to remain weak but should decline less strongly than was the case in the first quarter of 2009. This assessment incorporates adverse lagged effects, such as a further deterioration in labour markets, which are likely to materialise over the coming months. Looking ahead into next year, after a phase of stabilisation, a gradual recovery with positive quarterly growth rates is expected by mid-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 below, but close to, 2% over the medium term. The outcome of the monetary analysis corroborates the assessment of low inflationary pressure, as money and credit indicators continue to be weak. Against this background, we expect the current episode of extremely low or negative inflation rates to be short-lived and price stability to be maintained over the medium term, thereby continuing to support the purchasing power of euro area households.
Let me now explain our assessment in further detail, starting with the economic analysis. The data and survey information that have become available since our last press conference in early June have broadly confirmed our previous expectations. Economic activity over the remainder of this year is expected to remain weak but should decline less strongly than was the case in the first quarter of 2009. Looking ahead into next year, after a phase of stabilisation, a gradual recovery with positive quarterly growth rates is expected by mid-2010. The significant policy stimuli in all major economic areas should support growth globally, including in the euro area.
In the view of the Governing Council, the risks to the economic outlook are balanced. On the positive side, there may be stronger than anticipated effects stemming from the extensive macroeconomic stimulus being provided and from other policy measures taken. Confidence may also improve more quickly than currently expected. On the other hand, concerns remain relating to a stronger or more protracted negative feedback loop between the real economy and the turmoil in financial markets, further increases in oil and other commodity prices, the intensification of protectionist pressures, increasingly unfavourable labour markets and, lastly, adverse developments in the world economy stemming from a disorderly correction of global imbalances.
With regard to price developments, annual HICP inflation was, according to Eurostat’s flash estimate, -0.1 % in June, compared with 0.0% in May. As explained on previous occasions, the further decline in annual rates of inflation was anticipated and reflects primarily base effects resulting from past sharp swings in global commodity prices.
Looking ahead, owing to these base effects, annual inflation rates are projected to remain temporarily in negative territory over the coming months, before turning positive again. Such short-term movements are not relevant from a monetary policy perspective. Consistent with available forecasts and projections, looking further ahead, inflation is expected to remain in positive territory, while price and cost developments are expected to remain dampened in the wake of ongoing sluggish demand in the euro area and elsewhere. In this respect, 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 below, but close to, 2% over the medium term.
Risks to the outlook for inflation are broadly balanced. On the downside they relate, in particular, to the outlook for economic activity, while on the upside they relate to higher than expected commodity prices. Furthermore, increases in indirect taxation and administered prices may be stronger than currently expected owing to the need for fiscal consolidation in the coming years.
Turning to the monetary analysis, the latest data confirm a continued deceleration in monetary dynamics. In May, the annual growth rate of M3 declined further to 3.7%, with that of loans to the private sector falling further to 1.8% – the lowest rates since the start of Stage Three of Economic and Monetary Union. This concurrent deceleration supports the assessment of a slower underlying pace of monetary expansion and low inflationary pressures over the medium term.
In May, the outstanding amounts of most components of M3 showed a contraction, reflecting, to a large extent, the recent declines in interest rates paid on short-term deposits and marketable instruments and the increased allocation of funds to instruments outside M3 that these may have fostered. Following a substantial strengthening in April, the growth of M1, while having remained strong, also moderated in May. The short-term developments in M3 have been volatile over the past few months. Looking beyond this volatility, the pace of monetary expansion has clearly slowed since the last quarter of 2008.
The flow of bank loans to non-financial corporations and households has remained subdued, reflecting in part the weakening in economic activity and the continued low levels of business and consumer confidence. A moderate monthly contraction in the outstanding amount of loans to non-financial corporations has been observed over recent months. These developments are mostly due to a decline in short-term lending, while the flow of loans with longer maturities has remained slightly positive. In this respect, it is important to note that past reductions in key ECB rates have continued to be passed on through lending rates to both non-financial corporations and households. The resulting improvement in financing conditions should provide ongoing support for economic activity in the period ahead. However, as we have stressed in the past given the challenges that lie ahead, banks should take appropriate measures to strengthen further their capital bases and, where necessary, take full advantage of government measures to support the financial sector, particularly as regards recapitalisation.
