Introductory statement to the press conference (with Q&A)

Jean-Claude Trichet, President of the ECB,
Vítor Constâncio, Vice-President of the ECB,
Frankfurt am Main, 7 April 2011

Jump to the transcript of the questions and answers

Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. Before we report on the outcome of today’s meeting, we wish to express our sincere sympathy to the people of Japan, after the tragic events and lamentable loss of life. All our thoughts are with those who have suffered directly or indirectly from the natural and nuclear disaster.

Let me now start reporting on the outcome of today’s meeting.

Based on its regular economic and monetary analyses, the Governing Council decided to increase the key ECB interest rates by 25 basis points, after maintaining them unchanged for almost two years at historically low levels. The adjustment of the current very accommodative monetary policy stance is warranted in the light of upside risks to price stability that we have identified in our economic analysis. While our monetary analysis indicates that the underlying pace of monetary expansion is still moderate, monetary liquidity remains ample and may facilitate the accommodation of price pressures. All in all, it is essential that the recent price developments do not give rise to broad-based inflationary pressures over the medium term. Our decision will contribute to keeping inflation expectations in the euro area firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term. Such anchoring is a prerequisite for monetary policy to contribute to economic growth in the euro area. At the same time, interest rates across the entire maturity spectrum remain low. Thus, the stance of monetary policy remains accommodative and thereby continues to lend considerable support to economic activity and job creation. Recent economic data confirm that the underlying momentum of economic activity continues to be positive, with uncertainty remaining elevated. We will continue to monitor very closely all developments with respect to upside risks to price stability.

As stated on previous occasions, the provision of liquidity and the allotment modes for refinancing operations will also be adjusted when appropriate, taking into account the fact that all the non-standard measures taken during the period of acute financial market tensions are, by construction, temporary in nature. Accordingly, the Governing Council will continue to monitor all developments over the period ahead very closely.

Let me now explain our assessment in greater detail, starting with the economic analysis. Following the 0.3% quarter-on-quarter increase in euro area real GDP in the fourth quarter of 2010, recent statistical releases and survey-based indicators point towards a continued positive underlying momentum of economic activity in the euro area in early 2011. Looking ahead, euro area exports should be supported by the ongoing recovery in the world economy. At the same time, taking into account the relatively high level of business confidence in the euro area, private sector domestic demand should increasingly contribute to economic growth, benefiting from the accommodative monetary policy stance and the measures adopted to improve the functioning of the financial system. However, the recovery in activity is expected to be dampened somewhat by the process of balance sheet adjustment in various sectors.

In the Governing Council’s assessment, the risks to this economic outlook remain broadly balanced in an environment of elevated uncertainty. On the one hand, global trade may continue to grow more rapidly than expected, thereby supporting euro area exports. Moreover, continued strong business confidence could provide more support to domestic economic activity in the euro area than currently expected. On the other hand, downside risks relate to the ongoing tensions in some segments of the financial markets that may potentially spill over to the euro area real economy. Downside risks also relate to further increases in energy prices, in particular in view of ongoing geopolitical tensions, and to protectionist pressures and the possibility of a disorderly correction of global imbalances. Finally, there are potential risks stemming from the economic impact on the euro area and elsewhere of the recent natural and nuclear disaster in Japan.

With regard to price developments, euro area annual HICP inflation was 2.6% in March 2011, according to Eurostat’s flash estimate, after 2.4 % in February. The increase in inflation rates in early 2011 largely reflects higher commodity prices. Pressure stemming from the sharp increases in energy and food prices is also discernible in the earlier stages of the production process. It is of paramount importance that the rise in HICP inflation does not lead to second-round effects in price and wage-setting behaviour and thereby give rise to broad-based inflationary pressures over the medium term. Inflation expectations must remain firmly anchored in line with the Governing Council’s aim of maintaining inflation rates below, but close to, 2% over the medium term.

Risks to the medium-term outlook for price developments remain on the upside. They relate, in particular, to higher than assumed increases in energy prices, not least owing to ongoing political tensions in North Africa and the Middle East. More generally, strong economic growth in emerging markets, supported by ample liquidity at the global level, may further fuel commodity price rises. Moreover, increases in indirect taxes and administered prices may be greater than currently assumed, owing to the need for fiscal consolidation in the coming years. Finally, risks also relate to stronger than expected domestic price pressures in the context of the ongoing recovery in activity.

