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Introductory statement with Q&A

Jean-Claude Trichet, President of the ECB,Lucas Papademos, Vice President of the ECBFrankfurt am Main, 10 January 2008

Jump to the transcript of the questions and answers

Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our first press conference of 2008. Let me therefore wish you all a very Happy New Year. I would also like to take this opportunity to welcome Cyprus and Malta as countries which have adopted the euro as their currency. With Cyprus and Malta, the euro area now comprises 15 EU Member States. Accordingly, Mr Orphanides, the Governor of the Central Bank of Cyprus, and Mr Bonello, the Governor of the Central Bank of Malta, became members of the Governing Council on 1 January 2008.

Let me now report on the outcome of our meeting, which was also attended by Commissioner Almunia.

On the basis of our regular economic and monetary analyses, we decided at today’s meeting to leave the key ECB interest rates unchanged. According to the latest information, strong short-term upward pressure on inflation has continued, with HICP inflation remaining at 3.1% in December. As regards the medium term, and in a context of very vigorous money and credit growth, our assessment of upside risks to price stability has been fully confirmed. The Governing Council remains prepared to act pre-emptively so that second-round effects and upside risks to price stability over the medium term do not materialise and, consequently, medium and long-term inflation expectations remain firmly anchored in line with price stability. Reflecting its mandate, such anchoring is of the highest priority to the Governing Council. The economic fundamentals of the euro area are sound. However, the ongoing reappraisal of risk in financial markets is still accompanied by uncertainty about its potential impact on the real economy and the risks surrounding the outlook for economic activity are on the downside. We will continue to monitor very closely all developments over the coming weeks.

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

The latest information on economic activity suggests that quarterly growth at the turn of the year was at a more moderate pace than the quarter-on-quarter rate of 0.8% observed in the third quarter of 2007 (revised upwards from 0.7%). This assessment is in line with indicators for business and consumer confidence which, while declining over the past few months, generally remain at levels that continue to point to ongoing growth.

Our main scenario remains that of real GDP growth broadly in line with trend potential. The fundamentals of the euro area economy are sound, profitability has been sustained, employment growth has been robust and unemployment rates have fallen to levels not seen for 25 years. Consumption growth should therefore continue to contribute to economic expansion, in line with real disposable income, and investment growth should provide ongoing support. On the expectation that the global economy will, on balance, remain resilient – with the slowdown in economic growth in the United States being mitigated by the continued strength of emerging market economies – external demand should support euro area exports.

That said, uncertainty about the prospects for economic growth remains high and the risks surrounding the outlook for economic activity lie on the downside. The latter relate mainly to a potentially broader than currently expected impact of the ongoing reappraisal of risk in financial markets on financing conditions and economic sentiment, with a negative impact on world and euro area growth. Further downside risks stem from the scope for additional oil and other commodity price rises, concerns about protectionist pressures and the possibility of disorderly developments due to global imbalances.

With regard to price developments, according to Eurostat’s flash estimate the annual HICP inflation rate was 3.1% in December 2007, unchanged from November. This confirms the strong upward pressure on inflation in the short term, stemming mainly from strong increases in oil and food prices in recent months.

Looking ahead, the annual HICP inflation rate is expected to remain significantly above 2% in the coming months and is likely to moderate only gradually in the course of 2008. Hence, the period of temporarily high rates of inflation would be somewhat more protracted than previously expected. Moreover, it is important to stress that the expectation of a moderation in the rate of inflation – which is embedded in the December 2007 Eurosystem staff macroeconomic projections – assumes some reversal of the recent rises in commodity prices – in line with what is currently captured by futures prices – and, more fundamentally, that recent oil and food price dynamics and their impact on HICP inflation do not have broadly-based second-round effects on wage and price-setting behaviour.