To sum up, the current rates remain appropriate taking into account all the information and analyses that have become available since our meeting on 4 June 2009. The fall of annual inflation rates into negative territory in June is in line with previous expectations and reflects mainly temporary effects. After a return to positive inflation rates, we expect price developments to remain dampened over the policy-relevant horizon. Recent data releases and survey information provide further indications that economic activity over the remainder of this year is likely to remain weak but should decline less strongly than was the case in the first quarter of 2009. This assessment incorporates adverse lagged effects, such as a further deterioration in labour markets, which are likely to materialise over the coming months. Looking ahead into next year, after a phase of stabilisation, a gradual recovery with positive quarterly growth rates is expected by mid-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 below, but close to, 2% over the medium term. A cross-check of the outcome of the economic analysis with that of the monetary analysis corroborates the assessment of low inflationary pressure, as money and credit indicators continue to be weak. Against this background, we expect the current episode of extremely low or negative inflation rates to be short-lived and price stability to be maintained over the medium term, thereby continuing to support the purchasing power of euro area households.
As the transmission of monetary policy works with lags, our policy action should progressively feed through to the economy in full. Hence, with all the measures taken, monetary policy will provide ongoing support for households and corporations. The Governing Council would like to recall that the Eurosystem provided a significant amount of liquidity to euro area banks at its recent first 12-month longer-term refinancing operation. This operation at a fixed interest rate of 1% is expected to strengthen further the liquidity position of banks and to support the normalisation of money markets and the extension of credit to the economy alongside the other measures of enhanced credit support. Once the macroeconomic environment improves, the Governing Council will ensure that the measures taken are quickly unwound and that the liquidity provided is absorbed. Hence, any threat to price stability over the medium to longer term can be effectively countered in a timely fashion. As has been emphasised many times, 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.
As regards fiscal policies, the Governing Council welcomes the spring 2009 orientations for euro area fiscal policies as agreed by the euro area finance ministers in June. A return to sound, sustainable public finances, thus strengthening overall macroeconomic stability, must be ensured. Against this background, euro area governments should prepare and communicate ambitious and realistic fiscal exit and consolidation strategies within the framework of the Stability and Growth Pact. In the view of the Governing Council, the structural adjustment process should start in any case not later than the economic recovery. In 2011 the consolidation efforts should be stepped up. To correct the envisaged large fiscal imbalances of euro area countries, structural consolidation efforts will need to exceed significantly the benchmark of 0.5% of GDP per annum set in the Stability and Growth Pact. In countries with high deficits and/or debt ratios the annual structural adjustment should reach at least 1% of GDP.
Turning to structural policies, there is a need to intensify efforts to support potential growth in the euro area. Given the negative impact of the financial crisis on employment, investment and the capital stock, it is crucial to accelerate the implementation of necessary structural reforms. In particular, product market reforms are required to foster competition and speed up restructuring and productivity growth. Furthermore, labour market reforms need to facilitate appropriate wage-setting and labour mobility across sectors and regions. At the same time, many of the policy measures taken in recent months with a view to supporting specific segments of the economy should be phased out in a timely manner. It is crucial that the focus is now on strengthening the adjustment capacity and flexibility of the euro area economy in line with the principle of an open market economy and free competition.
We are now at your disposal for questions.
Transcript of the questions asked and the answers given by Jean-Claude Trichet, President of the ECB, Lucas Papademos, Vice-President of the ECB and Yves Mersch, Governor of the Banque centrale du Luxembourg
Question: You talked about the auction which you held last week. I have just three questions about how it went. First, are you happy with the impact that it has had on money market rates, including the EONIA.
Second, you are going to have a few more auctions for 12 months over the year, would you consider adding a spread to the ones you are going to have in September and December? And how do you see demand for those two auctions?
Third, overnight deposits have come back up to their highest rate since January following the auction. Are you worried that instead of putting this money out into the markets, that banks are just handing it straight back to you?
Trichet: We were happy with the result of this long term refinancing operation. It is symbolic of what we have been doing in terms of enhanced credit support in the domain of liquidity supply, and, in our eyes, the impact of this operation is proof that this is the appropriate channel for our enhanced credit supply.
As regards the future auctions, we will decide when the time comes. We have taken no decision as yet, which is not particular to the long-term operation, rather it is the case for all term operations that we decide what to do as regards spreads just before the operation itself.
