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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, 3 July 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 today’s press conference. Let me report on the outcome of our meeting, which was also attended by the President of the Eurogroup, Prime Minister Juncker, and Commissioner Almunia.

On the basis of our regular economic and monetary analyses, we decided at today’s meeting to increase the key ECB interest rates by 25 basis points. This decision was taken to prevent broadly based second-round effects and to counteract the increasing upside risks to price stability over the medium term. HICP inflation rates have continued to rise significantly since the autumn of last year. They are expected to remain well above the level consistent with price stability for a more protracted period than previously thought. Moreover, continued very vigorous money and credit growth and the absence thus far of significant constraints on bank loan supply in a context of ongoing financial market tensions confirm our assessment of upside risks to price stability over the medium term. At the same time, while the latest data confirm the expected weakening of real GDP growth in mid-2008 after exceptionally strong growth in the first quarter, the economic fundamentals of the euro area are sound. Against this background and in full accordance with our mandate, we emphasise that maintaining price stability in the medium term is our primary objective and that it is our strong determination to keep medium and long-term inflation expectations firmly anchored in line with price stability. This will preserve purchasing power in the medium term and continue to support sustainable growth and employment in the euro area. On the basis of our current assessment, the monetary policy stance following today’s decision will contribute to achieving our objective. We will continue to monitor very closely all developments over the period ahead.

Allow me to explain our assessment in greater detail, starting with the economic analysis. Information that has become available since the June press conference confirms our previous expectation of rather weak real GDP growth in the second quarter of 2008, in part as a technical counter-reaction to the strong quarter-on-quarter increase of 0.8% in the first quarter. As we have stressed previously, the quarterly growth rates for the first half of this year have been subject to strong temporary and compensatory factors, notably weather-related effects on the profile of construction activity. Therefore, in order to assess the underlying momentum of euro area economic activity and to avoid being misguided by highly volatile quarterly outturns, it is necessary to evaluate the first two quarters of 2008 together. Interpreted on this basis, the information available remains broadly in line with our expectation of moderate ongoing growth.

Looking ahead, both domestic and foreign demand are expected to support real GDP growth in the euro area in 2008, albeit to a lesser extent than during 2007. While moderating, growth in the world economy is expected to remain resilient, benefiting in particular from continued robust growth in emerging economies. This should support euro area external demand. As regards domestic developments, the fundamentals of the euro area economy remain sound and the euro area does not suffer from major imbalances. In this context, investment growth in the euro area should continue to support economic activity, as rates of capacity utilisation remain elevated and profitability in the non-financial corporate sector has been sustained. Moreover, employment rates and labour force participation have increased significantly in recent years, and unemployment rates have fallen to levels not seen for 25 years. However, these developments, which support household disposable income and consumption, are unlikely to fully compensate the loss of purchasing power caused by higher energy and food prices.

In the view of the Governing Council, the uncertainty surrounding this outlook for economic activity remains high, owing not least to the very high levels of commodity prices, and downside risks prevail. In particular, risks stem from the dampening impact on consumption and investment of further unanticipated increases in energy and food prices. Moreover, downside risks continue to relate to the potential for the ongoing financial market tensions to affect the real economy more adversely than anticipated. Concerns about the emergence of protectionist pressures and the possibility of disorderly developments owing to global imbalances also imply downside risks to the outlook for economic activity.

With regard to price developments, annual HICP inflation has remained well above the level consistent with price stability since last autumn, reaching 3.7% in May 2008 and – according to Eurostat’s flash estimate – 4.0% in June. This worrying level of inflation rates results largely from sharp increases in energy and food prices at the global level in recent months.

Looking ahead, on the basis of current futures prices for these commodities, the annual HICP inflation rate is likely to remain well above 2% for quite some time, moderating only gradually in 2009. We are thus currently experiencing a protracted period of high annual rates of inflation, which is likely to be more persistent than anticipated some months ago.

Risks to price stability at the policy-relevant medium-term horizon remain clearly on the upside and have increased further over the past few months. These risks include notably the possibility of further increases in energy and food prices. There is also a very strong concern that price and wage-setting behaviour could add to inflationary pressures via broadly based second-round effects. The Governing Council is monitoring price-setting behaviour and wage negotiations in the euro area with particular attention. Furthermore, there are potential upside risks from unanticipated rises in indirect taxes and administered prices.