Risks to this medium-term outlook for price developments are fully confirmed to lie on the upside. These risks include the possibility that stronger than currently expected wage growth may emerge, taking into account capacity constraints and the positive developments in labour markets. Furthermore, the pricing power of firms – notably in market segments with low competition – could be stronger than expected. At this juncture, it is imperative that all parties concerned meet their responsibilities and that second-round effects on wage and price-setting stemming from current inflation rates be avoided. In the view of the Governing Council, this is absolutely essential in order to preserve price stability in the medium run and thereby the purchasing power of all euro area citizens. The Governing Council is monitoring wage negotiations in the euro area countries with particular attention. Any indexation scheme of nominal wages to prices should be eliminated. Finally, further rises in oil and agricultural prices, continuing the strong upward trend observed in recent months, as well as increases in administered prices and indirect taxes beyond those foreseen thus far, could materialise.

The monetary analysis confirms the prevailing upside risks to price stability at medium to longer-term horizons. Money and credit have both continued to grow vigorously in recent months. The annual growth rate of M3 in November, unchanged at 12.3%, is likely to have been influenced by a number of temporary factors, such as the flattening of the yield curve, the financial market turmoil and specific transactions associated with the restructuring of certain banking groups. Nonetheless, even taking these special factors into account, the underlying rate of monetary expansion remains strong. Moreover, the sustained expansion of loans to the domestic private sector, which grew at an annual rate of 11.0% in November, points to the continued vigour of underlying monetary dynamics. Monetary developments continue to require very careful monitoring, both to detect underlying trends associated with inflationary pressures at longer horizons and to form a better understanding of shorter-term monetary dynamics.

Such monitoring will also provide a more complete picture of the response of the private sector to the increased volatility in financial markets. A broad assessment of underlying trends in money and credit growth is particularly important at present given recent financial market developments. Heightened financial volatility may influence the short-term behaviour of money-holders and thereby complicate the extraction of the underlying trend monetary developments. At the same time, monetary and credit data can also offer an important insight into how financial institutions, households and firms have responded to the financial market turmoil.

For the time being, however, there is little evidence that the financial market turbulence since early August 2007 has strongly influenced the dynamics of broad money and credit aggregates. Indeed, the growth of bank loans to the domestic private sector has remained robust in recent months, which may suggest that the supply of credit has not been impaired thus far. The growth of M1 and household borrowing have moderated further over the past few quarters, reflecting the impact of higher key ECB interest rates since December 2005 rather than the influence of the financial turmoil. Borrowing by non-financial corporations remains very strong. Further data and analysis will be required in order to obtain a more complete picture of the impact of the financial market developments on banks’ balance sheets, financing conditions and money and credit growth.

To sum up, a cross-check of the outcome of the economic analysis with that of the monetary analysis fully confirms the assessment that there are upside risks to price stability over the medium term, in a context of very vigorous money and credit growth and sound economic fundamentals in the euro area. At the same time, the potential impact on the real economy of the ongoing reappraisal of risk in financial markets remains uncertain. Consequently, we will monitor very closely all developments. The Governing Council remains prepared to act pre-emptively so that second-round effects and upside risks to price stability do not materialise and, consequently, medium and long-term inflation expectations remain firmly anchored in line with price stability. Reflecting its mandate, such anchoring is of the highest priority to the Governing Council.

Turning to fiscal policy, most euro area countries have submitted their updated stability programmes. On this basis, after a reduction in the euro area aggregate deficit ratio in 2007, an increase in the ratio is projected for 2008 despite many countries not having achieved sound fiscal positions. There is a clear risk that some countries will fail to comply with the provisions of the preventive arm of the Stability and Growth Pact, thereby undermining the credibility of the Pact. In 2008 some countries with fiscal imbalances will consolidate by less than the required minimum of 0.5% of GDP in structural terms. In these countries, much more ambitious policies will be necessary to ensure that they achieve their medium-term objectives by 2010 at the latest, in accordance with their commitment of April 2007.