With regard to the functioning of the money markets, taking into account this very large additional supply of liquidity, I would say the following: Since we decided to embark on a “fixed rate full allotment procedure”, namely a few days after the intensification of the crisis, in October last year, we have observed the EONIA positioning itself between the main refinancing rate and the deposit rate. This has been the normal functioning of the money market in the shortest part of the money market since then. This is therefore taken into account in the way we are handling the money market in the present period. We are examining closely how the markets are moving. At this stage, we consider the fact that the EONIA is positioning itself between the main policy rate and the deposit rate to be a normal feature of the money market. We expect this rate to be established by a real private market functioning, i.e. supply and demand of very short-term liquidity by the market participants. We will see whether this kind of normal market functioning continues. We are observing very closely what is going on, but we saw no reason today to change the concept that we have been applying since the beginning of this full allotment mode, which has been systematic since the intensification of the crisis. That said, I am not ruling out anything. Our main aim is to have an appropriate functioning of the money market and to diminish the various risk premia on this market as much as possible. From this point of view, we are very happy because we can clearly see that we have decreased the risk premia. We have seen a number of consequences in the term money market, in particular for the one-year rate where the risk premia are lower than in other equivalent money markets. I would therefore reiterate that our judgement is very positive. However, we will continue to monitor the situation, and we are very keen on having the various market participants setting the EONIA at a level that would reflect an appropriate functioning between market participants. As regards overnight deposits, we will see what happens. Of course, it is not surprising that we have large recourse to deposits when we have a level of liquidity that is obviously significantly larger than that required by the functioning of our own financial sector. The various banks and counterparts of the Eurosystem will adjust to take into account the liquidity situation and we will therefore see what will be precisely the next operation. All operations are with full allotment. I expect of course that the excess of liquidity that we are observing today, which is not surprising given the enormous success of our first one-year operation, will diminish progressively.
Question: Since the 12-month tender there has been a lot of volatility in money market rates. And I was wondering whether that concerns you or not at all and, if so, whether there is anything you might do to address this?
Also, I was wondering whether there have been any calls for a further rate cut or the expansion of the €60 billion bond purchase programme over the last two days?
And also, could you perhaps give us some more details on that programme, particularly as there seems to have been some confusion as regards the maximum maturity of those bonds – is that five years or ten years?
And finally, Mr Weber said last week that the ECB will have to bypass the banking system if banks fail to pass on liquidity. Could you let us know under what particular circumstances the ECB might consider such a move?
Trichet: As regards the covered bond purchase programme, we will publish at 5 p.m. CET the legal details of the decision we took today to permit the programme to go on. This concerns details of a technical nature, and we will start this programme on 6 July 2009.
As regards the maximum duration of the maturity of those bonds, I draw your attention to the fact that the Governing Council is a single entity with a “porte parole”. Therefore, as regards the duration of these covered bonds, I will stick to what I said earlier, it will depend very much on a case-by-case basis what is the appropriate duration of these covered bonds, but it could go from three years to ten years.
As regards the enhanced credit support that we are embarking on – by which I mean both the covered bonds and the liquidity supply, as well as all the measures that we have taken with regard to full allotment and the enlargement of collateral – all this is, in our opinion, appropriate right now. That is true also for the interest rates themselves, and we do not envisage anything at the present moment. Of course, we continue to monitor everything very closely.
As regards your first question, namely the functioning of the money market, I already responded at great length on that question. We observe the money market, and at the present moment we consider that what we are observing is explainable, taking into account the very large amount of extra liquidity that we have injected. As I said, we judge this to have been a great success, and we will continue to observe what is going on. Our goal is as it has been the case since the very beginning of these extraordinary measures, to have a money market which really functions, with active participation of market participants and that has been the case until now. At present we do not plan to change our way of handling the money market.
On your last point, I never comment on the comments of colleagues. I speak on behalf of the Governing Council, and I said that we had not envisaged any other new measures or operations. We consider that what we are doing now is appropriate.
Question: It ties in actually with the question of my colleague here. If we look at the development of M3, we see that the loans to the corporate sector are almost heading towards stagnation. When you talk to the market participants, they say it’s a question of not enough supply rather than a question of not enough demand. How concerned are you by the fact that evidently transmission processes from the banking system into the real economy don’t work, and indeed do you have any contingency plans if this process continues? Because obviously it could lead to a real crunch and problems in the economy.
And the second question may be more on a technical note. If you already made the decisions about what’s happening with the covered bond programme, why are we getting a press release at 5 o’clock rather than now?
Trichet: As regards you second question it’s a decision which has to be legally processed. There is absolutely no other reason.
