Introductory statement with Q&A
Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB,
Frankfurt am Main, 6 April 2006
Ladies and gentlemen, let me welcome you to our press conference and report on the outcome of today’s meeting of the ECB’s Governing Council. The meeting was also attended by Commissioner Almunia.
On the basis of our regular economic and monetary analyses, we have decided to keep the key ECB interest rates unchanged, following the increase of 25 basis points on 2 March 2006. The information which has become available since then confirms our assessment that a further adjustment of our accommodative monetary policy stance was warranted to address upside risks to price stability. It remains essential to ensure that medium to long-term inflation expectations in the euro area are kept solidly anchored at levels consistent with price stability. Such anchoring of inflation expectations is a prerequisite for monetary policy to make an ongoing contribution towards supporting economic growth and job creation in the euro area. With interest rates across the whole maturity spectrum still at very low levels in both nominal and real terms, and monetary and credit growth remaining strong and liquidity ample, our monetary policy remains accommodative. We will continue to monitor very closely all developments to ensure that risks to price stability over the medium term do not materialise.
Turning first to the economic analysis, recent information has confirmed our assessment of an improved outlook for economic growth in the euro area, following the more subdued developments in late 2005. On the basis of the latest data, survey releases and various indicator-based estimates, it appears that growth is strengthening and broadening in the first half of 2006. Indeed, the conditions remain in place for solid growth over the coming quarters. Activity in the world economy remains strong, providing support for euro area exports. Investment activity is expected to remain solid, benefiting from an extended period of very favourable financing conditions, balance sheet restructuring, and accumulated and ongoing gains in earnings and business efficiency. Consumption growth should also strengthen over time, in line with developments in real disposable income, as the labour market situation continues to gradually improve. This outlook for economic activity is also confirmed by available forecasts from international organisations and private sector institutions.
The risks to economic growth appear to be broadly balanced over the shorter term. Further ahead, downside risks still relate to potential increases in oil prices and concerns about global imbalances.
Turning to price developments, according to Eurostat’s flash estimate, annual HICP inflation was 2.2% in March 2006, compared with 2.3% in February and 2.4% in January. In the short run, inflation rates are likely to remain above 2%, with the precise levels depending largely on developments in the more volatile components of the index. Beyond the short term, changes in administered prices and indirect taxes are expected to significantly affect inflation in 2006 and 2007, and an upward impact may also be expected from the indirect effects of past oil price increases. At the same time, wage dynamics in the euro area have remained moderate over recent quarters and growth in wages is expected to remain contained, partly reflecting strong global competitive pressures, particularly in the manufacturing sector. Over the recent past, moderate wage trends have helped to dampen domestic inflationary pressures; looking ahead, it is crucial that the social partners continue to meet their responsibilities in this regard, also in the context of a more favourable economic environment.
Risks to the outlook for price developments remain on the upside and include further increases in oil prices, a possibly stronger pass-through of oil price rises into consumer prices than currently anticipated, additional increases in administered prices and indirect taxes, and – more fundamentally – stronger wage and price developments than expected due to second-round effects of past oil price increases.
Turning to the monetary analysis, the latest developments confirm that the stimulative impact of the low level of interest rates remains the dominant factor behind the high trend rate of monetary expansion. Moreover, the annual growth rate of credit to the private sector has continued to increase over recent months, with borrowing by households – especially loans for house purchase – and non-financial corporations rising rapidly. Overall, strong monetary and credit growth in an environment of ample liquidity in the euro area continues to point to upside risks to price stability over the medium to longer term.
To sum up, annual inflation rates are projected to remain elevated in 2006 and 2007, and the economic analysis indicates that the risks to price stability remain on the upside. Given the strength of monetary growth and the ample liquidity situation in a context of improving economic activity, cross-checking the outcome of the economic analysis with that of the monetary analysis supports the assessment that upside risks to price stability over the medium to long term prevail. It is essential that medium-term inflation expectations remain firmly anchored at levels consistent with price stability. Accordingly, the Governing Council will continue to monitor very closely all developments to ensure that risks to price stability do not materialise, thereby making an ongoing contribution to sustainable economic growth and job creation.
As regards fiscal policies, while the budgetary results reported for 2005 are mostly better than anticipated a few months ago, the budget balances planned for 2006 imply no significant progress in fiscal consolidation for the euro area as a whole. Given the economic outlook, a faster pace of deficit reduction is necessary. Delaying fiscal consolidation in times of improving economic activity implies risks for the medium term, as has been observed in the past. Speeding up deficit reduction on the basis of credible and fully specified measures as part of a comprehensive reform programme would help to enhance confidence in the medium-term prospects of the euro area and prevent a repeat of past experiences, when complacency in good times contributed to persistent budgetary disequilibria.