With regard to structural reforms, the new three-year cycle of the Lisbon Strategy for growth and jobs has started. While the achievements made over the last three years of the relaunched Strategy are encouraging, it is important that governments step up their reform efforts to deliver enhanced knowledge and innovation, competitiveness and labour market flexibility. Such reforms are crucial to raising productivity and fostering employment opportunities in the euro area.

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: I am a little puzzled. You seem so relaxed and still you are telling us that the ECB is probably going to miss the 2% inflation rate target – not only this year, but next year, too. So, I listened to you very attentively: could you give me a very brief answer why you are not announcing an interest rate hike today? What is the reason for that? I simply don’t understand you anymore.

Trichet: I think that you have missed the point. I said on behalf of the Governing Council that we were prepared to act pre-emptively, so that second-round effects and upside risks to price stability would not materialise and that, consequently, inflation expectations would remain anchored. We are in a position of total alertness, and we are saying very clearly to all decision-makers in all countries, in the whole euro area – and that means a great number of decision-makers in the public and in the private sector, in the 15 countries that are members of the euro area – that we are calling upon them not to permit a spiralling of this headline inflation, which originates from oil and commodity prices, which also comes from, as we all know, food prices at present and from a number of decisions that were taken earlier, particularly in the field of indirect taxes, and administrative prices. We are telling all of them that we will not tolerate their engaging in any spiralling. It is our responsibility and we are totally alert. We are calling upon them to behave properly, in circumstances that are – as you have said – demanding. I repeat: we will not tolerate a materialisation of these risks. That is clear.

Question: A question along the same lines, in a way: I do see that you are asking also for the wage partners and for collective wage bargaining to show moderation, but there is no denying the fact that (a) we have had several zero rounds, or (b) a lot of wage moderation, and that what we are getting this year is probably not along those lines. We have pricing power again in the labour market and that seems to be filtering through in wage demands. And also, politicians want to win elections and even they are harping along the same lines. So, should we take home the message, in a way, that if we see wage rounds of 4% or 5%, settlements like those in the German markets, and in some of the other markets, then – bang on – you are going to get a rate increase?

Trichet: We are not in a position to engage in trade-offs. We are telling them the following: you can take whatever decision you want, it is your responsibility, but we warn you in advance not to let it contribute to a spiralling of current headline inflation in the medium term through what we call second-round effects. These effects are not only to be found in the wage settlements – although wage settlements are a very great, perhaps even a dominant element. We also have all the other price setting mechanisms. Again, we are fulfilling our mandate, which is absolutely clear, namely to deliver price stability in the medium term. We are experiencing a protracted period of high inflation, because of a number of factors which are not under our own control and, amongst those factors I would mention not only oil, commodity and food prices, but also a number of decisions that have been taken by the governments, and also by the parliaments, in a number of countries. Decision makers know and everybody knows that we are here to guarantee price stability in the medium term. That is clear.

Question: Mr President, what policy options did you discuss today and did any Members of the Governing Council vote differently? If so, could you please elaborate on the arguments they made?

Trichet: As you know, we do not vote and have never voted in the past. Today, we took a consensus decision on the basis of the explanation that I just gave in the introductory statement. Our message is very clear: no second-round effects. That being said, I would say that we had a very important discussion, weighing up very carefully the pros and cons of the various positions that we could take, and ultimately came to the decision, – by consensus – that I have just explained.

Question: Just three questions here. First of all to bring us to the point, last month, you said that some voices favoured a rate increase. Would you repeat that sentiment this month, and feel free to elaborate if you want to tell us who favoured a rate increase?

My second question is just on this matter of acting pre-emptively. That word suggests to me that if you are prepared to act pre-emptively, we are staring down the barrel of a significant number of wage negotiations. Why not act? What exactly are you aiming at, I mean, if you are going to act pre-emptively then now would seem to me to be the time.

And my third question is, I wanted to ask if you could comment on the developments in the credit markets, specifically the interbank market seems to have relaxed considerably, especially in the wake of your unexpected Christmas gift of the most recent liquidity injection, but, in particular, I wondered if you could also address the fact that there have been some changes in the corporate credit market which have indicated rising tensions, as well..

