Introductory statement with Q&A
Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB,
Frankfurt am Main, 7 July 2005
Ladies and gentlemen, welcome to our press conference.
The Governing Council of the ECB expresses its deep sympathy and its total solidarity with the British people and the Bank of England in these dreadful circumstances. We have observed a minute of silence in memory of the victims of these terrorist attacks and we convey our sincere condolences to the British people and the Bank of England.
The Vice‑President and I will now report on the outcome of today’s meeting of the Governing Council of the ECB, which was also attended by Commissioner Almunia.
On the basis of our regular economic and monetary analyses, we have concluded that the monetary policy stance is appropriate, given the current outlook for price stability over the medium term. Accordingly, we have decided to leave the key ECB interest rates unchanged. Across the maturity spectrum, interest rates in the euro area are low by historical standards, in both nominal and real terms, and thus lend ongoing support to economic activity. The Governing Council will continue to monitor carefully all factors that might affect this assessment and remains vigilant with respect to the emergence of risks to price stability over the medium term.
Allow me to explain our assessment in greater detail.
In the context of our economic analysis, recent indicators of economic activity in the euro area have, on balance, confirmed that growth has remained subdued. High and rising oil prices in particular appear to have weighed on demand and confidence. On the basis of current information, the growth rate in the second quarter of this year is expected to be lower than the first quarter growth rate of 0.5%, quarter on quarter. Available data are still mixed, with some of the most recent indicators showing a slight improvement, but there are no signs as yet that a more sustained recovery in economic activity has already started. At the same time, looking beyond the short term, there continues to be reason to expect a gradual improvement in economic activity in the euro area. On the domestic side, investment should benefit from the very favourable financing conditions, the robust growth of corporate earnings currently observed and ongoing improvements in corporate efficiency. Consumption growth should evolve broadly in line with expected developments in disposable income. On the external side, ongoing growth in global demand and improvements in euro area price competitiveness should support euro area exports. This assessment is in line with available forecasts and projections.
This baseline scenario for growth continues to be surrounded by a good deal of uncertainty. On balance, risks to economic growth lie on the downside and are notably related to the persistence of high oil prices, the low level of confidence prevailing in the euro area and global imbalances.
Turning to price developments, annual HICP inflation was 2.1% in June, according to Eurostat’s flash estimate, compared with 1.9% in May. Over the next few months annual HICP inflation rates are expected to fluctuate around current levels and may not fall below 2% for the remainder of 2005. This outlook mainly reflects recent developments in oil prices, which were seen as an upside risk in the context of the June 2005 Eurosystem staff inflation projections. However, 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, we continue to see no significant evidence of underlying domestic inflationary pressures building up in the euro area.
At the same time, upside risks to this scenario for inflation warrant close monitoring. These risks relate mainly to oil price developments and their potential to lead to second-round effects stemming from wage and price-setting behaviour. It is important that the social partners continue to meet their responsibilities. Moreover, uncertainties about future developments in administrative prices and indirect taxes need to be taken into account when assessing currently available inflation projections.
Looking at inflation prospects over medium to longer horizons, our assessment is also based on the results of our monetary analysis. In line with developments since mid-2004, monetary and credit growth in the euro area remain strong. The stimulating impact of the low level of interest rates has remained the dominant factor driving monetary developments, as reflected in the strength of M1 growth and the dynamism of loans to the private sector. Liquidity remains ample by all plausible measures. Overall, monetary developments support the case for vigilance with regard to upward risks to price stability over medium to long-term horizons.
To sum up, the economic analysis confirms that domestic inflationary pressures over the medium term remain contained in the euro area, while oil price developments in particular imply some upward revisions to the main scenario for price developments. The monetary analysis identifies risks to price stability over the longer term. Overall, cross-checking the information from the two pillars suggests a need for ongoing vigilance in order to maintain inflation expectations in line with price stability. In fact, by keeping medium-term inflation expectations firmly anchored at levels consistent with price stability, monetary policy is making a significant contribution towards a recovery in economic growth.