Turning to the monetary analysis, the annual growth rate of M3 increased to 2.0% in February 2011, from 1.5% in January. Looking through the recent volatility in broad money growth owing to special factors, M3 growth has continued to edge up over recent months. The annual growth rate of loans to the private sector also increased further to 2.6% in February, from 2.4% in the previous month. Hence, the underlying pace of monetary expansion is gradually picking up, but remains moderate. At the same time, monetary liquidity accumulated prior to the period of financial market tensions remains ample and may facilitate the accommodation of price pressures in the euro area.

Looking at M3 components, annual M1 growth moderated further to 2.9% in February 2011, while the growth of other short-term deposits and marketable instruments has increased. This rebalancing within M3 reflects the impact of the recent steepening of the yield curve on the remuneration of different monetary assets. However, this steeper yield curve also implies a dampening impact on overall M3 growth, as it reduces the attractiveness of monetary assets compared with more highly remunerated longer-term instruments outside M3.

On the counterpart side, a further rise in the annual growth rate of bank loans to the private sector in February is due in part to a further slight strengthening in the growth of loans to non-financial corporations, which rose to 0.6% in February, after 0.5% in January. The growth of loans to households was 3.0% in February, compared with 3.1% in January. Overall, in early 2011 the positive flow of lending to the non-financial private sector has become more broadly based across the household and non-financial corporation sectors.

The latest data confirm that banks have expanded their lending to the private sector further, while at the same time the overall size of their balance sheets has remained broadly unchanged. It is important that banks continue to expand the provision of credit to the private sector in an environment of increasing demand. To address this challenge, where necessary, it is essential for banks to retain earnings, to turn to the market to strengthen further their capital bases or to take full advantage of government support measures for recapitalisation. In particular, banks that currently have limited access to market financing urgently need to increase their capital and their efficiency.

To sum up, the Governing Council decided to increase the key ECB interest rates by 25 basis points. The adjustment of the current very accommodative monetary policy stance is warranted in the light of upside risks to price stability that we have identified in our economic analysis. A cross-check with the signals from our monetary analysis indicates that while the underlying pace of monetary expansion is still moderate, monetary liquidity remains ample and may facilitate the accommodation of price pressures. All in all, it is essential that the recent price developments do not give rise to broad-based inflationary pressures over the medium term. Our decision will contribute to keeping inflation expectations in the euro area firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term. Such anchoring is a prerequisite for monetary policy to contribute to economic growth in the euro area. At the same time, interest rates across the entire maturity spectrum remain low. Thus, the stance of monetary policy remains accommodative and thereby continues to lend considerable support to economic activity and job creation. Recent economic data confirm that the underlying momentum of economic activity continues to be positive, with uncertainty remaining elevated. We will continue to monitor very closely all developments with respect to upside risks to price stability.

Turning to fiscal policies, it is essential that all governments achieve the consolidation targets for 2011 that they have announced. Moreover, the announcement of fully specified consolidation measures for 2012 and beyond would help to convince the general public and market participants that the corrective policies will be sustained. Strengthened confidence in the sustainability of public finances is key, as this will reduce interest rate risk premia and improve the conditions for sound and sustainable growth.

At the same time, it is crucial that substantial and far-reaching structural reforms be urgently implemented in the euro area to strengthen its growth potential, competitiveness and flexibility. In the case of product markets, policies that enhance competition and innovation should, in particular, be further pursued to speed up restructuring and to facilitate advances in productivity. On the labour market, the priority must be to enhance wage flexibility and incentives to work, and to remove labour market rigidities.

Finally, the Governing Council is of the view that the package of six legislative proposals on economic governance, adopted by the European Council at its summit on 24-25 March 2011, goes some way to improving economic and budgetary surveillance in the euro area. However, in our view, the proposals fall short of the necessary quantum leap in the surveillance of the euro area which is needed to ensure the smooth functioning of Economic and Monetary Union. Therefore, the Governing Council, in line with the ECB’s opinion of 17 February 2011 on these proposals, urges the ECOFIN Council, the European Parliament and the Commission to agree, in the context of their “trialogue”, on more stringent requirements, more automaticity in the procedures and a clearer focus on the most vulnerable countries with losses in competitiveness. All this would help to ensure that the new framework is effective in the long run.

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
 Vítor Constâncio, Vice-President of the ECB

Question: Mr Trichet, you said last month that this rate increase would not be the start of a series and I was wondering whether you would be willing to repeat that statement this time around as well.

Also, could you please tell us whether this decision was unanimous, whether there were any calls for a 50 basis point increase or even for leaving rates unchanged?