Trichet: As I said, we discussed the pros and cons of increasing rates and of not increasing rates, and finally came to the decision – by consensus – that it would be appropriate not to increase rates and to communicate the strong message that I just gave you.

Regarding your second question, as I have said before, the role of a central bank is to solidly anchor inflation expectations and to not let second-round effects materialise, because when they do, it is too late. The pre-emptive attitude of a central bank is therefore fundamental. We will see what happens. Our message is: you have to know that we will not tolerate the start of second-round effects. That is very clear.

As for your third point, in the interbank market – by the way, we did not give a gift to anybody, as you know – I can say that we actually made money out it. But that being said I have to say that it was certainly something that highlighted the cooperation between various central banks, including ourselves, and a number of banks that had decided to cooperate together. Let me mention that today the ECB’s Governing Council has decided, in conjunction with the Federal Reserve and in the context of the term “Term Auction Facility”, to further offer US dollar liquidity in January in order to contribute to satisfying the exceptional need for dollar funding and to facilitate further normalisation of conditions in the money market. For your information, the operations will be of the same size and will be conducted according to the same procedures as those carried out in December 2007 on this side of the Atlantic. They will be settled on the 17 and 31 January 2008 respectively, with a maturity of 28 days each and for an amount of USD 10 billion each, as was the case in December.

Question: Can I just follow on from that last point here because this is something which has always been very mystifying to me when you make these dollar tenders. The forex markets are still functioning perfectly well and that has been an argument in the past for why it was necessary to offer dollar liquidity on this side of the Atlantic. Could you explain to us the rationale behind this I have yet to hear a convincing answer as to why you need to offer dollar liquidity to the forex market?

Trichet: Having taken everything into account and having talked to Ben Bernanke at the Federal Reserve, it appeared that it was useful for a number of reasons. Again, we took this decision for the month of January. As you say, there is a swap market that is functioning and there are a number of other observations that could lead us to decide that it is not necessarily worth continuing. But, in this particular case, taking into account the fact that some tensions remain, as well as the fact that the opening up of the market in New York could be a little bit under strain owing to demands and requests coming from European banks, we think it is a right way to cooperate in the month of January.

Question: You said you discussed the pros and cons of various options today. Would you say then the support for a rise at this meeting was stronger than in December?

Trichet: The only way I would describe it is that first we discussed those different possibilities and we agreed by consensus on both the decision and the message.

Question: I'd like to follow up on the announcement you just made. Is this something that we should expect would continue as long as we see any evidence of money market tension? Would we expect that the ECB will cooperate with the Federal Reserve to provide dollars to the market in February, in March, as long as we see these tensions remain?

Trichet: No, if that were the case I would say so. I have not said that and we will continue to examine the situation and look very carefully at all the information we are getting from the markets.

Question: You’ve said in the opening statement as you’ve said in most recent opening statements that the real economy impact of the ongoing credit market turmoil on the euro area economy remains unclear. Policy-makers have also said that we might achieve some clarity on some points with the release of audited annual statements in March. Is that when you also imagine you might have a more clear notion of the real economy impact, and if not then, do you have some other date in mind?

Secondly, can you help me understand the Governing Council’s thinking on emerging markets? Those of us who read your statements closely have noticed that over the past couple of months your characterisation of the support that the euro area economy might get from emerging markets seems to be weakening. First they would “largely offset” a US slowdown then they would “partly”, today we hear that they could “mitigate”. It sounds like you are changing your thinking. If you’re not, please let us know and if you are, please also let us know.