As regards structural reforms, the Governing Council welcomes the call by the European Council, which met in Brussels on 23-24 March 2006, to maintain the momentum of the re-launched Lisbon strategy for growth and employment. As emphasised by the European Council, the focus should now be on ensuring the effective, timely and comprehensive implementation of the measures agreed in the national reform programmes presented by Member States and, if necessary, on strengthening them. These measures are designed to, among other things, enhance the sustainability and quality of public finances, promote flexible labour and product markets, support a favourable business environment, and ensure a fully operational EU internal market, including the markets for energy and services. Applying comprehensive structural reforms is of particular importance for the euro area countries, in order to increase wage and price flexibility and the resilience to shocks, facilitate structural adjustment, raise potential output growth and job creation, and reduce price pressures, thereby facilitating the task of the single monetary policy.
We are now at your disposal for questions.
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Transcript of the questions asked and the answers given by Jean-Claude Trichet, President of the ECB, and Lucas Papademos, Vice-President of the ECB
Question: Two questions, Monsieur Trichet. One about inflation. Some concern has been expressed over the past few months that there might be secondary effects arising from inflation and, indeed, from the oil price shock. Have you noticed any secondary effects or is this still in question, and second, with the economy around the euro area picking up at the moment, how much of a concern is monetary growth and especially credit demand for you right now?
Trichet: First of all, as regards the first question, I would say, with some caution, that we do not observe any secondary effects today. They would represent a high risk, but one which did not materialise. I mentioned, in particular, what we observed in the sphere of wages and salaries. I draw your attention to the fact that if and when you do observe those secondary effects, it is already too late. So, our problem is to prevent them from materialising. We are not particularly happy because they are not materialising, we consider that it is exactly what should be observed. We are doing our own job properly, when we do not see these secondary effects materialising. As regards the monetary pillar, you know it is one of the major differences between our monetary concept and a number of others that we are continuing what was the strong tradition and also the success of the euro area national central banks before the euro was set up. I have mentioned the fact that the Governing Council follows what is happening very carefully. The development of the monetary aggregates and their counterparts is very dynamic, particularly loans to the private sector. This is something that we interpret in the medium to longer run, as more and more economists and the mainstream are also doing, as an important information regarding future inflation.
Question: Mr Trichet, the markets were expecting you to say vigilance in order to prepare them or prepare for an interest rate rise in May. You did not say vigilance, was that deliberate? And second, did the Council discuss raising rates today?
Trichet: As we do in all our meetings which concentrate on monetary policy, we discussed the issue of rates. We discussed it at length. It is our responsibility to be as clear and transparent as possible with market participants, investors and savers. I would say that the current suggestions regarding the high probability of an increase of rates in our next meeting do not correspond to the present sentiment of the Governing Council. I would also add that the sentiment that I see from time to time in some remarks or market literature concerning the perception that we do not increase rates when we are out of Frankfurt is equally not at all the sentiment of the Governing Council. I trust that, for the sake of clarity, transparency and simplicity, it was perhaps useful to make these two remarks. And it is true, vigilance is not mentioned in the introductory remarks, as you very wisely remarked.
Question: I would like to come back to the wage moderation for a moment. Would you say that the recent agreements in Greece are still in line with what you call wage moderation? That was about 10% over three years, I read in the paper, which is quite a lot, I think.
Trichet: As you know, we do not qualify all the decisions that are taken in member countries of the euro area. We usually provide general orientation, convey general messages, and make general recommendations for the euro area as a whole. In the present particular case, even if the Governing Council did not discuss that, I would say that it does not seem to me in line with what would be appropriate.
Question: I would like to know if, as far as the economic development is concerned, you said that risks are balanced. Did risks increase or did they get lower, because the International Monetary Fund has revised downwards the projections for Germany and for Italy, both for 2006 and 2007? The situation in France with the strikes doesn’t look as good as it was a couple of months ago, so the three major countries maybe don’t have the growth that some economists had projected. This is the first question. And the second question is about some off-the-record statements that a senior European Central Bank official has given to a news service, maybe for the second time within 15 days. This was referring to an agreement of the Governing Council to increase rates in May. So we would like to know if the silence of the central bank means that you agree with this or, if not, why don’t you from the first moment condemn this and say this could not be coming from the European Central Bank.