Against this background, it is imperative to ensure that medium to longer-term inflation expectations remain firmly anchored at levels in line with price stability. The shift in relative prices and the related transfer of income from commodity-importing countries to commodity-exporting countries have to be accepted. They require a change in the behaviour of companies and households. Therefore, broadly based second-round effects stemming from the impact of higher energy and food prices on price and wage-setting behaviour must be avoided. All parties concerned, in both the private and the public sector, must meet their responsibilities in this regard. In this context, the Governing Council is concerned about the existence of schemes in which nominal wages are indexed to consumer prices. Such schemes involve the risk of upward shocks in inflation leading to a wage-price spiral, which would be detrimental to employment and competitiveness in the countries concerned. The Governing Council therefore calls for such schemes to be avoided.

The monetary analysis confirms the prevailing upside risks to price stability at medium to longer-term horizons. In line with our monetary policy strategy, we take the view that the sustained underlying strength of monetary and credit expansion in the euro area over the past few years has created upside risks to price stability. Over recent quarters, these risks appear to have become manifest as inflation has trended upwards. Against this background, the continued strength of monetary dynamics represents an important signal of the risks to price stability over the medium term that we have been addressing through our actions since end-2005, including today’s move.

More specifically, annual M3 growth has remained very vigorous in recent months, supported by the continued strong growth of MFI loans to the private sector. Although annual M3 growth of still above 10% overstates the underlying pace of monetary expansion, owing to the impact of the flat yield curve and other temporary factors, nonetheless, even after taking such effects into account, a broad-based assessment of the latest data confirms that the underlying rate of money and credit growth remains strong.

The current structure of yields has triggered substitution both within and into the broad monetary aggregate M3, leading to a pronounced decline in annual M1 growth and very rapid increases in time deposits. At the same time, higher short-term interest rates have served to moderate the growth of household borrowing, although cooling housing markets in several parts of the euro area have also played a substantial role in this regard. However, the growth of bank loans to non-financial corporations has remained very robust despite the rises in short-term rates. While some moderation can be expected in the future in the light of tightening financing conditions and more moderate economic growth, bank borrowing by euro area non-financial corporations grew at an annual rate of 14.2% in May 2008, and the flow of loans in recent months has been strong.

Not least in the face of the ongoing tensions in financial markets, the monetary analysis helps to support the necessary medium-term orientation of monetary policy by focusing attention on the upside risks to price stability prevailing at medium to longer horizons. Moreover, a thorough assessment of the money and credit data has provided an important insight into bank behaviour and financing conditions. In particular, the strength, maturity and sectoral composition of bank borrowing suggest that, at the level of the euro area as a whole, the availability of bank credit has, as yet, not been significantly affected by the tensions.

To sum up, a cross-check of the outcome of the economic analysis with that of the monetary analysis clearly confirms the assessment of increasing upside risks to price stability over the medium term, in a context of very vigorous money and credit growth and the absence thus far of significant constraints on bank loan supply. At the same time, the economic fundamentals of the euro area are sound, and incoming macroeconomic data continue to point to moderate ongoing real GDP growth when the high volatility of growth rates in the first half of this year is taken properly into account. Against this background and in full accordance with our mandate, it is imperative that we prevent broadly based second-round effects and counteract the increasing risks to price stability. We emphasise that maintaining price stability in the medium term is our primary objective and that it is our strong determination to keep medium and long-term inflation expectations firmly anchored in line with price stability, thereby preserving purchasing power in the medium term and supporting sustainable growth and employment in the euro area. On the basis of our current assessment, the monetary policy stance following today’s decision will contribute to achieving our objective. We will continue to monitor very closely all developments over the period ahead.

Regarding fiscal policy, budgetary consolidation targets are at risk in a number of euro area countries. Moreover, the risk of countries’ budget deficits coming close to or even exceeding the 3% of GDP reference value has increased. The Governing Council therefore reiterates its strong support for a rigorous implementation of euro area governments’ 2008 budgets and a prudent design of fiscal policy plans for 2009, in line with the agreement in the Eurogroup in May 2008. Achieving and maintaining sound structural fiscal positions is essential to ensure the sustainability of public finances as well as to create scope for the free working of automatic stabilisers in all euro area countries and thereby contribute to the smoothing of cyclical fluctuations.