And a third question: did the ECB encourage Portugal to seek aid?

Trichet: As regards your second question, the decision taken today by the Governing Council was unanimous. It was a decision taken in order to enable us to deliver in the future, as we have done in the past, price stability over the medium term, in line with our definition.

As regards your first question we did not decide today that it would be the first of a series of interest rate increases. We will continue to do in the future what we have done in the past, namely to take decisions that are necessary for the delivery of price stability in the medium term.

With regard to Portugal, we encouraged the Portuguese authorities to do what was commanded by the situation, given the recent political developments in the country.

Question: Monsieur Trichet, to what extent are you concerned about the risks of contagion in the euro area? It seems that the markets keep pushing one country after the other to the brink, and Mr Bini Smaghi said recently that the risk of contagion was not insignificant.

I also have question on today’s rate hike: the headlines having been saying that this would put further strain on the peripheral countries. I do not necessarily buy that argument, but what do you say to that?

Trichet: I am very happy that you do not buy that argument.

In answer to your first question, I would say again that, if you take the euro area as a whole, you have an economy that is integrated. It is a single market with a single currency. Its external current account is balanced and its currency has kept its value over 12 years with an average annual rate of inflation of 1.97%. Furthermore, according to all projections, the public finance deficit for this year will be approximately half that of other advanced economies, namely Japan or the United States. Nevertheless, there are a number of countries in the euro area that need to correct their situation, not just in terms of their fiscal policies, but also in terms of their economic policies. Plans are in place in some countries and, in our view the plans need to be rigorously applied. Plans will also be defined in one other country, which is something that we welcome, and these plans too will need to be applied. For all countries, we continue to recommend that they stay ahead of the curve.

In answer to your second question, I will only say that we are responsible for ensuring price stability for 331 million people, and all the decisions that we have taken since the very beginning of the euro, including today’s, have been designed to deliver price stability to 331 million people.

Question: You talked of urgent vigilance for the periphery; if we have Portugal going from, say, a budget deficit of 7.3% of GDP this year to 8.6% per cent, it is very difficult trying to borrow in the commercial markets because of higher interest rates and a stronger euro. Doesn’t this dig the hole even deeper for countries like Greece, Ireland, Portugal and potentially Spain?

Trichet: What we decide is designed to deliver what we are called upon by our primary mandate to deliver for all 17 countries and all our fellow citizens. Price stability is of extreme importance for growth and job creation in the euro area as a whole. Of course, all countries would benefit directly or indirectly from the fact that the euro area as a whole will have more growth and more job creation, in particular because, with inflation expectations being well-anchored, we will have a financial environment in which medium and long-term interest rates in the market will be lower than if inflation expectations were higher. This is pure arithmetic. I would also add that high inflation is a particular burden for the most vulnerable and the poorest of our fellow citizens. We call upon all countries, not only the countries that you have mentioned, to be ahead of the curve in terms of their public finances, in terms of maintaining their costs at a competitive level; and last but not least in terms of embarking on the appropriate structural reforms. This is very important, particularly the structural reforms. Our message is for all. Of course, some are in a particular situation which calls for hard work and the particularly active implementation of adjustment plans.

Question: A colleague here mentioned the effect of interest rates on the physical situation of various countries. I would like to shift that to the banking system. If you look back in recent history, in 2007 the Federal Reserve System started increasing interest rates and this is said to have triggered the events later on that led us into the sub-prime crisis. Given the elevated uncertainty, I imagine that also applies to the banking system. Do you fear that the increase in the interest rate could actually affect the banking system, which is also what stands behind the physical crises in Portugal and elsewhere The Spanish banking system holds €90 billion worth of the debt of Portugal, so what happens in Portugal affects the Spanish banking system. And the same can be said for Ireland.

My second question goes back to Glass-Steagall. I’ve been here in Frankfurt for the last month and there is increased discussion of Glass-Steagall. Also, in London, the Treasury Select Committee issued a report today calling for a separation of retail banking and investment banking in Britain – or at least ring-fencing it within the banks. Has a “twin” banking system or Glass-Steagall approach been discussed within the ECB?