Trichet: On the impact on the real economy of the significant market correction that we are observing, I would say that it’s an ongoing process which has been envisaged for a long time as being probably unavoidable and probably also in many respects a necessary correction. And the risks for the real economy as we see them, stemming from a number of factors including this ongoing correction, are on the downside undoubtedly. That being said, when we look at all the facts and figures, whether in the surveys, in the real economy or coming from the financial sector, at the moment we see mixed signals. Some are good, such as the revising up from 0.7% to 0.8% of growth in the third quarter, as I said earlier. We see that there are surveys that hint at a diminishing of the positive balance, but most of these surveys are over the threshold which signals ongoing growth. We are in a complex environment from that standpoint. As I said on behalf of the Governing Council, our baseline scenario remains one of ongoing growth, but risks are clearly on the downside. I wouldn't say that we are convinced that the dust will settle at the moment of the publication of the certified accounts by financial institutions, as regards the financial turmoil, even though that is certainly an important moment. But I think it would be wrong to think that doubts will evaporate by virtue of this. That being said, it is the position, not only of the Governing Council but of the international community in its entirety that we call for clarity, transparency and a fair and candid picture of the situation. Because it is clear that the absence of full transparency and clarity plays a major role in complicating the functioning of a large number of markets including the money market.

As regards emerging markets, there are two phenomena as seen from our standpoint on this side of the Atlantic. There is, on the one hand, the robustness of growth in the emerging markets and, on the other hand, the issue of the United States and the rest of the industrialised world apart from the euro area. In this respect the subtle changes that you noticed in the comments of the Governing Council are due not only to the emerging markets themselves but also to the risks that are associated with the developments in the industrialised world and the United States in particular. So I would rather suggest that you interpret our comments to mean that we have to take into account the fact that the risks coming from the United States seem to be strengthening. Then, of course, the “offsetting” or “mitigating” role of emerging markets, to pick two of the words that we have used, would operate in a different fashion. But up to now we have seen continuous encouraging signals coming from the emerging markets and I was able to say that recently in Basel after the global economy meeting.

Question: The long-term rates in the money markets, such as the three-month Euribor rate, have been unusually high for quite some time, as measured against the usual Refi rate. I wonder whether, from the point of view of the ECB Governing Council, this is rather welcome, because it dampens inflationary pressures, or whether it is rather unwelcome, because it shows that the market is still not functioning properly.

Trichet: The response is very simple: again, we make a clear distinction between what we have to decide in order to deliver price stability, be credible in the delivery of price stability and continue anchoring solidly inflationary expectations. That is the policy stance. Then, once that has been decided, we have to ensure that the money market acts properly. But we are only influencing directly the shortest part of this money market. So, we are not particularly satisfied to see that, all over the industrialised world, not only on this side of the Atlantic but also on the other side of the Atlantic and in other industrialised countries’ money markets, we have these tensions that are the reflection in the money market of, I would say, tensions that are originating out of it and are associated with the complex market correction we are experiencing.

Question: A couple of questions: firstly, you published your last bank lending survey three months ago; are we due for another one? If so, can you tell us, give us a preview of what it is likely to show?

Secondly, just to push you once more, you just said that you discussed all different options at your meeting today. Was there any discussion at all about an interest rate cut, or was the view advanced that the credit market developments and the euro foreign exchange market developments might have done some of the work for the ECB already?

And my third question, very quickly: the UK is the euro zone’s largest export market and the pound has weakened quite considerably. Would you agree that a strong pound was in Britain’s interest?

Trichet: To take the last point first, I do not give advice to colleagues, as you know, and I have always said in this forum that we are a very strong brotherhood of mutual admiration. And so I will not say anything on the US policies or on the UK policies.

On the discussion we had, let’s be absolutely clear that, for all the reasons I have given already, we are in a position of alertness, in a position of giving messages and in a position of saying very clearly that we will not accept second-round effects, because it is our mandate. So, the debate, the discussion we had was on the pros and cons of two possibilities and not three possibilities.