As regards the first question it is not new that we see a deceleration of the outstanding amount of credit to non-financial corporations in particular, and also to households. And the decision we just took – and I’m commenting on €440 billion, i.e. the allotment of the one year refinancing operation – was taking into account what we are observing. We are responding by embarking on this new very bold mode of supplying liquidity. We will start the purchase of the covered bonds in a few days. And in our view it is appropriate taking into account what we are observing.
Let me remind you of the figures. As regards the annual rate of growth for loans to non-financial corporations, what we are observing is +4.4%. This is the annual rate. It doesn’t capture, as you said, the most recent evolution, which is slightly negative as regards the monthly flow in May for outstanding loans, at -€5 billion.
We see clearly that there is a difference, as I said on behalf of the Governing Council, between loans over five years, which continue to augment as far as outstanding loans over five years are concerned, and shorter-term loans, which are by contrast declining. So you have a rebalancing within outstanding loans to non-financial corporations.
And as regards loans to households, they are flat now over one year. We have in April and in May around zero – -0.2% – from the last statistics. Even if the monthly flow is slightly positive as regards the May statistics.
That’s clearly the situation, and the decisions we have taken are exceptional, the results are exceptional because what we have observed with our one-year refinancing operation has never been observed: you have never had the central bank supplying more than €440 billion of liquidity. And we believe that it is commensurate with the challenges that we have.
We are also doing it because there is an exit strategy which is very obvious. And when time comes we will be able to unwind this extraordinary mode of supplying liquidity.
Question: Two questions. One on the outlook for the credit market. You have managed to avoid answering the question about what the ECB will do if this extra liquidity is not passed on to the private sector, on to commercial companies in the private sector. In that context, I wonder what you can tell us about the immediate outlook for the credit market? If I understand correctly, you had the first results of your bank lending survey at this meeting. Can you tell us what they are showing? And reports from Germany suggest that we may be in for something more of a credit crunch in the coming months because of the delayed effect of the accountancy changes. Are things going to get worse before the effects of your operations feed through?
And secondly, a more general question. You have talked today about policy being appropriate once more, which is now being translated, I think, in the markets as meaning you are basically in a wait-and-see mode. And one of the reasons why demand was so high for the one-year liquidity, as you know, was because markets do not expect any more cuts in the main policy rate and markets are now talking about rates remaining on hold well into next year, possibly beyond. Would you like to say anything today to correct those impressions?
Trichet: We are looking very carefully at all the elements which could permit us to be enlightened on the supply and demand aspects of the credit provision and, taking into account the global decline of activity – particularly in a number of cases the very sharp decline of global trade – we trust that it is not surprising that demand is playing a very important role in the slowing down of credit that we are now seeing. We trust also that there are elements of supply in what we are observing, even if we consider that it is very difficult to disentangle demand and supply. But to the extent that supply is undoubtedly also at stake, it justifies what we have been doing in terms of non-conventional measures. It also justifies our call to commercial banks in general to be up to their responsibilities, namely to ship to the real economy the extraordinary efforts that we are making ourselves. We call for their full responsibility when they provide credit. We also call upon them to take full advantage of the possibilities which are being offered to reinforce their balance sheets. And I am referring to market reinforcement of balance sheets through, in particular, a possible issuance of new capital, which would be subscribed by the private sector. And, as I said on behalf of the Governing Council, we call upon them to take advantage of the possibilities, including recapitalisation, which exist at the level of the euro area. We believe that only 55 - 56% of the recapitalisation capital has been utilised. What has been earmarked by the various governments and parliaments contains a non-utilised element, which is of the order of magnitude of more than a hundred billion euros. And that is something which we trust would be very useful in a number of cases. We are not dictating their behaviour, neither to the commercial banks, nor to governments. But we trust that our own efforts have to be accompanied by this support to the financial sector and to the banks, which is part of our joint efforts to revive the economy. That being said, we are observing what is happening and we consider that what we have been doing until now is appropriate and we have now to pursue these efforts. We are starting, as I have said, in a few days the purchase of these covered bonds. And to give you more details we were unanimous in today’s decision as regards the interest rates. I do not change the message I gave two months ago and one month ago. We did not decide today that this was the lowest level we would ever attain under any circumstances. I repeat that, as I did a month ago and two months ago. But we judge that the interest rates are appropriate and we will continue to monitor the situation very closely.
Question: I have a couple of questions. On the purchase programme: Is it permissible, under the programme, to have covered bonds backed by mortgages or other assets outside the euro area – UK mortgages, for example?