As regards structural reforms, we reiterate our full support for all efforts to enhance competition, increase productivity and foster market flexibility. In view of the marked increase in international food commodity prices, removing impediments to competition at the various stages of the food supply chain in the retail and distribution sectors would benefit European consumers through lower prices. As regards labour markets, let me direct your attention to the ECB’s 2008 Structural Issues Report, which was recently submitted to the European Parliament. It emphasises the generally favourable labour market developments in the euro area over the last decade but equally points out the urgent need to counter the ageing-related reduction in the labour force, in particular by increasing employment in all groups of society, by making labour markets more flexible and by enhancing investment in education and training.

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: Mr Trichet, last time you all but announced the rate hike for today and surprised the markets, which in itself is not surprising as they are easily surprised. They then promptly priced in a series of rate hikes and we had comments from the ECB signalling: “Don’t expect a series of rate hikes now, if we deliver a rate hike, that doesn’t mean that…”. The market clearly does not believe it. Are they that wrong in pricing in more rate hikes?

And the second question, if I may, as far as second-round effects are concerned, we’re all talking about the danger of second-round effects, but isn’t that a case of mission creep? Haven’t we already seen them on the fringes? Whether it is energy prices that are passed on by the likes of Lufthansa or whether it is wage demands, etc. Aren’t the second-round effects already there and it’s just that we don’t want to talk about it?

Trichet: In answer to your first question, the remarks I just made on behalf of the Governing Council speak for themselves. Against the present background and on the basis of our present assessment, we believe that the monetary policy stance after today’s decision will contribute to achieving our objective of price stability. Starting from here, I have no bias. You are aware of our constant position, which is fully part of our monetary policy handling. We make no pre-commitment on the medium term and we do always what is necessary to deliver price stability in line with our definition in the medium term. I insist on both “the medium term” and “in line with our definition”. And we do what is necessary to be credible in this delivery in order to solidly anchor inflation expectations in line with our definition.

As regards your second question, which was on second-round effects, our message is the same as it has been since the very beginning of these increases in the prices of commodities, the price of oil and more recently the price of food. We are solemnly telling all economic agents, corporate businesses, price-setters in the economy and social partners that the worst decision they could take would be precisely to believe that what we are observing today, namely this protracted period of high inflation, will last in the medium term. On the contrary – we are there precisely with a mandate from the European people to deliver price stability below, but close to, 2% in the medium term. They can have confidence that we are there to deliver that level of price stability and to solidly anchor inflation expectations. We believe that what we did today and what we did before is precisely there to enable us to deliver price stability in the medium term.

Question: Can you shed some light on the discussion in the Governing Council today. Were some of your colleagues still against today’s move, or were some asking for a bigger increase and was there some appetite to say something more needs to be done.

And am I right in interpreting when you say you have no bias that you are not ruling out that further increases may be needed, because at the moment the inflation outlook is deteriorating even more – the oil price hit a new record, inflation expectations on the five-year break-even on French bonds today hit another record, so the picture is still fairly gloomy.

Trichet: In answer to the first question, we were unanimous, taking into account all the information that we have and all the information that we received between the last meeting and today’s meeting. What I said on behalf of the Governing Council speaks for itself. The monetary policy stance after today’s decision will contribute to achieving our objective of price stability. I have no bias and we are never pre-committed, as you know. It is a constant feature of our monetary policy and we do what is necessary to deliver price stability in the medium term, and to be credible in that delivery.

Let me go back to the question you asked, because the two are closely linked: we saw from our analysis that risks had augmented and this was the reason why we took today’s decision. I would not say that we are satisfied by all the decisions that have been taken, either by price-setters in Europe or by social partners, but we are solemnly telling them that they can count on us to guarantee price stability in the medium term, to deliver price stability in the medium term and to solidly anchor inflation expectations. It is our mandate, it is our duty. This position is commanded by our mandate and by the decision of the people of Europe. We are doing what the Treaty calls upon us to do. It is also what the people of Europe are asking us to do today. If you look at the most recent surveys, you will see that inflation is now the number one concern of our 320 million fellow citizens. They are counting on us to be the anchor of price stability in a period which is obviously very demanding. They can count on us. They can have confidence in the fact that the Governing Council of the ECB will do what is necessary in accordance with its mandate, and that confidence is essential at the present juncture. It is essential that households have confidence that we will preserve price stability and that the most vulnerable and poorest of our fellow citizens can count on the fact that we will deliver price stability in the medium term. It is important that corporate businesses understand that their own contracts will not be changed by the level of inflation in the medium and long run. And it is extremely important, as I have already told you, that investors and savers continue to have confidence that their own investments and savings will be preserved. Take a look at the issuance of treasuries on a 50-year basis. What credibility is the 50-year issuance of treasuries based on, if not on our own credibility, in the eyes of the investors and savers in Europe and in the world and on our capacity to deliver price stability in line with our definition over a very long period of time?