As regards the bank lending survey, I can tell you that we will publish on Friday 18 January 2008 the results of the January 2008 bank lending survey via the usual means, press release and ECB’s Website. All I can say is that we have had some kind of first hint, but I am very cautious and prudent because we do not have the survey itself yet, although we have some preliminary sentiments which were given and which seem to confirm that there is an ongoing increase in the net tightening of credit, I would say, both for loans to enterprises and for housing loans to households. That was the very preliminary, provisional information we were given this morning.

Question: I am sorry, I have to interrupt the series of questions right now and ask you something else. In Bulgaria we had very high inflation last year. Would you recommend anything to the authorities in Sofia, taking into account the claims of Bulgarian government that it would be ready to introduce the euro in 2011 or 2012? Thank you.

Trichet: I would say that we permanently encourage Bulgaria to have the best possible control over inflation and over the other elements that characterise the present pace of the real economy in Bulgaria, and the financial and monetary economy. We expect that in Bulgaria, as well as in all the other Members States of the European Union, appropriate measures would be taken. But we have no particular message in this respect apart from saying that it is in the interest of all countries concerned to have the soundest and wisest possible policy both on the fiscal side and the monetary side. The fiscal side is very important for all sorts of reasons, particularly in the countries where you have current account deficits that are quite large and a number of other factors like inflation. So, I do not have particular message for Bulgaria, but a general message for all countries.

Question: Having heard what you all said, I am still puzzled because many experts agree that giving an average inflation rate of 3.1% now is problematic because of – you mentioned yourself – the development in food. The population at large sees other developments: if you go shopping, you see the inflation rates in various basic categories of food; you fill your tank at the gas station. So, it is a different impression you have. And because of that, a number of experts – I think the number is growing also – agree with the American economist LaRouche that we are at the beginning of the process of hyperinflation. That is a different dynamic, so I would like to mention that. My question though is a different one, because you said yourself we still have so-called “outside problems”: problems of market corrections, problems that relate to the United States, which we cannot yet fully assess. So there may be more problems coming in this. You wished us a “Happy new year” – the year may, however, develop in a different way – the year of 2008 – which we do not hope for.

Trichet: So, what is the question, Sir?

Question: So, my question is, if things turn to the worst, who would be the lender of last resort in Europe, this I do not know. Do you?

Trichet: So the question is: “If things went worse, who is the lender of last resort?” As far as we are concerned, we have proven that we were able to maintain rates on the money market – those short-term rates that we directly influence – in line with our own monetary policy decisions. We will continue to consider our monetary policy stance with our primary goal of delivering price stability and being credible, and therefore anchor inflationary expectations, and we will take care of this shortest part of the money market if there are abnormal tensions. That said we are not an institution which has to take care of solvency problems. So, your question was about solvency problems – and I have to say that this is another question. We must draw a clear-cut distinction between liquidity issues and solvency issues.

Question: Just a little thought experiment on wages. If I was a wage-bargainer, a trade union leader, and I’m very wise and I want to do what my central bank tells me, so I want to avoid second-round effects, could you specify what exactly I should do? In other words, do you have a rule in mind, a rule for wage increases which are consistent with price stability? Is it productivity plus inflation, or isn’t there a rule at all?

Trichet: I have already responded many times to such questions, because – as you know – we are running a currency for 320 million people in a large number of sectors, and we have very different situations from country to country. I always say that three parameters are essential in normal times. One parameter is the present level of competitiveness in the particular sector where you are, and of course this is of great importance. A second parameter is the level of unemployment in your sector and in your economy. A third parameter is productivity, the yearly labour productivity progress that you are making. You have to take account of those three parameters. On top of that, we have today the exceptional hump in headline inflation. What we say to the unions as well as to entrepreneurs, all social partners and, of course, governments on account of the public sector, is to consider that after the temporary hump, we will be back to our definition of price stability. Take that into account. If you don’t take that into account, you will engage in the spiralling of wages and salaries, you will disanchor expectations. We have given a very clear warning of what the consequences would be.

Question: How do you evaluate the latest reports of the Slovakian government towards joining the euro zone in the next year, and what possible risk do you see threatening the Slovak plan?