Prudent fiscal policies could provide considerable support for confidence in the euro area. The discussions on revising the Stability and Growth Pact regulations have been concluded and rigorous implementation is now key to ensuring an effective framework for fiscal policy coordination and discipline. This is all the more true as current and projected fiscal deficits in several euro area countries still need to be addressed with rigour. In a number of cases these deficits not only imply a rising debt ratio, but also leave no safety margin for short-term budgetary relief in the event of adverse developments. In this context, as significant revisions of past deficit and debt figures have been reported for a few countries, let me also reiterate previous calls by the Governing Council for the reliable compilation and timely reporting of government finance statistics.
Finally, let me conclude with a few words on structural reform. As we have stressed repeatedly, a decisive and comprehensive set of measures aimed at achieving a more dynamic and competitive European economy with flexible labour and product markets is urgently needed. The primary objective of such measures is to deal with the ongoing challenges from globalisation, rapid technological change and ageing populations and, overall, to ensure greater resilience to shocks. These challenges are not specific to the euro area. Successful structural reforms would, however, also contribute to fostering the adjustment processes within the euro area. In particular, they would allow those member countries with a weaker record in terms of economic growth and employment creation to perform better in the future. As regards existing growth and inflation differentials within the euro area, there is clear evidence that the dispersion of inflation and real GDP growth rates in the euro area is not materially different from that of the United States and it does not show any signs of having increased since 1999. However, in cases where differences are not due to catching-up processes or temporary factors, structural reforms are even more necessary to enhance economic performance and flexibility in the adjustment process.
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, three questions. First of all, after the September 11 attacks in the United States you did make some efforts to ensure the stability of the financial system, notably by making liquidity available wherever it was needed on whatever side of the Atlantic. I wanted to ask if you saw any similar necessity this time around or any other measures which might be necessary under the current circumstances. My second question is: what was your message to Mervyn King when you spoke to him today? And my third question is: did you discuss a rate cut today?
Trichet: On the first question, I have been in touch with Mervyn King on the functioning of the markets. Our joint observation was that markets were functioning on both sides of the Channel. Of course, both the stock market and the interest rate market had taken into account the events, but infrastructure and systems were functioning, payment systems were functioning. And so, we are alert, we are vigilant, we are monitoring all developments, we are keeping in touch and, at this stage, we have no particular information that would call for action. If this were the case, you can be sure that we would act immediately. Again, we are in permanent contact. On this occasion, I expressed our very deep sympathy to Mervyn. I expressed the emotion of the Governing Council. As I said, we had a moment of silence to express condolences to the British people and the families concerned and I asked Mervyn to convey this emotion and these condolences to the British people and to the authorities. I have been in touch also with Alan on the other side of the Atlantic and we made the same observation. The markets are taking events into account, are assessing the situation and all systems and infrastructure are functioning correctly. Again, we keep in touch. You very rightly recall that in the case of 9/11 we judged that it was appropriate to take decisions in real time and pour in liquidity on both sides of the Atlantic in the most expeditious and efficient way. And, as I said, we are in touch in real time, as demanded by our responsibilities. On the third point, we are looking at the situation with extreme care. We considered all possible factors that are guiding our own judgement on the monetary policy stance. We concluded that the interest rates were appropriate and that we were exactly in the same state of mind as last time. I am not pre-announcing a rate cut to you. I am not pre-announcing an increase of our rates. We think that they are appropriate: this is our present judgement. Again, we are taking everything into account, all the information that is available at the moment I speak. We have a wait-and-see attitude. But, again, I am not pre-announcing a rate cut. I am not pre-announcing a rate increase.
Question: President Trichet, you mentioned that European exporters were becoming more competitive. Has that made you any more confident about an economic pick-up in the second half of this year?
