Introductory statement with Q&A
Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB,
Berlin, 4 May 2005
Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to the press conference here in Berlin. Today is the 11th time that the Governing Council has met outside Frankfurt, and I would like to thank President Weber for his invitation and hospitality. Let me also express our gratitude to the staff of the Deutsche Bundesbank for their excellent organisation of today’s meeting.
Let me now report on the outcome of today’s meeting, which was also attended by Commissioner Almunia.
On the basis of our regular economic and monetary analyses, we continue to see no significant evidence of a build-up of underlying domestic inflationary pressures in the euro area. Accordingly, we have left the key ECB interest rates unchanged. The exceptionally low level of interest rates across the entire maturity spectrum provides considerable support to economic activity in the euro area. At the same time, continued vigilance with regard to upside risks to price stability is warranted.
Allow me to elaborate on our decision, turning first to the economic analysis. Regarding the current situation and the short-term outlook for economic activity, recent data and survey indicators are, on balance, on the downside. Some of the downward risks to economic growth identified earlier, in particular those related to persistently high oil prices, appear to have partially materialised over the past few months.
At the same time, when looking beyond the short term, conditions remain in place for stronger real GDP growth. On the external side, euro area exports should continue to be supported by foreign demand. On the domestic side, investment should benefit from the very favourable financing conditions, the robust corporate earnings currently being observed and ongoing improvements in corporate efficiency. Consumption growth should evolve broadly in line with expected developments in disposable income. Downside risks to economic growth continue to be related to oil price developments and global imbalances.
Turning to price developments, according to Eurostat’s flash estimate, annual HICP inflation was 2.1% in April, unchanged from March. Over the coming months, annual HICP inflation rates are likely to remain around these levels. Wage increases have remained contained over recent quarters and, in the context of moderate economic growth and weak labour markets, this trend should continue for the time being. Overall, when looking ahead, we see no significant evidence of underlying domestic inflationary pressures building up in the euro area so that inflation rates should develop in line with price stability.
However, there continue to be upside risks to price stability, relating mainly to oil price developments and their potential to lead to second-round effects stemming from wage and price-setting behaviour. In order to avoid this, it is important that the social partners continue to assume their responsibilities.
As regards the monetary analysis, monetary and credit growth remain strong despite some moderation over the recent past. These developments mainly reflect the stimulative effect of the low level of interest rates in the euro area. As monetary dynamics over the past year have mainly been driven by developments in the most liquid components of M3, this continues to signal upside risks to price stability in the medium to longer term.
To sum up, the economic analysis suggests that underlying domestic inflationary pressures remain contained. However, upside risks to price stability over the medium term need to be monitored closely. Cross-checking with the monetary analysis supports the case for continued vigilance with regard to the materialisation of such risks. Against this background, longer-term inflation expectations need to be monitored closely.
As regards fiscal policies, recent information and forecasts suggest little progress in reducing fiscal imbalances in the euro area. A timely and full implementation of consolidation commitments is essential. This will strengthen the confidence of investors and consumers in the soundness of economic policies. At the same time, it is essential to implement, in a strict and timely manner, the revised Stability and Growth Pact procedures, which are soon to enter into force, so as to underpin the credibility of the EU fiscal framework.
The Governing Council has repeatedly argued in favour of structural reforms to improve the potential for higher economic growth in the euro area. Authorities are aware of the structural obstacles and have taken important measures to address them, but continued reforms will be needed in order to keep up with the unavoidable challenges arising from an ongoing deepening in the division of labour at the global level, rapid technological change and population ageing. It is important to explain to the general public that these reforms will progressively deliver higher growth and lead to more job creation, and that, as a result, our societies will be better off. Over recent years, uncertainties surrounding the structural reform agenda in some euro area countries appear to have hindered the necessary improvement in the confidence of consumers and entrepreneurs. A clear commitment to implementing the reforms and the explanation of their benefits will help to reduce such uncertainties and thereby make a considerable contribution to improving the economic outlook for 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 and Axel Weber, President of the Deutsche Bundesbank
Question: President Trichet, you said last month, and I quote, “a decrease of rates is not an option for the Governing Council”. Would you make the same strong statement today in the light of recent economic data such as business confidence and the purchasing managers’ survey?