Trichet: Again. Clarity and transparency are essential. First, as regards growth, the sentiment of the Government Council as expressed in the introductory remarks is that we had confirmation during the last month of the way we had assessed the situation in our last meeting. You may remember we were a little bit challenged after our last monetary policy meeting. We increased rates, while we said: yes, there is some volatility as regards quarterly growth. It’s true that quarterly growth appeared to be a little less flattering than was expected for the fourth quarter but we look at the trend. We consider the trend as the pertinent entity. We make a synthesis out of all information received and we are not impressed by short-term or quarterly volatility. It seems clear to me that it was a good way to look at the situation and that all the information we have had since then has confirmed that we have a trend which is around our growth potential. So I see absolutely nothing which would contradict the way we were looking at the situation a month ago. You were mentioning downside risks to growth in a number of countries. I would say that the Governing Council considers that the risks as regards growth are really balanced at the moment I am speaking. I could even say there are a number of indications which are really on the upside. But we remain prudent. We look at the trend, we are not impressed by the volatility of figures, whether they are so-called soft data or hard data. It has always been the position of the Governing Council and of the ECB. It’s part of our way of looking at things.
As regards your second question: first of all, we never comment on rumours. You could have asked a question on rumours about markets, exchange rates, etc. – we never comment on rumours. Second, our communication is transparent, crystal clear and public. There is absolutely no concept of “anonymous communication” by the Governing Council. We don’t like and we don’t need anonymous communication. Why would we need anonymous communication? And on the occasion of the successive press conferences I communicate on behalf of the Governing Council. There is a lot of public and transparent communication.
Question: Until a few moments ago, markets had been pricing in a nearly 100% chance of a May rate rise. So I take it from your comments that it is now not an option. But would it be reasonable for markets to expect that the ECB will move in June because of what you said about “away-from- home” meetings, and also can you give us some information about the discussion today? Was there a lack of consensus on a May move, and if so how much was lacking or how close to consensus were you? Can you give us a flavour of the discussions regarding the May move that had been widely expected previously?
Trichet: I have said all that I have to say on both May and June. You may draw your own conclusions, but it seems to me that I was very clear on both May and June.
Question: First, with regard to the point about market sentiment vis-à-vis a possible move in May. You seem surprised by market sentiment. Maybe you could in your usual elegant way suggest why markets might have got things wrong. I am wondering whether maybe the recent course of the euro might have had an impact on your discussions today. The second question, which requires only a yes or no answer: It seems to me, from the way in which you have commented and acted in the last six months or so, that when you have moved you have never surprised us, and the guidance has been excellent for the markets. Is it reasonable, therefore, to assume that markets will always have a good idea a month or two ahead about what the ECB is going to do, but that, beyond that timeframe, they have to use their own analysis?
Trichet: First, we consider in the Governing Council that we owe you – as journalists, observers, watchers and market participants – the appropriate level of clarity and transparency. We are very proud to be transparent, and we are also very proud to have introduced the concept of transparency and real time communication from the very beginning of the setting up of the euro, under the presidency of my predecessor. This is one of our assets, and we are very attached to that. Second, let us not complicate things. From time to time, we give markets pieces of information that the markets regard as important information. I remember when I said, on behalf of the Governing Council, that we would probably do something in December. This was not known by the market at all, so the market took that as an important piece of information. From time to time, we give information that is a little bit different from what the market may have expected. In the present case, it is perhaps a slight correction, because the market, if I am not misled, is pricing in a 100% probability that in June at the latest we will move rates. What I told you concerns May, and I do not want to elaborate more on that. Each time we will consider what is necessary for you to have as pertinent communication and what I, as spokesperson of the Governing Council, should communicate to you. It is as simple as that, and that is what we are doing today.
Question: Just to follow up on your comments. Fundamentally, I suppose that there are two things that the markets could have done in coming to the wrong conclusion: they could have overweighted things on the side of their economic analysis, or they could have made a corresponding error on the inflation side, perhaps having forgotten your dictum that inflation, that price stability, is the needle on your compass. Can you give us an idea of on which side you think that the mistake was made? My second question is just a clarification on the fiscal policies. You said that the budget balance plans for 2006 imply no significant progress in fiscal consolidation for the euro area as a whole. And now, there is a major member of the euro area that has undertaken a significant fiscal consolidation programme of which the Commission has taken note. Does this mean that you are not overly impressed by the programme of fiscal consolidation in that major member state, or that there has been a deterioration in other places, because these are the two possibilities involved in that statement?