Trichet: Reflecting not on a short-term basis but on a slightly longer-term basis, we believe that growth will be more dynamic. That is also the judgement being made by all European and international, public and private observers; so we are not original in that respect. But we see good reasons why that should be the case and why it is not only our conclusion, but also that of global observers. That being said, we also say – and I have said this before – that we have real downside risks for the three reasons I have been mentioning: oil price increases, which are of course something that is certainly important, global imbalances, and the level of confidence. You know to what extent we are committed, being faithful to our mandate, to doing everything we can to consolidate, preserve and enhance confidence in all “constituencies” of the euro area; not only the abstract “economic agents”, but households and entrepreneurs. We trust that we have a responsibility in this respect.
Question: You say that you do all you can. Today in the British newspapers, and also over the last few days, there has been a sort of attack on the ECB because rates are putting a brake on growth. What do you say to that?
Trichet: You are used to hearing from me why we trust that what we do is what we should do; and that what we do is the best we can do for growth and job creation in Europe. I do not want to identify any newspaper or media. In various media I have read various pieces of good advice, some going in totally the other direction. And from time to time advice going in both directions in the same media, as is perhaps normal in the very vivid opinion-based democracies of Europe and the world. So, we have a lot of good advice: to increase rates, to decrease rates, or to stick to the present level. But, again, my reasoning is the following: our mandate under the Treaty is to deliver price stability. There is no doubt anywhere that we are and will remain faithful to our mandate. We owe that to the people of Europe who consider price stability to be something which is extremely important. In a number of economies and countries the sentiment of the people is even that there are more price increases than we believe, more than is calculated at the national or European levels. This sentiment has to be taken into account.
We are credible in delivering price stability according to our definition. That is the reason why the inflationary expectations are well anchored in line with our definition of price stability. In our surveys, we are at the level of 1.9%. When your definition is less than but close to 2%, it is difficult to do better than 1.9%. And the break-even inflation that we are extracting from index-linked bonds, by all means, is also in line with the fact that financial markets inflationary expectations are also fully in line with our definition of price stability. The fact that our financial environment incorporates inflation expectations in line with our definition is one of the reasons, not the only reason, but one of the reasons why we are currently observing the lowest level of the ten-year rate that has been observed in Europe for a 100 years. If we were less credible, we would have higher inflationary expectations. And then, all other things being equal, market interest rates would be higher. So that is why we think that, by being faithful to our mandate, we are delivering what is necessary for growth and job creation. I say that with the information that we have today, with the anchoring of inflationary expectations that we have today and with all the information that is available to you and to us. Things could be different tomorrow. We are pragmatic people. But today, clearly, this is our conclusion. And we can prove it.
Question: Mr Trichet, you talk about the people of Europe. Yesterday, for the first time in seven years, the representatives of the people of Europe could not agree on a common resolution on the ECB, its policy and its work. And obviously the parties on the left think that maintaining price stability is not enough. They want to change the mandate. Does that worry you?
Trichet: First of all we are guarding the currency, the currency of Europe, for 307 million people. We are multi-partisan – in other countries or economies or even continents we would say that we are bi-partisan – I would say we are multi-partisan; we have only one mandate, which is to guard the currency, preserve price stability, issue a credible currency. This has been a promise which has been made to all sensitivities in Europe and we are extraordinarily attached to this multi-partisan nature of our institution. Second the European Parliament has rejected twice amendments which were calling on us to decrease rates. I say that loud and clear because I am not sure that all of you are aware of that, on the basis of what I read in some papers: twice the European Parliament rejected amendments calling on us to decrease rates. That is the truth. And I would like you to take note of that. Third, as you said, the resolution, which was presented by the rapporteur and which had been prepared for the plenary in accordance with the appropriate procedures in the Parliament, found no majority, so there is no resolution. But again, if this is interpreted as a call on us to decrease rates, I can prove that it is a totally wrong interpretation. Now, let me say the following: any kind of comments from my side about a possible change of our own mandate is totally out of the question. We have a Treaty, we have a mandate – in the eyes of the European democracies, that mandate made price stability our primary goal whilst it is also a necessary condition for sustainable growth and job creation. And again, it seems to me that we are doing all we can by preserving price stability, to deliver a financial environment which is good for growth and job creation. And again we are speaking of figures and facts: when I say that we have historically low rates, it can be substantiated by all of you.