Trichet: I said a word on Bulgaria, and I would say exactly the same on Slovakia, and for the whole euro area itself: sound fiscal policies, sound structural policies and sound wage and salary policies. In the case of Slovakia I will only say that the Governing Council of the ECB will very carefully examine the situation of the country within a few months, as will the European Commission.

Question: One more time, just to make this absolutely sure. What I take home from the discussion and your statements we had here today is that, under the general proviso which we all understand, that you are always open to act in any way you feel necessary, I would take home from the discussion we had that the ECB at the moment is more concerned about inflation than about recession, and the ECB discussed rate hikes and leaving rates on hold, which means for me, if you have any bias then you still have a tightening bias, but you’re not in neutral. Would that be correct?

Trichet: We are certainly not neutral. It’s a good interpretation of what I said. You could also say there was a very strong message to all price-setters and social partners. That was really an important part of the message. I would not correct too much what you said, but it is your own responsibility: what I said is what I said.

Question: You are certainly not neutral and you have signalled such a position quite a few times before, so when will you deliver? What is the trigger for you to deliver?

Trichet: When the Governing Council so decides. But this is not new. I have always said that we are constantly alert. And I have always said that at any given time we will do what we judge appropriate to preserve price stability. The circumstances are obviously very difficult because of the oil price, commodity prices and food prices, and because of other decisions that have been taken and that have an impact on headline inflation. And this is the reason why we have a very strong message.

Question: Last week you said money market tensions are receding. Do you still see this process under way and what implications does this have for your monetary policy in the future?

Trichet: I said that the end of the year had passed in a way which was technically satisfactory and, in that sense some tensions which were associated with the end of the year have receded. But I never said that tensions had been eliminated, and everyone can see that we are, still, at least according to some indicators on the money market, in a situation where those tensions originating outside of the money market are reflected in the money market.

Question: I am taking into account all the answers that you have already given to my colleagues from Bulgaria and Slovakia. You have spoken about fiscal policies and the risk that some countries’ fiscal policies will fail. Romania is a country which has a firm target date for joining the euro area. It is 2014. This year is an election year and as we well know fiscal policies are threatened by the elections. So, what ambitious policies would you recommend in order to keep on track to join the euro area?

Trichet: It would be best to have a consensus on running sound policies. This is the case in some countries which then have very good results. So my general advice is to have policies that are as sound as possible. Fiscal policies are very important in all respects and, particularly, when you are in a catching up process where growth is quite significant. In such a position we strongly recommend that you do not hesitate to have surpluses.

Question: I just wanted to make sure I understood this information about the dollar tenders correctly. First of all, is this a coordinated action, are other central banks involved in this? And, secondly, you said that you had detected some tensions in the dollar money market when European banks would go to New York when the market was opening there. At least I think this is how you were describing that. Am I to take it from this that you viewed that, to use a medical metaphor, as a kind of trigger point in the tensions in the markets, and you feel that if you can release that particular point of tension that it would help the overall market? Not that I do not have great respect for USD 10 billion, but it is not a tremendous amount under the circumstances.

Trichet: Of course the action is in cooperation with the United States, because it is based on an accord with the Federal Reserve System and the dollars are from a SWAP agreement that the ECB has with the US Federal Reserve System.

Question: Is the ECB more worried about second-round effects in some countries than in others? I have in mind countries like Spain with a 0.43 rate and salaries indexed to inflation.

Trichet: We are responsible for a single currency, the euro, which has its own characteristics, credibility, associated interest rates and relationship with other currencies. We are running a currency for 15 countries and 15 economies and it is true that each country's situation is not the same. The Governing Council is the guardian of the currency for the 320 million citizens and it is clear that our message for the 320 million has to be understood at the level of each particular situation. I have a number of occasions to say with my colleagues – the governors of the national central banks – that in some economies indexation in particular is totally adverse to what is needed today, because precisely what is needed today is not to engage in the spiralling of prices and of wages and salaries. So it is absolutely clear that our message is particularly strong for those economies where you have, de facto or de jure inbuilt elements of indexation with all the risks that are associated with the hump being transferred to a number of prices and to wages and salaries.