My second question is: We had the Financial Stability Review a couple of days ago, and one of the messages was that the banking sector in the euro area is still very vulnerable. Given that fact, you’re providing that banking sector with quite a lot of liquidity – €450 billion – against weaker or worse collateral than before. What does that say about the financial soundness of the ECB’s balance sheet in the coming months?
Trichet: On the covered bonds, all the details of our today’s decision will be published on our website later on at 5 p.m. I can give you a few additional elements immediately. We confirm the targeted nominal amount of €60 billion. We mentioned that we would purchase bonds from eligible counterparties in the primary and secondary markets. We confirm that we will have, as a rule, a minimum issue size of €500 million. In special cases, a Eurosystem central bank may decide to purchase outright covered bonds with an issue size of below €500 million, provided that the issue size is not below €100 million, where it decides, at its own discretion, that specific market circumstances relating to risk management considerations require such a purchase. And the counterparties eligible for the covered bond purchase programme are: domestic counterparties participating in Eurosystem monetary policy operations and other counterparties established in the euro area, either through incorporation or through a branch, that are used by a Eurosystem central bank for the investment of its euro-denominated investment portfolios. This is the information you will find in this decision that I have just signed, following today’s decision by the Governing Council.
We will see how exactly the purchases are carried out. For obvious reasons, we would expect to concentrate on what is done for the euro area economy, as the collegial central bank of the euro area – i.e. the Eurosystem. That being said, I know that in some cases you have a small non-euro area element, in some of the assets that are backing the covered bonds, and that would not be a cause for ineligibility. You had a second question.
Question: Yes, it was about the combination of the lower quality of collateral in refinancing and the huge amount of money being given to the banks and, at same time, the increased risk for the banking sector, as it is still very vulnerable, as it still has a lot of toxic assets on its balance sheet.
Trichet: As you know, we recently published figures that were different from the IMF’s figures and significantly lower. When I call for the restructuring of the balance sheets of commercial banks to be as proactive as possible, this is something which seems, to be appropriate considering the challenges that we face. We have a forthcoming collateral framework. That’s absolutely clear, and it is also one of the reasons why we have decided not to take on additional risks associated with the purchase of securities that would increase our risks. I have said explicitly that we believe that this purchase of covered bonds is very much in line with what we are doing with our own refinancing operations, because we have in front of us the signature, backing or guarantee of the counterparties – the commercial banks themselves – plus the collateral in the one case, or the assets covering the bonds in the other. In both cases, we have a double guarantee, which is something that we considered appropriate taking into account the fact that we have a high level of risk, closely related to the fact that we have an accommodating collateral framework. This is fully in line with the need to be careful regarding risks in the Eurosystem.
Question: I have a question on exit strategies. The BIS general manager, Jaime Caruana, said this week that, for central banks, the bigger risk is exiting too late and too slowly from stimulus measures and lower rates. At what stage are the Governing Council’s plans for an exit strategy?
Trichet: Everything that we have been doing has been designed to facilitate exit strategies. The way that the ECB and the Eurosystem have been operating is fully in line with our fundamental goal of not hampering in any respect the solid anchoring of inflation expectations, both in the medium and long term. We are happy that this very solid anchoring has not been put into question. We will see what the results of the next survey are, but, at the moment, five-year ahead inflation expectations are at the level of 1.9% according to the Survey of Professional Forecasters. We attach great importance to being able to unwind everything that we are doing. I do not think that there is any doubt in the minds of observers, market participants, investors and households that we would be fully capable of doing that. I am not going to comment on other strategies and tactics, but as far as our own strategy and tactics are concerned, we are credible and will continue to solidly anchor our expectations, which we consider to be our major asset. It protects us from the longer-term risks of inflation occurring in the future and we are pleased to say that it has also functioned well in terms of protecting us from the shorter-term threats of deflation, which never materialised in our case. We continue to monitor the situation very closely.
Question: Just to clarify the question that my colleague asked about collateral. If a German branch of a US bank put up US mortgages as collateral, would that be acceptable?
Trichet: I said that in some markets in the euro area it is considered normal that a small proportion of assets are related to non-euro area assets. This would not be a reason for ineligibility. We are doing everything in order to support the euro area. I expect that all our colleagues, and the ECB, will look carefully at what they are purchasing. The ECB itself will purchase 8% of the €60 billion amount and the other 92% will be shared among all other members of the Eurosystem in this operation. We will see how to optimise this additional enhanced credit support that we are giving with a view to supporting the euro area. That goes without saying.