Question: Mr Trichet, this is just a quick clarification question. In your opening statement last month you said that you would be vigilant with regard to upside risks to price stability. And then, in the first paragraph today you said “vigilant with respect to the emergence of risks to price stability”. Some people might understand that to mean something a little bit different, maybe that you are a little bit less worried about upside risks to price stability right now…
Trichet: No, the interest of the press conference is precisely to clarify such things. No, there is no difference. Vigilance is, for us, of the essence. And again, if we were deemed not to be vigilant, inflationary expectations would go up and we would be in an environment that would not be as favourable to growth as I have said previously. No, it is the same message, the same posture. Of course, some elements have changed and we have to take that into account. We were not in exactly the same environment in terms of oil prices, with all the effects that oil prices have on both growth and possible future inflation.
Question: And then, the other clarification question: you said today that, on balance, the risks to growth are on the downside. And you spoke of upside risks to inflation, but can you also say that, on balance, risks to inflation are on the upside?
Trichet: Yes, I said that. There is no doubt.
Question: Mr Trichet, you have been talking about the downside risks to growth. Would you say that the events in London are a downside risk to growth in the euro area and that they could weaken sentiment and hinder the recovery that you expect in the second half of this year? And secondly, just to clarify your earlier answer in which you concluded that leaving rates where they are is the appropriate course. Do you mean by that the Governing Council only discussed leaving rates on hold, that this was the only option, and there was no discussion about a cut or a raise at today’s meeting?
Trichet: On the first point I would say that we do not think at this stage that these events could have any significant impact. We have had the experience of the abominable terrorist attack in Madrid, for instance, and the very same questions were posed at that time. And we had the sentiment that it was not the case. I would say that that is also our sentiment now. In any case, in these exceptional circumstances, the duty of an institution like ours is to be faithful to its mandate, to continue to be the anchor of confidence – more than ever – and to be alert. Monitor all developments and keep calm. On monetary policy, things are very clear. We consider that we have the appropriate level of interest rates. We judge the pros and cons of all possible action. And we judged, all of us, that the present rates were appropriate. And, again, I am not pre-announcing a rate cut. I am not pre-announcing an increase in our rates. This is exactly where we stand at the moment I am speaking. Wait and see.
Question: President Trichet, you said that you today examined rates in accordance with the economic situation in the European Union. In discussing rates, did you take into account the economic situation in the new Member States of the EU? And if so, in which way?
Trichet: When we look at the situation through our economic analysis we look at all factors that are influencing our own situation in the euro area whether it is the global situation, the oil price, or anything that comes from outside. So, the situation of the economies that are in the centre and in the east of Europe is, of course, taken into account as part of the overall environment of the euro area.
Question: Two questions. First, on the events in London today. Can you just clarify: when you say you are vigilant and alert and will take action as necessary, what precisely are you vigilant and alert about? You do not see a risk to growth. Maybe you might just go into a little bit more detail about what it is that you will be monitoring particularly closely in the days to come. Second, I would like to ask about your inflation outlook. Given the upside risk to inflation you have talked about, would it not be more useful if we had a slightly stronger euro at the moment? And, also, there is a very strong possibility that a euro area country might increase VAT substantially. Would you regard this as a threat to price stability or would that be a one-off effect?
Trichet: As regards the first question, when I mentioned “alert” and “vigilant” I meant alert and vigilant in all the domains where we have a direct responsibility, namely the appropriate and smooth functioning of the payment system, the appropriate and smooth functioning of the money market, all the infrastructure, and, of course, all segments of the financial markets. In the case of 9/11 it appeared that, because of the difficulty with some counterparties on one side of the Atlantic, we had to be – in the United States as well as here – very attentive to the necessary pouring of liquidity. This is, as I said, not the case so far in the present circumstances. But we will do all that we judge necessary. At this stage, we are observing that payment systems are functioning correctly, markets are functioning correctly. And I have nothing else to say after having checked with our own people here and being in touch with our friends – my close friends Mervyn in Europe and also Alan on the other side of the Atlantic.