Trichet: On your first question, we have a very clear message for the banks that has been sent very often by the Governing Council and, indeed, today I mentioned the fact that to address the challenge that they face, it is essential for banks to retain earnings, to turn to the market to further strengthen their capital bases or, if they have difficulty in doing that, to take full advantage of the government support measures for recapitalisation. So, we have a very strong message for banks: to do what is necessary to put themselves in a situation as healthy as possible to be able, of course, to do their job, which is to finance the real economy. As regards the financing of the real economy, you have the figures. Credit to euro area residents has increased by 3.8% overall. Regarding loans, I mentioned the fact that we have had an increase, albeit very slight, in the overall amount of outstanding loans to the non-financial corporate sector, and we have confirmation that loans to households grew at the level of 3.1% last month, and they have grown 3% this month. The whole economy benefits from interest rates that solidly anchor inflation expectations and from the effect on confidence of this medium-term stability. It is good for medium and long-term market interest rates, it is good for the financial environment, and it is good for confidence – not only the confidence of economic agents or corporate businesses, but also the confidence of our fellow citizens, which is essential. And we never forget that it is to our fellow citizens that we owe a duty to maintain price stability.

On the second question, as you know, Europeans have no past experience of a separation between investment banking and retail banking. The concept of many banks in Europe is that their activity is comprehensive – they have, or can have, both franchises. We are certainly following very carefully the global debate on banks in general within the various working parties that exist – not least, of course, the Basel Committee and the Financial Stability Board.

Question: Two questions. One, it is pretty much an open secret that the Governing Council has discussed, at various times, measures against the so-called addicted banks or persistent bidders. You have not said anything about that so far. I wonder whether you could update us where the Governing Council is in their discussion. And I am slightly confused also because there is this talk about a facility for banks in restructuring; perhaps that would help Irish banks? Could you tell us also whether that has yet been discussed by the Governing Council and was there a decision?

And secondly, just on monetary policy itself, you said the Governing Council has not decided that today’s move will be the first of a series of increases. And you have said nothing so far that would make anyone think another increase in interest rates was likely in the next month or so. But given that upside risks to inflation remain and, as you say, policy remains accommodative, would markets be correct in assuming that further interest rate increases are likely later this year?

Trichet: I already said on the first question that, if and when we decide something on that front, you can be sure that we will make it public immediately. So let me only say that we are reflecting on it. It is an important issue which has more or less changed in nature over time, with the correlation between sovereign difficulty and banks’ difficulty. And that is the reason why we call on both the sovereign and the banks to take all appropriate measures to consolidate, preserve and, where necessary, improve significantly their own credibility, because everything depends on the confidence that market investors and savers have in the sovereign and in the banks themselves. So, again, if and when we decide, we will make it public immediately.

On the Irish banks, we welcomed the decision of the government to recapitalise and we did that in liaison with the IMF and the European Commission. We all three welcomed the decision that was taken. And we took a decision on collateral. It seems to me that the market has understood that these were important decisions.

I already mentioned, on your third question, that we did not decide it was the first of a series of interest rate increases. But you know from our own “doctrine” and from the past that we always do what we judge necessary to deliver price stability in the medium term. So I confirm that we will do all that is necessary to deliver price stability in line with our definition in the medium term. We did not decide that it was the first of a series of interest rate increases.

Question: Last month Mr Weber did not attend the meeting. Was he here this time for this last meeting on monetary policy decisions before he leaves office?

And second: maybe it is a historic moment today because the ECB is acting before other major central banks. In 2004 and 2005 the ECB followed the steps of the Fed; this time you are the first to move. Are you sending a signal there for the euro area or to other central banks?

Trichet: As regards your first question, as I said, we were unanimous. All colleagues were there, including Axel Weber. And, again, we were unanimous.

As regards your second question, neither the Fed, nor us, nor the Bank of England, nor the Bank of Japan has reason to say: “I am the first”, “I am the second”, “I am a follower”, “I am a leader,” and so forth. That is not the issue. The issue is for us to do our job, to be faithful to our mandate and to take into account circumstances that are never the same. On both sides of the Atlantic we have enormous responsibilities. We in Europe have a very important economy of more than 300 million people and we have to take decisions that are appropriate. We have never had the sentiment that we were the followers of anybody and we do not have the sentiment of being the leader. We do what we have to do. And what is very important, of course, is that we give the benchmark: you know what our definition of price stability is in the medium term and you judge us on our own results. We give the yardstick, we give the benchmark, and you can control what we do and, over the years, you see what the results are.

Question: Just to follow up on what my colleague from the FT said, you did not quite answer the question fully on the Irish bank and the potential facility for medium-term funding. The Irish governor, obviously one of your policy-making team, said last week that the chance of this being put in place in the near term was unlikely. Can you confirm that? Is the programme effectively dead in the water?