Trichet: It was not a “strong statement”. It was a mention of the position we have had for a long time. I said on behalf of the Governing Council a long time ago that a decrease of rates was not an option. And I can confirm that this meeting has seen no change to our previous analysis or to the conclusion that we reached a month ago. Our attitude is to wait and see. We undertook a very thorough analysis of the situation and we believe that the interest rates are in line with what is required by our overall economic and monetary analysis. And I would like to draw your attention to the following point: our short-term intervention rates are exceptionally low. Together with all market interest rates, they are creating an environment which is extremely favourable to growth and job creation in Europe. And it is because we are credible in terms of our own delivery of price stability that we are benefiting from these very low medium and long-term market rates. This is an exceptional contribution to the economic situation in the euro area. These very low market rates are based on the vigilance and credibility that we have in delivering price stability. Do not forget that inflationary expectations are priced in the level of market interest rates we are observing on a ten-year basis, where the benchmark is around 3.40.
Question: Oil prices have remained high for several months. Do you think the risks of second-round effects are now greater than they were in past months?
Trichet: The fact that oil prices are high and have been so for a number of months is, in itself, an element which calls for vigilance. And that is the reason why we have called on all price-setting economic agents and social partners to act responsibly. If inflationary expectations are in line with our definition of price stability, it is because all observers think, that thanks to our own vigilance triggering appropriate behaviour of price-setters and social partners, no second-round effects will be observed. This is of the essence, both for price stability and for growth and job creation in Europe.
Question: Last week, there were economists who said if the Governing Council is going to realise that the perspectives for economic growth are deteriorating they will have to think – start to think – about a rate cut and, if that happened, the ECB is going to play down the risk arising from the monetary sector. So, if I remember correctly, you did not mention anymore the risk of asset price inflation as you did during the last few months. So are these economists right that you have tried not to get in conflict with your own strategy and prepare maybe even a rate cut?
Trichet: Let us be absolutely clear: we are certainly not preparing for a rate cut. Not at all, for a very simple reason. As I said, we consider that our contribution, being faithful to our mandate, is to deliver price stability. The risks to price stability are still there. When we look at the inflationary expectations we consider three kinds of surveys. One is being done by ourselves, one is being done by the private sector, and one is being done by the European Commission. They all point to inflationary expectations in the medium to long run being at 1.9%. 1.9% is below but very close to 2%. That sole observation will call for us to maintain a position of vigilance. Because, if economic agents think that the delivery of price stability will be 1.9 %, it is because they believe that we will be vigilant. So again, we are considering the situation and are convinced that by maintaining the interest rates at their present level and by maintaining a position of vigilance at the same time, we are doing what is needed to be faithful to our mandate and to maintain and preserve a financial environment that is exceptionally favourable to growth and job creation
Question: You said that you are not in any way preparing for a rate cut. To what extent is it fair to say that you are preparing for a rate increase? And what would you have to say to the number of economists who have pushed forward into the future – well into the next year – about their expectations for the next rate increase….?
Trichet: We let observers and market participants make their own judgement. We are very clear that on the basis of our analysis, the present level of our intervention rate is fully in line with what we judge appropriate in view of our own mandate. Everybody knows that if we were called to increase rates, we would do so. And again, we are credible because we have not said anything else to market participants. There is no contradiction at all between being faithful to our mandate and preserving an environment as favourable as possible for growth and job creation. You know that ten-year rates at the level of 3.4% is something that, before the setting up of the euro, would have been considered impossible to deliver to the 306 million inhabitants of the euro area. So, it is something which is obviously extremely favourable for growth and job creation. I have to stress this point again and again because delivering a favourable financial environment is a necessary condition for growth and job creation, but it is not a sufficient condition per se. There are other conditions, and these certainly include the structural reforms that I have mentioned on behalf of the Governing Council. Among these conditions there is also confidence. The confidence of the households and the confidence of the entrepreneurs are very important. We, ourselves, are an institution which is profoundly devoted to confidence – to inspiring and consolidating confidence. We could say that price stability and the present environment, which we are helping to create on the financial side, are elements of confidence for the households. We tell the households that they can trust us to deliver price stability and, if they intend to consume, we would certainly tell them they can consume with confidence and that, of course, would be an element of growth. We would say the same to the entrepreneurs: you have an environment which is exceptionally favourable to physical investment in Europe with the present long and medium-term market rates, and there are a lot of good reasons to have confidence and to invest.
Question: Three quick questions. First off on the question of structural reforms. You noted that uncertainty over reform has contributed to a decrease in confidence and presumably precautionary savings in some parts of the euro area. To what extent can you say to an economist that creating those perspectives towards effective structural reform will reverse that process in a similar way on the upside as happened on the downside? My second question to you is regarding the fiscal outlook: have the recent negative economic data that you have seen over the past months led you to reassess the fiscal situation of the euro zone governments? My third question is: do you believe that lower interest rates would contribute to growth if you were to lower them?