As regards inflation, it is absolutely clear that we have to take into account the administered prices and administrative decisions that could influence the inflation risk on the upside. I will not comment on the exchange rate. We take into account absolutely everything when we analyse our own situation including exchange markets. But I will certainly not comment on a particular level. It is not as you know the way I use to deal with that question.
Question: I would like to return to oil prices just briefly. Oil prices have gone up dramatically since your last meeting in early June. So I have two questions on that: (i) is your neutral stance on rates equally neutral to your stance in June, and (ii) do you see the danger of higher oil prices being more likely that of stemmed or weaker economic growth and consumer demand, or is it more likely to be in higher inflation?
Trichet: It is on both, by definition. The influence of an increase of oil prices goes in the two directions you have suggested. Let me say two things. First, we are totally pragmatic. We have to take into account all facts and figures, and the reality as it is. But, simultaneously, I would call on all partners to be as responsible as possible, for the producers to be as responsible as possible, as well as the consumers. We are not in a normal situation in this respect and, as you know, the international community – and the ECB as member of the international community – believes that progress can be made and must be made in the functioning of the market, particularly as regards higher levels of transparency of that market, so I would take advantage of your question to call again for as much transparency and responsibility as possible by all partners. As regards our present stance in comparison with the previous meeting, I repeat that we have the same attitude and I think I was eloquent enough in qualifying the monetary policy stance not to repeat what I have already said. But again an increase in the price of oil has exactly the two consequences you said, it is exerting downward pressure on the growth side and it is adding to upside risks on the inflation side. That is clear enough.
Question: I have two questions. The first question regards your statement. You said in the statement “overall, we continue to see no significant evidence of underlying domestic inflationary pressures”, and before you said that HICP inflation will not come down to 2%. Does it mean that you will be looking more, and more closely, now at the core inflation instead of the headline inflation? And the second question is: are you concerned about the crisis of the European Union after the referendum, which is putting pressure on the ECB, maybe in your monetary policy stance and so on. Do you want a further step to more political integration in the next year?
Trichet: On the first question: as you know, in our monetary policy concept we are reasoning medium term. Medium term, that is what is important. It is the reason why we are credible, fully credible – and I can prove it – as regards inflation expectations and price stability being delivered by us in the medium and long term, when everybody knows that we have had to face a number of shocks, including the present oil shocks, since the setting-up of the euro. So observers, market participants and economists could see that because of these successive shocks, we could have inflation over and above 2%, but nevertheless they had and they have full confidence in our capacity to deliver, in the medium run, price stability. The fact that we had a succession of shocks is well understood, I have to say, by observers, market participants, investors and savers.
As regards your question on the political integration of Europe, we all have our sentiments as European citizens, in the Governing Council and in this room. As an institution, we do our job. Our job is to deliver price stability, to deliver a currency which is credible and inspires confidence to 307 million people. We had to care for that currency having the highest level of confidence that existed before the setting-up of the euro. That currency is called upon to be the currency of much more than 307 million people and 12 countries. Because, you know, that in the 25 present members of the European Union, 23 have no opting-out clause. So that is our responsibility. We will exert it as well as possible.
As regards the organisation of the executive branches, I see very favourably the best possible organisation of the Eurogroup. I welcome the fact that the Eurogroup has a President for two years. We are totally independent, our credibility relies totally on our own independence, which everybody knows is not only conferred by the Treaty but is a visible reality. If the Eurogroup has anything to tell us, they can do so. Every fortnight I invite the President of the Eurogroup to our discussion in the Governing Council. I have the honour of being invited every month, together with the Vice-President, to the meeting of the Eurogroup, so this makes three times a month that we have the possibility of a physical encounter. I think that is a world record! I am not sure that you will find any other place in the world where such possibilities are offered! They are offered by the Treaty, which calls upon me to invite the President of the Eurogroup.