And my second question is on the bond-buying programme. With Portugal now under the rescue umbrella, does that change anything for your bond-buying programme? And what would happen if there were signs that financial markets were turning their attention to Spain and there was a risk of contagion there?

Trichet: On your first question I have no particular comment. We have rules and we are respecting them. And I think that the communication that accompanied the very important decision to recapitalise the bank by the government was understood by all those who are observing what this government does and what we are doing ourselves.

On the SMP programme I would only say that, you see – not month after month, but week after week – what we are doing. It is a programme that is very visible. And you will see what we do in the future. I have no other comment on the SMP.

Question: Just two more Irish questions for you. Firstly, in relation to the bailout package announced last week. They have not yet given any deadline as to when the cash would actually be put into the banks. Now in the original EU/IMF bailout it was due to be put in at the end of February. There does not seem to be any particular urgency around that now. Does the ECB have any view on when money should actually start going into the banks or are you happy for that to be open-ended?

And then also on the interest rate crisis, I think people back in Ireland do appreciate that the ECB has a responsibility to all 17 countries. But equally there are a lot of people in Ireland who are already finding things very difficult and are already really struggling. Do you have anything to say to them in the context of today’s interest rate increase?

Trichet: On the first question, I would say that it is really a question to be discussed by the government and the fund suppliers. I have no particular comment.

On the second question, I would say that it is in the interest of all members and partners of the single market with the single currency that we maintain maximum credibility for the anchoring of inflation expectations. As I already said, it is good for the euro area as a whole that we have these well-anchored inflation expectations. It is good for confidence, which benefits everybody, including of course those who are in most difficulty at present. It is extremely important because we are all intimately intertwined and because the long and medium-term interest rate markets crucially depend on the level of inflation expectations. So, all countries without exception have a major interest in us being faithful to our primary mandate, directly or indirectly.

Question: First of all, I thank you Mr Trichet and I deeply appreciate your kind words to the Japanese citizens. I have two questions. Firstly, could you explain a bit about your analysis of the aftermath of this huge earthquake in Japan? There are two sides: on the one hand, the growth rate of the world economy or European economy, and on the other hand, there is much opposition to nuclear power plants because of this trouble in Fukushima and it may cause pressure on energy prices, such as for oil or nuclear energy. What would you say?

Trichet: Let me express again the emotion of the Governing Council, the emotion of the Executive Board, and the emotion of the ECB. We were in close contact with the governor of the Bank of Japan, and with all our friends in Japan. I have to say that we admire the resilience of the Japanese people in such dramatic circumstances.

On the global growth rate, we could see the immediate impact on the global PMI for instance. What we expect is that it has an immediate impact, which is big obviously, and then, as was observed at the time of the Kobe earthquake, we see the profile going up again, even sharply up, because you have to reconstruct and you have to invest again in very large areas. The devastation has been absolutely abominable. I saw on YouTube that there were some videos that had been seen by 17 million people or more. It is so abominable. A lot of reconstruction will take place. The expectation is that after a certain period of time, this dramatic episode will be absorbed. But we have to be realistic and when I was mentioning risks, I explicitly mentioned the associated risks for us from this dramatic natural event through the global economy. I also note en passant – as I mentioned in recent speeches or articles – that when we call for maximum soundness of fiscal policies, we have to take into account not only a financial crisis, but also natural crises. And of course in such dramatic events the ultimate protection comes from the public finances. So the credibility of public finances is absolutely decisive, not only to permit the economy to be more resilient in dramatic circumstances, but also because events of this kind do happen.

On the impact on energy prices, we will see what happens exactly. We do not have of course a competence in nuclear power plants. We will see how to permit to reassure fully the Japanese people, but also all other people in the world, that such events can be controlled and prevented. I think that a number of lessons have already been drawn from what has happened. I mentioned as a risk the combination of the Japanese event, particularly its nuclear aspect, with what happens in the Middle East and in North Africa, because all this clearly combines to create risks.

Question: Mr Trichet, first a question about Germany. There is a perception among some commentators that the German economy has exceptional weight in your policy-making. Were you concerned that the German economy could become overheated because of the level that rates were at and how much did that figure into your decision today?

And then, secondly, regarding the bank stress tests that are coming up in June, I wonder if you could update us on what your level of confidence is that they will do more to restore confidence in the banking system than the last round of stress tests?