Question: Mr Trichet, on the one hand, we have inflationary risks and, on the other, we have growth risks. I would like to know what makes you and the ECB so certain that we will still have moderate growth. The unemployment rate is a late indicator. At the moment, if we look at the unemployment rates, they are still going down, but this is a late indicator. On the other hand, if we look into the economy, in all parts of the economy, we can already see huge downside developments. The most recent figure we heard concerned German engine builders. What makes you so sure that we will have moderate growth in late 2008 and in 2009?

Trichet: First of all, at the mid-point of this year, we do not have a rate of growth that is flattering. That is clear and I warn you in advance that the second quarter will be very different from the first quarter. The two quarters must be taken into account together, because we clearly had a very flattering first quarter, which will certainly not be mirrored in the second quarter. And I can say that the third quarter will probably not be particularly flattering either. That being said, the information we have at our disposal permits the Governing Council to trust that its assessment of moderate ongoing growth is appropriate at the time of speaking. But I also told you that the risks were on the downside.

That being said, let me just mention one point, one piece of information available, namely that on a yearly basis outstanding credits – outstanding loans – to non-financial corporates were still growing at the level of 14.2%. Remember, I mentioned figures which were even higher: the figure for April was 14.9%. So it is slowing down a little bit, but only a little bit as you can see. When we look at growth over a three-month period in order to try to capture the more immediate trend, we still have figures that are very dynamic and much more dynamic than the rate of growth of the GDP of the euro area in value terms. So, we have to synthesise a large array of information, and that drives us to qualify the situation as one of moderate ongoing growth, taking into account the downward risks I mentioned.

That being said, do not forget that, for us, there are not two needles in our compass; there is only one needle in our compass. Taking everything into account, where exactly is the needle that captures the risks to price stability? It is according to the analysis of all the risks to price stability that we take our own decision. And you can see what our present analysis was today. It is clear. We trust that we had to increase the rates of our monetary policy stance by 25 basis points and we trust that this will contribute to delivering price stability in the medium term.

Now let me make a thought experiment for a moment. If we did not have that needle in our compass and instead had another needle, the natural consequences would probably be that inflation expectations would go up. Inflation expectations going up, the unanchoring of inflation expectations would start and then all of our medium and long-term market interest rates would go up. The interest rates of 50-year treasuries – as I mentioned before – which at the moment of speaking are probably around 4.9%, would be much higher with the unanchoring of inflation expectations. So, again, we do not see any contradiction between the mandate that we have and sustainable growth and job creation.

Question: There has been a notion that this rate hike will fuel a weaker dollar, which will be transferred to a higher oil price. Are there any dangers that this rate hike will result in higher inflation expectations?

Trichet: That a rate hike would be translated into higher inflation expectations? No, I don’t think that this could be the case.

Question: Do you think the market is right to put rates at 4.5% by the end of the year? The second question is: You dropped the phrase “heightened alertness” – does this mean that we should be able to substitute that in future with the phrase “strong vigilance”, and does it mean that the ECB is back in a wait-and-see mode rather than a ready-to-act mode?

Trichet: The fact that we have not mentioned “heightened alertness” or “strong vigilance” doesn’t mean anything. We said clearly last time that it was possible but not certain that we would increase rates today. You see what we have decided unanimously today. We will communicate in a fashion which, as always, will be clear and permit observers, our fellow citizens and markets to see what we will do. I never comment on future markets. I said already that we have no bias. We are not pre-committed. We do whatever is necessary to deliver price stability.

Question: Since the meeting last month, there has been considerable discussion among private sector economists about whether or not one interest rate rise can in fact counter rising inflation pressures. Notwithstanding your sentence today that the current monetary policy stance will contribute to achieving your objective, would you care to weigh in on the debate about whether or not one interest rate rise can in fact counter rising inflationary pressures?