Question: Some days ago we got a clear signal from Mr Almunia’s office that the new Member States do not need to join the euro zone as early as they can. The office said that you need to grow first because you are catching-up countries; you do not need to join before 2009 or 2010. Can you comment on this?
Trichet: My comment is very simple: it is not a question of growth, it is a question of convergence. To enter into the euro area, one has to meet the Maastricht criteria and to do so not only for a moment, but in a sustainable fashion. This is in the Treaty. Some economists would say that it has to be a nominal and a real convergence, namely a sustainable convergence. So that is the rule according to the Treaty. We will respect the Treaty. I will only add that it is of course in the interest of all partners that this convergence is substantiated. It is certainly in the interest of the euro area itself and it is also, of course, in the interest of a country which is joining, because joining without having converged would create problems. So we have a joint interest in this convergence exercise being as successful as possible and as well checked as possible. I guess that this was what the person you mentioned wanted to say.
Question: I am sorry that I am so insistent, because a colleague asked something similar before. You know that we here in Germany have a big discussion about increasing value added tax by 2 percentage points. Now even people like the Chairman of the German Council of Economic Advisors, our “Sachverständigenrat”, says with some regret that if we still had the Bundesbank it would lower the interest rate, it would react with an accommodating monetary policy and we cannot expect that from the ECB. That means, he says, that the ECB is restricting what German politicians would like to do. Now the calculation is as follows: a 2 percentage point increase in value added tax would mean an increase in the level of consumer prices in Germany by 1.5%; as Germany is one-third of the euro area, this would mean an increase in European consumer prices by 0.5%. Now the question is, and this is what is being discussed: how does the ECB treat that? Like a one-time oil price increase and just let it pass, until it drops out of the calculations a year later? How are you going to handle it? I think it would be good if you answered this question just to stop these funny discussions.
Trichet: First of all, we have decided together to put our destiny in common in having a single currency. And when I say that, I say what has been said in all countries, but certainly also in the country that you were mentioning. And it is clear that we look at 307 million people ourselves and we have to, just as the Federal Reserve looks at Alaska, California, Florida, Massachusetts and all the other states, and there are differences and indirect taxation can be raised in various states, so we are not in the presence of something which is new or aberrant. We are in a universe where we have to look at the full body of a very vast continental (including Ireland) economy. It is not the first time that we have had to cope with that problem. We already had increases in administered prices and indirect taxation all over Europe. It was one of our problems over the last years. One of the difficulties was that we had to cope with these decisions and when they were all added up the order of magnitude was substantial in terms of inflation. So, it is not that new. It cannot be presented as a quid pro quo between an institution which has the responsibility for a global currency with 307 million people and a particular state. But of course we have to take into account those figures proportionally with the importance of the economy and the economy that you are mentioning is important, that is absolutely clear. Now, to say that the central bank of Germany was much more complacent would not fit with what I have seen and have read in all the German papers that were publishing articles in real time. I know that because I have been working with my friends in the Bundesbank during a great number of years. So I would not say that at all. I would say that, again, we will do our job. By doing our job, whatever is done by the various executive branches or parliaments, we are creating an environment which is obviously very favourable. And because you have quoted Germany let me say that at a recent lecture to which I was invited at the Bundesbank, Axel Weber said, and I repeated, that the present long-term rates in Germany are the lowest since Bismarck. So I do not know whether others were more efficient in delivering a financial environment which would be more favourable for growth and job creation, but it seems to me that we are trying at least to do our best and we have elements that would substantiate that we are doing everything we can to be credible in delivering price stability. By doing that, we are creating a financial environment which is obviously favourable for growth and job creation, but we all know and you all know that to have a favourable financial environment is a necessary condition. It is not, unfortunately, a sufficient condition per se. There are a number of elements for growth and job creation, but let me insist in conclusion, because your question was the last one, on confidence. In Europe today confidence is really very, very important. We are doing everything we can to improve and consolidate the confidence of households, entrepreneurs and investors. Particularly in difficult circumstances obviously like today’s, we will continue to be this anchor of confidence which is demanded by the situation.
Thank you very much for your attention.