Trichet: As regards your first question it has always been our intimate conviction that a resolute attitude, positive in the direction of structural reforms - along the line which was agreed upon by the Lisbon European Council in 2000 on a proposal of the Commission and has been confirmed several times, including during the important Brussels European Council -should progressively increase confidence. It is our intimate conviction and I trust there is a consensus on that. The problem is the difficulty of the delivery, and we have said how important it is to explain why society as a whole would be better off with the delivery of these reforms. We consider that we are part of this explanation exercise and I take the present occasion that you offer me to confirm that, i.e. to say that we are absolutely convinced that the entire society will progressively be better off with the delivery of those structural reforms.
As regards the fiscal outlook, our main message is that we are about to have, in a short span of time, a new framework – and I don’t want to go back to what our position is: you know it. I have repeated it a number of times. We call now for the full and strict implementation required by the text, and that is the main message.
For the last point, the question was already asked: we firmly believe that our mandate calls for maintaining interest rates where they are and that if we were to go in the direction which is from time to time suggested we would not get a decrease in rates. We would get an increase in rates, it is as simple as that! Because we would be considered by economic agents, market participants, observers, investors and savers as being less credible as regards delivering price stability over time; then they would augment their inflationary expectations. Those higher inflationary expectations, as augmented, would be incorporated in market rates, and then this “good advice” would lead to a result which would be exactly the contrary of the result which is hoped for, I presume. And that’s the reason why we trust that we have the appropriate level of interest rates at the moment I am speaking.
Question: I have two questions. First, I wondered if you have altered your assessment at all on the effects of the strength of the euro on competitiveness of euro area exports, it seems to be a particular problem for some countries in the euro area? Second, can I come back to the question raised by my colleague and ask why there is no line in the statement about the asset prices which you described as unsustainable in some countries in the past? It didn’t seem to be there. Is this another case of a central bank forgetting an important part of the statement?
Trichet: First point, we incorporate absolutely all elements, as you know, when we proceed with the economic analysis. So, all parameters that are of importance are taken into account. Certainly, the price of oil, the price of commodities – which we did not mention explicitly in our communiqué – all elements that we can observe at the global level, including what has been observed in emerging Asia and so forth, as well, of course, as the constellation of exchange rates: we take all of this into account when we make our judgement. As you have seen, we consider that when we look beyond the short term, the conditions are there for growth to get progressively closer to what we would call the growth potential of the euro area. As far as asset prices are concerned, we did not mention the point in this communiqué. It does not mean at all that things have substantially changed, and I would say that our analysis is the same. We see a number of economies, a number of countries in the euro area, where we have phenomena that are combining very dynamic growth of credit and elements of asset prices that need to be monitored. But as I have said already, perhaps on the occasion of the last two or three press conferences, it is not – at this stage – alarming at the level of the euro area as a whole.
Question: Mr Trichet, could you please be more precise on when you expect the economy to start rebounding again? Because you argue that in the longer term, conditions remain in place for stronger liquidity growth: will that be in the second half of the year or in the second quarter?
Trichet: As you know, we certainly do not embark at the level of the Governing Council of the ECB on any such precise profile projections. As you also know, the projections which are made by the staff of the Eurosystem or the staff of the ECB are not necessarily underwritten by us. We do not endorse the projections which are made, even by our own collaborators, at the level of the Governing Council. We consider that we must look at all that is said, including what is said by the private sector, by the international institutions, and as you know, they are very much converging in the same direction as our staff projections. There is a very small difference between the various institutions concerned. As far as our own staff are concerned, you also know that, since we first embarked on the publication of these projections, they have produced quite large bands to capture the degree of uncertainty. And as regards my own position, you might remember that last time, and even two months ago, I said in response to a question like yours that “I am not optimistic, I am not pessimistic, I am realistic”. We in the Governing Council look at facts and figures and we take facts and figures as the information which is crucial for our own considerations. The Governing Council, as I said, has looked at facts and figures and on balance has considered that a number of them were on the downward side on a short-term basis. But I will not elaborate more on that. Again, we are realistic.
Question: I have a question for both of you. Mr Trichet, you mentioned a recent interview that market liberalism is the source of wealth and richness. If you look at – and this is the question to Mr Weber as well – the criticism of its capitalism – this debate going on in Germany – do you really think that European politicians are ready for market liberalism?