Secondly, again notwithstanding your strong suggestion at last month’s meeting that you would in fact raise your interest rate, which you did today, inflation expectations as measured by the market, many market measures, rose quite sharply. You’ve said today that you have no bias. Do you worry, given this backdrop that those inflation expectations will rise yet more sharply? And finally, last month I wonder whether you were surprised by the sharp yield curve inversion that followed your press conference, and whether or not you see potential losses from banks on the basis of that yield curve as yet another risk to financial stability and in line with further bank write-downs and ongoing money market tensions?

Trichet: I have nothing to add, what I said spoke for itself. There is nothing new. You know that I have always said since I was appointed President – and my predecessor did the same – we are not pre-committed. This institution operates like that. Others can pre-commit, perhaps, either to go up or to go down or to stay at their level for a considerable period of time. It is not the way we operate. It’s part of our own handling of monetary policy. We are not pre-committed and we do what is necessary to deliver price stability in the medium term. It is what we did today. I don’t underestimate that when I said clearly on behalf of the Governing Council that it was possible to increase rates today, it was considered an important message. It proves that we take seriously the anchoring of inflation expectations and our responsibility vis-à-vis our fellow citizens. It also proves that they can trust us when we say that we will maintain price stability in the medium term. Confidence is absolutely of the essence at the present juncture. We consider ourselves as an anchor of stability and an anchor of confidence. I call upon all market participants, economic agents and authorities to take into account that confidence is absolutely of the essence at the present juncture.

Question: Mr Trichet, two questions. One: last month you spoke a little bit about what you saw as analogies to the oil shock of the 1970s and the situation today, what was similar and what was quite different. In the meantime we have seen, obviously, some much more troubling economic growth numbers. As you explained the action you took today, how valid in this historical analogy is the oil shock of the 1970s? Have your thoughts about it changed over the past month with the new information you have got?

And then the second question is just whether you can tell us at all what you and Treasury Secretary Paulson may have talked about on Tuesday. Was there any particular message you sent him back to Washington with?

Trichet: I have already said that the situation at the present moment is naturally not identical with what we observed in 1973 and 1974, at the moment of the first oil shock or, at the end of the 1970s, with the second oil shock, even if there are some similarities. So let us beware of oversimplifying the situation. We are in a situation which is very complex, with one major difference, which was that the first oil shock was really a supply-driven shock engineered by the cartel of the suppliers. What we have seen up to now is very much a demand-driven shock. That being said, there are similarities. One important similarity is that we have known since the first oil shocks that those who let inflation gallop, those who think that they can embark on second-round exercises because they want to deny that there is a transfer of resources from consumers to suppliers, are paving the way for a long period of a high level of inflation, slow growth, stagnation and unemployment at a higher and higher level. There was full employment in Europe before the first oil shock, and at the end of the 1970s we had dramatic mass unemployment which we are only starting to get out of. So that is a similarity and that is why in particular we are so attached to our message on ‘no second-round effects’. Not only because it is an absolute necessity to permit us to deliver price stability in the medium term, but because it is essential not to lose the success in job creation and the diminishing of unemployment that we had up to now. It is a very important matter in terms of jobs.

As regards the meeting the Vice-President and I had with US Treasury Secretary Paulson, it was a broad tour d’horizon, very useful certainly. And I think Hank Paulson has explained very well what we were discussing.

Question: Two questions. Firstly about today’s increase, as I'm sure you are aware, there is a lot of concern amongst politicians that the ECB might be hitting growth by putting interest rates higher. I wonder if I give you a chance maybe to come clean: is the intention of this move today to send a signal or are you deliberately trying to slow economic activity? Because obviously if some prices are increasing much faster than 2%, others have to increase by much less than 2% to get your price stability goal. So is this a deliberate attempt to slow economic growth or is it just a signal?

And secondly, looking forward, you are obviously aware that the markets will interpret your comment that today’s decision will “contribute to achieving our objective” as a sign that at the moment no further moves are envisaged. You have not gone beyond that in comments so far, but I wonder if you could give us a reassurance that, as you have in the past, the ECB will strive to be as predictable as possible. So, therefore, if we are to have another move in the pipeline, we will have some phrase “heightened alertness”, “strong vigilance”, in the month ahead.