Trichet: Thank you very much indeed for your question. As regards the first point, I would say that it is probably normal behaviour to consider the last indication that you have received as a very important indication. I have seen that both in the market and in the media. So when we have “bad news”, the idea that we will slow down the process of normalisation, in which we are, is always observed. The reasoning might go “Bad fourth quarter last year, ahah, they will probably cool down their interest rate increases; good news, of course they will accelerate.” As I told you, we do not reason like that. We take a medium-term perspective; we extract all the information we can in order to identify the trend. We are not too impressed by volatility. I guess that the reaction of some people might have been the result of being impressed by some very good figures that we had for Germany. These figures are a reason to rejoice, I have to say. For instance, the various Ifo surveys, the PMI and so forth, were giving a very good sign, and there have been a number of such signs. We extract information and transform it into a trend. In the process of normalisation, in which we are, we draw the appropriate conclusions in our fashion, namely with serenity and steadiness.
As regards the fiscal situation, our judgement is that, in the present episode of the cycle, and at the level of the various economies of the euro area as a whole, we have good behaviour and less good behaviour. But taking the euro area as a whole, we really believe that what is in the financing laws for 2006, does not correspond to the optimum in a period of cyclical recovery, even if we had some good news as regards the 2005 final results. They are in fact only quasi-final results because, in this domain, we always have to wait for the definitive figures. For a number of reasons and, in particular, for structural reasons, good and sound fiscal policies are absolutely of the essence in Europe and are closely associated with structural reforms.
Question: Following on from the structural reforms. The French Government suffered a bitter setback in its attempt to reform the job market, and this after the EU Constitution had been rejected. Are you worried that France could stand still for a while regarding the reform process? And one question regarding the rates. Since you seem very decided to raise the rates in June, why are you not doing so today?
Trichet: First of all, I said all I had to say on June and can confirm to you that we have absolutely no rules regarding not increasing rates when we are meeting outside Frankfurt. As regards the pace I was very clear: we are abstracting trends, looking at the facts and figures, being pragmatic. It’s clear that in June we will have a wealth of new information coming from a variety of angles, including the last quarterly results and the staff projections, amongst others. As regards France, we did not discuss, and the Governing Council does not have a position on the French reform. I can only say that, in the Governing Council’s opinion, the rigidities of markets are playing a very important negative role in producing mass unemployment, not only in France but in the whole of the euro area, which is unfortunately characterised by too high a level of unemployment. The rigidities in the labour market are particularly important in France. So if the goal is to progressively reduce unemployment, and ultimately eliminate mass unemployment, everything that is done with the aim of achieving less rigidity goes in the right direction. Inside the euro area, or the de facto euro area, you have very good examples that could be benchmarked: you have Ireland, which has no mass unemployment. It is a success because of the absence of rigidities in the economy, including the labour market. You have Denmark, which has a very different concept: it is de facto in the euro area, since it follows our monetary policy and has no mass unemployment. Denmark also has a very good level of flexibility and absence of rigidity in the labour market, together with a good social protection. We see that it works, we have examples and we are not necessary obliged to look at examples outside the euro area, as we have them “ à la maison”, at home.
Question: Two questions. First, the market expectations of a rate hike in May have been building up for some time. The Ifo which triggered the expectations was published two weeks ago, so what made you decide to wait until now to correct these expectations? And the second question: you are saying that monetary policy is still accommodative; can we expect that you want to remove that accommodation, that, in a given period of time, we will reach a neutral, non-accommodative monetary policy, if the recovery continues as expected?
Trichet: Thank you very much again for your question. On the first question, I have already said that we never comment on rumours. We give messages, we don’t comment on rumours. If you start commenting on rumours, you get into a dialogue which begins to be very abnormal. And again, anonymous declarations are, in our eyes absolutely nothing. As regards the discussion on accommodation or neutral rates and so forth, I would only say that what we have always been doing is to counter inflation risks. We do all that is necessary, even if it implies, at some moment, going over the neutral rate. The neutral rate itself is a very complex, Wicksellian concept. It is one of these concepts on which, of course, you could see a lot of different analysis and a lot of different opinions. I would only say that we are in a process of normalisation, we are in the process of countering inflation risks that we have seen as being on the upside for some time. That is why we have increased rates twice and why there will be an increase in rates in the future. We will do what we think is appropriate, taking into account our own analysis and all the information we extract from both analyses – both monetary and economic analysis. We are extracting the trends and we have a medium-term, a longer-term perspective; that is the concept.