Question: Recently oil prices reached USD 100, but the staff projections for December were for USD 89 in 2008 and USD 84 in 2009. Does this mean that the upside risks to price stability grew from December even without second-round effects or is it only a hump in the oil price?

Trichet: As you know the prices of oil and commodities go up and down. What I have said is that in our own staff projections we looked at prices at a certain moment and then the futures market indicated what would be considered the best objective information, although the volatility of prices is very significant. I have to say that the futures market does not appear to be a good predictive indicator when you look at what has happened in the past. So I would not qualify any particular short-term development. We have, unfortunately, to live with these short-term developments.

Question: Would you say that the inflation targeting regimes used by more central banks from the new Member States are ready to face the global inflationary pressures? How energetically should those banks react to the imported inflation?

Trichet: As you know, we have very different monetary policy concepts in the European Union outside the euro area. I think that those central banks to which you alluded have all the means to counter – within their own responsibility and their own economy – the pressures that are coming. We are obviously all in the same situation. A number of supply shocks are there and we have all to cope with them. It is our responsibility as central bankers to continue to solidly anchor inflation expectations. We do not have exactly the same monetary policy concept on both sides of the Atlantic or on both sides of the Channel but I know the goal and the goal is exactly the same. And it should, of course, be the same for the countries that are members of the European Union without being members of the euro area.

Question: I have the impression that you have some problems with this monetary analysis. Are you working on a new analysis for the monetary sector? I quote your statement: “First the data and analysis will be required in order to obtain a more complete picture”. You have problems with the non-banks in the aggregates, in the credit. Do you have a new adjustment of the monetary analysis?

Trichet: As I said, we are in a universe where you have a complex set of influences, and to disentangle the various influences and understand better what’s behind the figures that we have is a challenge. But it’s a very good challenge, because these are questions which permit us to better understand what exactly is going on in the financial sector. When we know that the present market correction is influencing all of the economy, including the real economy, it would be paradoxical if we did not examine the financial sector carefully, when it has such an influence on the real economy. And I draw your attention to the fact that, from this standpoint, our two-pillar strategy seems to me particularly pertinent, because we are in precisely a situation where the most important issue is what exactly is the influence of the financial sector on the real economy, and what are the dynamics behind it? Just to give you an example: when we look at the latest information we have on the rate of growth of loans to non-financial corporations, we have 14%, and the previous month, it was, if my memory is correct, 13.9%. So it has remained at a very high level. What is behind it exactly? We probably have very complex phenomena, including the fact that it is possible that a number of corporations are more inclined to be more liquid, perhaps to draw on their lines of credit. We perhaps have a phenomenon of re-intermediation, even if we are not sure that it is visible in those figures. We have a phenomenon of genuine dynamics of credit. It is very complex, and we are working a great deal on that. It is important. I will confirm that what we have in front of us, as you see, still very dynamic figures for the components and the counterparts of the monetary aggregates. We have also some provisional conclusions: for instance, M1 was clearly growing fast before we increased rates in December 2005, and since we engaged in this increase of rates, we have seen the dynamics of M1 decrease progressively month after month. That is a very clear evolution, in comparison with others that are very complex, calling for a better understanding. We are all working on it. I have to say that, all colleagues, including those who do not have a two-pillar strategy, would certainly not deny that it is important to do a lot of work on the financial aspects of the situation.

Let me also say at the end of this press conference, just for you to know, we issued a press release at 3 p.m. on the biannual information on euro banknote counterfeiting. You will have this information as well as the one regarding the dollar liquidity operation, relying on the swap agreement with the United States, to which I alluded during this press conference, in a press release.

Thank you very much for your attention.


Banca Centrală Europeană

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