Trichet: First to your second question, the message I gave is clear and I will not comment again on that. If and when we have something new to give to the market, we will certainly do that, as we have always done in the past. We will certainly do that in a clear fashion that will permit us to be as predictable in the future as we have been in the past. So I can reassure you fully on that. We believe that this move upward is the kind of move that was necessary to permit us to continue to tell our fellow citizens “You can have confidence that we will deliver price stability in the medium term despite the very difficult circumstances in which we are, particularly because of the very strong increase in the price of a number of commodities.”

I would like to take advantage of your question to ask again, as I have already done, all those who have a responsibility in this commodities market. Firstly, the consumers: our message is clear for them. We have anomalies concerning the high level of subsidies, which prevent in a number of economies - not only industrialised but also emerging market economies - the ultimate consumers from taking into account the real price of energy as it is. So a lot of progress has to be made in this direction for the prices to be fully reflected at the level of the ultimate consumers. We will still have in certain economies abnormal buying demand which is not corrected as it should be with the new prices at a global level. Secondly, we also tell the suppliers that, to the extent that part of the present prices come from a cartel, this is very abnormal. At the present juncture, at the global level, when we have a demand-driven increase in prices, then it plays a role in the automatic stabilisation of global growth. But if we have a supplier-driven artificial scarcity, then it is very grave and it has an impact which could be very grave at the level of the global economy. Let me also say that the industrialised countries have their responsibilities in this respect. There are a number of industrialised countries that are preventing drilling and exploration of new fields and that also contributes to the global difficulty. And finally, markets have to be as transparent and as competitive as possible. This is something which has to be as much as possible resolutely improved.

On your first question, no, I have nothing to say on what you said about those who have given us advice. We are an independent institution. Everybody knows that we are an independent institution. Our credibility relies entirely on the fact that we make our judgement on the basis of all information we have. The 21 members of the Governing Council take their decision to the best of their analysis and conscience and they know the responsibility that they have vis-à-vis 320 million fellow citizens. They also know that the Treaty applied was decided by all our 27 democracies including those that have an opt-out clause. It is extraordinarily important that the level of confidence that we can give our fellow European citizens is well preserved by the fact that we are fully independent.

Question: I have two questions. In the past days economists have been speaking of stagflation. Would you agree? Would you define the present situation as a stagflationary, and is it for the world or is it for Euroland?

And à propos pro-cyclical movement, somebody during the weekend said interest rates would have a pro-cyclical effect on growth, which is already slowing down, and that your move today would have an impact in the mid-term, that’s to say next year, when growth will already be slowing more strongly. And that’s why some suggest that you should have waited longer to hike rates because inflation will be slowed already by the slowing growth. What do you think of that?

Trichet: On the first point, I think that at the present moment nobody says that we are embarking on a stagflation episode at the global level. The global economy is growing. And part of the pressures on a number of commodities is coming precisely from this global growth. There is a level of slowing down in a number of economies, that’s clear, but significant global growth is there. At a global level we have inflation but we don’t have stagnation.

On your second point, in the industrialised world, you have to look country by country. Each of us is in a different situation. The United States is not the United Kingdom, the United Kingdom and the United States are not the euro area. As I have already mentioned with all due respect to the risks that are ahead of us, which I clearly pointed out, our present assessment is of a moderate, ongoing growth. Furthermore, we have to look at the first and the second quarters of this year together. As regards the present moment, we consider that it is necessary for us to increase rates today. I said that we had no bias for the future, with the qualification that we are not pre-committed and that we always do whatever is necessary to deliver price stability. The unanimity of the members of the Governing Council on today’s decision is important. Let me also say that the fact that we are credible is part of ongoing growth and job creation in the euro area. If we were not credible, where would our five-year, 10-year, 20-year, 30-year or 50-year rates be? All rely upon the credibility of this institution.

Question: The Spanish Prime Minister Mr Zapatero asked you to be cautious and responsible. Do you have something to say about this comment?

Trichet: I said already that we were an independent institution and we were concentrating on our responsibility vis-à-vis our 320 million fellow citizens in obviously demanding circumstances. We do what we believe we have to do.

Question: Does the Governing Council assume that the weakness of the US dollar could push oil prices higher? And do you take that into account in your monetary policy decisions?