Trichet: First of all, I said – and I am deeply convinced of the lessons that we can draw from all evolution; I am speaking in Berlin and I am always moved to be in Berlin myself, because I knew Berlin divided, I knew Berlin with the Mauer, I knew Berlin in totally different times – and so we know that the market economy lays down the rules that permit to create wealth, and that is extremely important. We also know, of course, that political democracy calls for discussion and for thought on how to get the best out of this wealth. But wealth has to be produced, and it is a clear lesson of the past, a difficult past – a terrible past in some respects – that these rules of market economy are key to produce goods. You can see that here in Europe. You can see that also so clearly in Asia – in emerging Asia. I will not pronounce, myself, on a particular debate in some countries that are members of the euro area.
Weber: No, I would not embark on that debate either, except to say that it is our assessment that in Europe we are moving towards a common market – a common market for goods and services – and we have a European framework for integrating financial markets. We look at reality and we judge that this reality is one of liberalising financial markets and having Europe grow together. In particular, here from this site in Berlin, over the last decades we have all seen the advantage of this liberalisation and of the growing together of Europe. This is the direction in which we should focus the economic debate and this is the main issue that is of concern to us at the European Central Bank and the national central banks of the Eurosystem. We have to establish a common European framework and financial markets. We have to grow together. I think this should be the main debate that we have in the months and years ahead: how we can make Europe work better?
Trichet: I would only like to add that we are an “apolitical institution” or a “multi-partisan institution”. We are guarding, defending and preserving a public good, which is the single currency. We have to guard this public good with standards that are extremely high, because we have to continue delivering a single currency which, according to the promise which was made, is at least as good as the best previous national currencies. And we were created ourselves by the virtue of a multi-national and multi-partisan consensus. A strong will to create the ECB.
Question: A propos creating a common European framework in the financial system, are you happy with the application of the rules of a united market in the public offer by ABN AMRO in Italy? And if not, what do you intend to do? Is it damaging also the credibility of the ECB because somebody in Italy is putting a brake to this offer?
Trichet: First of all, we in the Governing Council are strongly in favour of the level playing-field, the single market, the further integration of the financial markets. This is very clear and has been said several times. Second, I don’t want to qualify what is going on in any particular country. I am sure that the European rules will be respected and that we will see the appropriate functioning of the single market for financial services. This is my own working assumption and, again, this would be in line with the idea of having an integrated financial market and financial services market at the level of Europe as a whole.
Question: Two questions. First, several Governing Council members have suggested in recent speeches and remarks that, with an ageing population, Europe’s potential, or the euro area’s potential to grow is actually slowing down or is below what you previously assumed. With this in mind, do you think having an annual money supply target of 4.5% is too much money, are you providing too much money for the euro zone given its ageing population? Second question: last weekend we had three countries joining the ERM. How soon do you think it is before we will see the next expansion of the euro area?
Trichet: On this first question, the work of economists on determining the growth potential of any economy is being carried out permanently. It is a very complex question. There are various methodologies. You also have the introduction of the idea that you have a medium-term growth potential and perhaps a longer-term growth potential. Therefore I draw your attention to the fact that this is a very stimulating and interesting issue on which we are all working, including the OECD, for instance, which has done quite a lot of work on this issue. I don’t exclude the possibility that in the latest review of growth potential for various European economies and for the euro area as a whole, for the European Union as a whole, we might discover that the consensus of economists goes in the direction of revising down previous estimates. I don’t want to be definite, but at the same time I don’t exclude it, and, of course, the dynamism of the population is part of this, as well as the projections for labour productivity increases. As regards our own understanding, I would not have any kind of conclusion in the direction you are presently suggesting, i.e. that we should revise down the 4.5% target. As you know, we have to look at our monetary analysis reference, and we will do that.
As regards the second question, on ERM II: I refer again to the fact that we are in Berlin, a reunified Berlin, which is a very powerful and emblematic illustration of the unification of Germany. We also have a powerful illustration of the reunification of Europe as a whole, and it is moving. For the Governing Council, to consider that, in ERM II, we now have seven currencies, namely the Danish krone and the currencies of six of the ten newcomers, is very telling. It is a very heavy responsibility for all of us, for the countries concerned, for the governments of the countries concerned – the six I mentioned – for their central banks, for us, for the euro area. We all agree that convergence is of the essence, that succeeding in the convergence exercise is something which is of extreme importance and that we have no right not to succeed fully in this exercise. We are all taking extremely seriously the presence of these six currencies in ERM II and we will continue to carry out our actions together with the newcomers as responsibly and professionally and efficiently as possible to prepare, when the time comes, when convergence has been achieved and when criteria have been met, for what could be the next step. My message is a message of professionalism and of seriousness, because it is a very serious process and, at the same time, it shows that history is moving impressively.