Trichet: I wonder how Ben Bernanke would respond if he was asked whether he did this or that because of California or because of another big state? Germany is a large economy, the largest economy in the constellation of economies that we have in the euro area. We make our decisions taking into account the 17 countries, the 331 million people and the overall GDP of the euro area. No more, no less. Germany grew extremely slowly during the first few years of the euro. Germany is now growing much more actively, which is a good thing, and I am happy that I no longer have to respond to the usual questions I faced during the first few years of my mandate about Germany being the sick man of the euro area! We had an episode of a return to competitiveness, of hard work, and now we see the result of this hard work. It is good for Germany and good for the euro area as a whole. And again, we take our decisions on the basis of the average of this very vast continental economy, which is of a similar size to the United States.

As regards the stress tests, we very strongly encourage all those who have a responsibility in this exercise, including the national supervisors and the European Banking Authority. When the time comes, particularly when we have to embark on the peer review, the ESRB will also be involved, as it is required by legislation. It is important that the stress tests are carried out professionally, as is, of course, the intention of all partners.

Question: You mentioned before that you did not make a decision about this being the beginning of a series of rate increases. Given that a lot of the inflationary pressures are coming from globally set energy commodity prices that are somewhat outside the control of the ECB, do you really think that one interest rate increase will be enough to change these dynamics that are affecting inflation in the euro area?

And my second question is, do you see any evidence yet of second-round effects, whether it is wages or some kind of concrete evidence of higher inflation expectations?

Trichet: With regard to your first question, we did not decide that it was the first of a series of interest rate increases. We always do what is necessary, taking into account the delivery of our mandate, namely price stability in the medium term. So, when we have something new to say, I will tell you.

As regards the second question, we have not seen an un-anchoring of inflation expectations. It is of extreme importance that we have been able to maintain this anchoring of inflation expectations throughout the entire period that we have gone through and which has been – at least for the last three and a half years – particularly demanding. So, we are well anchored. But this depends on us and depends on the fact that everybody recognises that we will do what is necessary to deliver price stability. So we look at all the surveys and information extracted from the markets, including the five-year forward five-year break-even inflation rate, as very important indicators. As regards the second-round effects, we want to clearly signal that we are extremely alert in this respect and our message is that we will not accept and we will not tolerate second-round effects. This is because if there were to be second-round effects, this would mean that we would have a higher level of inflation in the medium term, which is not in line with our definition of price stability, as well as – all things being equal – higher medium and long-term market interest rates, and a worsening environment for confidence, growth and job creation. And it would also mean higher inflation for the poorest of our fellow citizens. So, avoiding second-round effects is essential and our message is very strong for all price setters – as I said in the introductory remarks on behalf of the Governing Council – and for all social partners.

Question: A question about the corridor of the different interest rates. You also raised the deposit facility today. Is it a general step to keep the corridor from the main refi rate to the other rates at 75 basis points, or can we expect a change back to 100 basis points in the future?

Trichet: We discussed that. We assessed the pros and cons of maintaining 75 basis points, that is, 150 between the top and the bottom, or to go back to 200. We considered that it was appropriate at this stage to maintain this, but there are various dimensions for this assessment and we will see when the time comes whether we can change the width of the corridor.

Question: You indicated this month once again your concern that the excess liquidity still in the system could lead to an acceleration of M3 growth. What evidence do you have for such a liquidity overhang given that M3 growth actually remains well below trend? And how concerned are you about the risks to price stability from this?

Trichet: We should not confuse the rate of growth of the monetary aggregate and the overhang, the stock. When I referred to the fact that we had ample liquidity which could materialise in some kind of risks to price stability, I was referring not to the present increase of the outstanding monetary aggregates, but the hangover that had been accumulated before the crisis. That’s the explanation.

Question: Perhaps I could go back to your basic concerns once more. We saw just two days ago the OECD being much more relaxed about the threat of price inflation and I might even say that you yourself one month ago were more relaxed. What is it that makes you really think that the short-term price shock from oil, food, and commodities is going to transform into medium-term inflation, when other people like the OECD, which is basically concerned with some of the same countries, is not so concerned?

Trichet: We are used to having our own analysis and it does not necessary coincide with the analysis of some observers, some market participants, some economists and even some international institutions. I can remember decisions we took to increase interest rates which were not recommended by any international institution. Very fortunately now, with the benefit of hindsight, they would say: “Yes, you did well”, so I don’t insist on that. In any case, we are responsible ourselves and we are judged by our people on the basis of what we deliver. It goes without saying that when you have a shock like the one we are presently observing, which is a price shock coming from oil and commodities, it is very important to avoid the second-round effects: It is our clear message today that we won’t accept second-round effects.