Question: Mr Trichet, if I understand you correctly, the Governing Council has some kind of hesitation with regard to a rate hike in May, and I am wondering – because you are talking so much about the trend you are looking at (and you said you believe growth is around its potential in the euro area, you see upwards risks to inflation in the short and medium term) – why is it necessary to hesitate? Does this mean that you do not believe that the trend, the economic growth trend, is going to hold over the summer and that there is sometimes a decline in the second half of the year or in the winter or something like that? And I am just wondering why you hesitate to raise rates when you see such a clear trend of strong growth around potential and when you see inflation risks?
Trichet: We do not hesitate. You could go back to only one month ago when some of your colleagues would have questioned increasing rates at the moment where you see that euro area growth in the last quarter of 2005 was only 0.3 %, which is much lower than the growth potential or trend rates. Again we do not hesitate, we do what we judge is appropriate in such circumstances; we do that with a view to extracting all the pertinent information. I told you that information received in the last thirty days confirm our previous analysis. I wouldn’t say that the Governing Council underwrites the staff projections, but we had the staff projections and we have the overall projections of international institutions. We are convinced that we are growing at a pace which corresponds, presently, to the best of our information, to the euro area’s growth potential.
Question: You also mentioned the global imbalances. The IMF has now focused on this risk, on the foreign exchange market. There are also structural reforms not made in Europe, in Japan, Asia, and in other states. The imbalances are growing year by year. We have a 7% current account deficit in the United States. What is the risk in your opinion, and is this also a point in your decision on monetary policy?
Trichet: I take your point. First: I don’t want to prejudge the outcome of the next international meetings, be they G7 meetings or IMF meetings. But it’s absolutely clear, if I refer to the present global diagnosis, on which we agree, that homework has to be done on both sides of the Atlantic and of the Pacific. On our side of the Atlantic, it’s clear that structural reforms are absolutely of the essence and could contribute not only to being better off in Europe but also to a better situation at a global level. We would contribute more to global growth and more to the solution of the global imbalances. On the other side of the Atlantic, it’s clear that the problem is not one of economic rigidities. It is clearly a lack of savings, a lack of domestic savings. This problem is of a very substantial size and you are right to say that we don’t see presently a correction of that situation. We all agree, on both sides of the Atlantic, that this lack of domestic savings is mirrored by a current account deficit of considerable magnitude which has to be corrected. As you know, we also judge that Japan has to continue with its structural reforms, just as the Europeans have to do. That being said, when we take a decision, we take all elements into consideration. But I would not attach a particular importance to imbalances in our decision. We see these imbalances as a risk to growth and, as I said on behalf of the Governing Council, we see two major risks to growth: the price of oil and global imbalances.
Question: There is an American saying about the tail wagging the dog. Your message today went very much against recent market expectations and behaviour. So was this a sort of deliberate exercise? Did you decide to show that it’s the dog that wags the tail, and not vice versa. I also have another question: Is there any good reason why the ECB does not publish the annual salaries of the members of its Executive Board, as the Federal Reserve System does in the United States?
Trichet: I will not comment on the saying itself! No, we do what we judge and trust is appropriate to do and it would be a mistake to do anything for reasons falling outside our own mandate. From time to time, we receive very good advice: “Don’t increase rates, please.” You might remember a number of voices at the end of 2005. Three other voices were saying in 2004: “Decrease rates, please.” We did not change our course of action. It’s the same today. We do what we have to do. It is for that reason we have the trust of those who are expressing inflationary expectations, long-term inflationary expectations. They can trust that we will do what we have to do and not react to, I would say, erratic inputs. As regards the salaries of the Executive Board, we publish the sum of salaries of the Executive Board Members.
Question: As you know, in emerging markets like Iceland, New Zealand and Hungary, the currency declines this year have been around 10%. One of the reasons is that the US and the euro area raised interest rates, and even Japan is likely to follow that tightening movement. Do you have any concern that those tightening monetary policies in US, the euro area and Japan will cause some damage to the emerging markets? How do you see the impact of carry trade unwinding?
Trichet: First of all, if the Japanese central bank changes progressively the course of its monetary policy it is for very good reasons. Governor Fukui and the Monetary Policy Council have very good reasons to do that and they are doing it certainly for the sake of the medium and long-term price stability and therefore prosperity of their own country, within their own responsibility and, by way of consequence, for the sake of the rest of the world. The same is true in the US and here in the euro area. It is certainly not to be judged as contributing to global difficulties. On the contrary, I would say. What we do is contributing to long-term, medium to long-term, stability. I have no particular comment on what has happened in the various markets you mentioned. Of course, we are analysing that but we have no particular comment on that.