Trichet: In our monetary policy decisions we take absolutely everything into account – by definition. All parameters are taken into account including, certainly, exchange rates together with all others. And let me say that we are convinced that sharp fluctuations between major currencies could have implications for economic and financial stability. This is the belief of all of us, and everybody knows that I consider it extremely important that the US authorities – the President, the Secretary of the Treasury, the Chairman of the Fed – say that a strong US dollar is in the interest of the United States.

Question: Just a follow up question: You mentioned certain industrial countries that are resistant to further exploration of oil fields. Could you be more specific about which countries you are talking about there?

Trichet: In my opinion it is unfortunately the case of a number of countries, and not only for drilling and exploration, as I already said, but also for permitting the new refineries that are necessary for products – including light products – to be processed. So, we have to look carefully at all these issues in the industrialised world itself. But it’s a general problem.

Question: As you said, as you called on Europeans to accept the transfer of resources from oil-consuming countries to oil-producing countries, do you see a case for compensating those at the lower end of the income scale who probably cannot afford to accept this transfer of resources. Should the state intervene to compensate in a way?

Trichet: I know that this has been discussed among governments. To my knowledge, governments in the Eurogroup are against any general measure that would go against taking into account the new prices and have a negative impact on the behaviour of consumers by encouraging them to consume more than they would do otherwise. As regards the particular attention being paid to the poorest or the most vulnerable of our fellow citizens, I know that it is being examined, but at this stage I have no further information.

Question: Monsieur Trichet, you say that you’re scared that second-round effects will mean that inflation becomes embedded through higher wages being paid to workers. Which countries are you most scared that that will happen in?

Trichet: I would say it’s a general problem for all members of the euro area. It’s particularly true for those who have indexation schemes, and I was very clear on the fact that indexation schemes were extremely dangerous for obvious reasons in this respect. Furthermore, the best way to increase unemployment would be precisely to embark on these second-round effects. So, it’s for all countries, with particular attention to those who have indexation schemes and also, more generally, those who are less flexible. It’s absolutely clear that flexibility of wages in the present circumstances is very important if we want to preserve price stability and job creation.

Question: Just a follow-up from that. Do you think the risk of second-round effects is increasing at the moment?

And then a slightly different question: I noted that one bank has had securities backed by Australian car loans accepted by the ECB. Do you think that the ECB rules surrounding acceptable collateral need to be refined now?

Trichet: On the first question: again, if we have increased rates today, it is because we consider that, taking everything into account, risks to price stability had augmented and we had to counter these risks to price stability.

On our collateral framework, we consider that it has served us very well since the beginning of the financial turbulence. We are permanently examining and applying our rules with great care, and looking carefully at all that happens. We will see what we have to do, if it is necessary to refine elements in our scheme, as we did in the past, two and four years ago. But till now it has served the euro area very well and, as you know, it was considered even at the beginning of the turbulence as some kind of role model in some respects for central banks.

Question: One more question on the inflation scenario: now, if we have an inflation scenario, which is already prevailing at the moment, where the real pressure comes from factors that are beyond your control, like the oil price, commodities, etc. Let’s say we have an oil price, lo and behold, of 200 dollars a barrel in half a year, while at the same time the euro zone economy has no intrinsic inflationary pressure, how can you possibly implement price stability without throttling the economy, or would you then risk throttling the economy to deliver price stability?

Trichet: We are concentrating on what depends on us. The second-round effects depend on us. By "us", I mean the economic agents of the euro area: social partners, corporate businesses, the productive sector and, naturally, authorities. We do not pretend that we have the capacity ourselves to correct the price of commodities that have a global reach and have global prices. But we are taking into account what is within our own reach and I refer again to the issue of the similarities to the first oil shock. You could see the difference between those economies which considered that they could not do anything and those which considered that they could preserve price stability in the medium term. We are always reasoning over the medium term. When I say that we will deliver price stability, I add immediately "in the medium term". 320 million fellow citizens are calling upon us to provide them price stability in the medium term. The reason for this is not only that they had decided earlier that we should deliver price stability – let’s not forget, we have a mandate given by the exemplary democracies of the EU 27 – but also because the period is such that they are calling even more insistently on us, and we will respond to this frank request of our fellow citizens.


European Central Bank

Directorate General Communications

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