Question: There are increasing concerns, even in policy-making circles, that the therapy applied to countries like Greece and Ireland, which is essentially austerity, does not work and in the case of Greece, the country might not be able to tap financial markets next year as planned and that other measures, that restructuring, might need to be taken into account, so would you still rule out completely that such a situation will come where debt might need to be restructured?

Trichet: We have a plan and we apply the plan. It is clear that countries that had in the first years of the euro area a behaviour which was unsound have to engage in a correction. Whatever is done, whatever happens, whatever the overall environment is; in any case, they have to correct what had been done in the past and what was wrong. It is true for absolutely all, particularly for those who had abnormal behaviour, which is certainly the case of the country you mentioned.

Question: Wage increases have been seen, for example, in the German chemical industry. Would you say “well, that is a second-round effect, and we have to deal with that”?

Trichet: Again, our message is for everybody. Our message to everybody is not to regard the present level of inflation as the normal level of inflation in the medium to long-term, because we are responsible for delivering inflation of less than, but close to, 2%, as we have done in the past. And that is the right benchmark. I have no immediate analysis as to what has been done in this case. But if it is based on projections for inflation in the medium term which are not in line with our definition, I would say there are abnormal elements in this deal.

Question: I think it was Mr Draghi who, sometime ago, underlined the need to limit banks’ dependence on ECB liquidity. Do you plan to do something about that? That is my first question.

And second, the Irish government wanted to have private investors participate in the losses of the banks, just before the stress tests. I think it was the Finance Minister in the Irish government who said that the ECB didn’t want it. Is this true? And if so, why?

Trichet: I have already given a precise response to the first question. It’s an issue that we are looking at. It has changed in nature over time because of the correlation between the creditworthiness of governments and the creditworthiness of banks. We are looking at it. If and when we have a decision, I will make it public immediately.

On your second question, I don’t want to enter into details, but as far as I recall, there are subordinated bonds that are not treated in the same fashion as others. What we are permanently asking all of our partners to do is to consider the confidence of the market. Because what is important, is to go back to the market as soon as possible. When you are back in the market, you are in a normal situation. And then you don’t need any more help, you don’t need any abnormal refinancing, and you don’t need to be placed in an abnormal situation. So there are responsibilities on the part of all governments and authorities concerned. The main message is confidence, to try to do everything that improves the confidence of the savers, the investors and the market participants.

Question: My first question is about China. The People’s Bank of China also raised its interest rates earlier this week. China is fighting hard against inflation. How do you see China’s inflation? And how does it affect the world, and especially Europe? Is there any advice you would offer to Mr Zhou Xiaochuan at the People’s Bank of China?

And second, on the issue of Portugal, if S&P or Moody’s continue to downgrade Portuguese bonds, will the ECB continue to accept these bonds as collateral in its programme?

Trichet: First of all, let me take this opportunity to say that we have a very close relationship with the Chinese central bank. I personally have a very close relationship with Governor Zhou, and we meet very often. For instance, we were in Nanjing only a few days ago, and we will meet again in Basel. And of course, I don’t want to encroach in any way on the very important responsibilities of the People’s Bank of China. As I have said in the past, central banks do not take the same decisions, as they are not in the same situation. But what really characterises all central bankers is that they have a unity of purpose – and that purpose is solidly anchoring inflation expectations. So, I have no particular message for Governor Zhou in this situation.

As regards your second question on Portugal, when we take a decision we will make it public. I have no other comment.

Question: Mr Trichet, as we understand it, there is not yet a consensus on the strategy for persistent bidders. But maybe you could at least tell us whether the decision to change the collateral rules for the Irish banks last week was unanimous. Or was there a lot of discussion about it in the Governing Council? And to what extent will or might this also change your risk provisioning in the central bank’s balance sheet? Is there any change here?

And the second question is on the money market in general. How would you describe its development? Has there been a steady normalisation in the last month?

And could you give us a bit of insight as to how the money markets might develop in the next few months?

Trichet: On the first question, you know that we don’t necessarily wait for consensus when taking our decisions. We can take decisions because we have a meeting of the Governing Council and there is a majority. If necessary, we are able to decide extremely rapidly. I mention that merely as an aside. We can decide by majority decision, we can decide by consensus and we can decide unanimously. These are the three categories. So, we decided not to take any decision on the “persistent bidders”. That is all there is to say. Again, when we have a decision, I will let you know. It was not because there was no consensus. It was because we decided not to decide.

As regards the Irish collateral, if I understand your question correctly, we took a decision which was in line with what we had done before, making the announcement following discussions with the Irish government, the IMF and the European Commission. As I have said, we welcome the result of this discussion and the very important decisions taken by the Irish government. So, we made the point very clearly.

On the last question on the money market as a whole, I have nothing particular to say. In terms of non-standard measures, we still have, as you know, full allotment at a fixed rate in the three windows that we have. And that has implications for the functioning of the money market. I would say that the volatility of the EONIA today is lower than the volatility observed previously. And we have also seen – as you all have – that the excess liquidity observed in the past has been reduced considerably, but we still have excess liquidity.

Question: (Translated from French) A question in French, if I may. Aren’t you afraid that you will increase the difficulties for the peripheral countries of the euro area by increasing the interest rates, and don’t you have the impression that you are, in a way, abandoning them?

Trichet: (Translated from French) No, it is exactly the opposite. It is because we want to maintain price stability for the 17 countries of the euro area and for the 331 million citizens of these countries, and especially because we are thinking of the poorest and the weakest among them, that we have to maintain confidence in the euro area as a whole. And that is what we are doing. We are maintaining the confidence of households; we are maintaining the confidence of entrepreneurs, of companies. And that is how we allow medium and long-term interest rates to stay at the level favourable to growth and job creation, because they incorporate expectations of low future inflation. And that is why we believe that we are directly and indirectly helping all countries, but especially those that most need to be in the best possible environment. They have difficulties at the moment; that is quite clear. They have plans, which they are implementing, and it is necessary to implement these plans very strictly, therefore they have to give themselves the means to find confidence again. We do what we have to, in the interest of everybody: of all the countries, without exception, and of all citizens, without exception.

Question: To what extent did you consider, even if is not a major issue, the fact that we have many young people, many young couples that need to buy or to build a house for their families, and they do not have the money, and now with the higher interest rate will face major problems?

Trichet: As I said, interest rates are low, and when people borrow, it depends on the country: some are borrowing on a short-term basis, others on a medium-term basis or a long-term basis. And we have to consider, of course, all interest rates. And in preserving price stability we are also preserving a financial environment that, everything else being equal, is better than one in which we do not anchor inflation expectations. That is the reason why we consider that there is no contradiction, but full complementarity in doing what is essentially a fulfilment of our primary mandate: i.e. delivering price stability, and growth and job creation, and protecting the poorest of our fellow citizens.

Question: Well, it is said that no man can have two masters, but that is what the ECB has kind of had in recent months and years. Price stabilisation and sustainability are the survival of the euro area. When do you think that the ECB will be a free man again? And do you hope that the EFSF will finally catch up, or are you waiting until 2013 to get your hopes up?

Trichet: We have only one primary mandate. That primary mandate is price stability. That primary mandate commanded us, as far as standard measures were concerned, to take appropriate interest rate decisions that were designed to deliver price stability. The past testifies to what we have been doing, including past criticism of our own interest rate increases. Criticism in 2004 by very eloquent parties, telling us to decrease our interest rates which we refused to do. Criticism in December 2005 by governments and international institutions, saying that we should not increase rates. Criticism in 2008 – and you remember that. So, again, we do what we have to do even when it is difficult, even when it is not necessarily pleasing everybody. That is our job. Second, we engaged in non-standard measures because we had monetary policy transmission mechanisms that were not functioning properly, and we took a number of measures to permit them to function better. That was a result of the fact that financial stability was not preserved by national governments, private institutions, executive branches, or parliaments, in some cases; it was because we have a responsibility with regard to monetary policy, and the mandate to deliver price stability. But it is the responsibility of governments individually and collectively to avoid in the future to being again in the very abnormal situation that we had to cope with. That is the reason why we are so strong in calling for appropriate governance, in calling for the reinforcement of governance by all means possible, and in calling on governments to fulfil their responsibilities and to have a sense of direction.

Question: After what happened in Portugal, what is your view on Spain, on the measures adopted by the Spanish government, and on the movements in the markets?

Trichet: I already said that all governments have to be ahead of the curve; that Spain did a lot of things in the past that we approved of; and that Spain still has things to do. And there are a number of measures that are in the pipeline, particularly as regards structural reforms in the labour market. So, I am sure that these reforms are anticipated by the observers and by everybody in Spain. It is extremely important that Spain continues along the same lines: these lines were defined months ago, and have progressively been appreciated, by the observers, the savers, and the investors, as going in the right direction.

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