Introductory statement with Q&A
Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB,
Frankfurt am Main, 4 May 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 leave the key ECB interest rates unchanged. Overall, the information which has become available since our last meeting broadly confirms our earlier assessment of the outlook for price developments and economic activity in the euro area, and that monetary and credit growth remains very dynamic. Against this background, the Governing Council will exercise strong vigilance in order to ensure that risks to price stability over the medium term do not materialise. Such vigilance is particularly warranted in a context of ample liquidity and still very low levels of nominal and real interest rates across the whole maturity spectrum, implying an overall accommodative monetary policy stance. For monetary policy to make an ongoing contribution towards supporting growth and employment in the euro area, inflation expectations must be firmly anchored.
Let me now explain our assessment in more detail, turning first to the economic analysis.
The data that have become available since the start of the year point to a re-acceleration of economic growth in the first quarter of 2006, following the moderation observed in the last quarter of 2005. In addition, the latest indicators and survey information point to continued growth in the second quarter and lend support to the scenario of a gradual broadening in economic activity as embodied in the March 2006 ECB staff projections. Business confidence is particularly buoyant, which, in principle, bodes well for investment, and the recovery in consumption and employment appears to be proceeding, albeit still gradually.
Looking further ahead, the conditions remain in place for continued growth over the coming quarters. Activity in the world economy is expected to remain strong, providing continued support for euro area exports. Investment growth should benefit from an extended period of very favourable financing conditions, balance sheet restructuring, and 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 improve. This favourable outlook for economic growth is broadly in line with available forecasts from international organisations and the private sector.
Considering the information available, risks to this scenario appear broadly balanced over the shorter term, although recently oil prices have again demonstrated high volatility and their potential for posing downside risks to growth. This underlines the need for further improvement in the transparency of oil markets and further investment in this sector. Concerns about global imbalances continue to prevail over longer horizons, as do risks relating to protectionism
With regard to price developments, according to Eurostat’s flash estimate, annual HICP inflation was 2.4% in April 2006, compared with 2.2% in March and 2.3% in February. In the short term, annual inflation rates are likely to remain above 2%, with the month-to-month profile largely dependent on developments in oil prices and the strength of their pass-through to other prices along the production chain. Beyond the short term, changes in administered prices and indirect taxes are expected to affect inflation significantly in 2007 and a further 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 in recent quarters and wage growth is expected to remain contained, partly reflecting global competitive pressures, particularly in the manufacturing sector. Recent wage moderation has helped to dampen domestic inflationary pressures. Looking ahead, it is equally crucial that the social partners continue to meet their responsibilities in this regard, not least with a view to fostering employment growth.
Risks to the outlook for price developments remain on the upside and include further increases in oil prices, a 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 developments than expected at present, possibly due to second-round effects stemming from past oil price increases.
Turning to the monetary analysis, in a context of ample liquidity in the euro area, monetary and credit growth remains very dynamic. In particular, the annual growth rate of loans to the private sector has continued to increase over recent months and has now reached double-digit levels. Credit growth has also become more broadly based across sectors, with borrowing both by households – especially for house purchase – and by non-financial corporations growing more strongly. Monetary growth continues to be driven mainly by the expansion of its most liquid components. Thus the latest developments confirm that the stimulative impact of the low level of interest rates remains the dominant factor behind the current high trend rate of monetary expansion. Overall, further acceleration of monetary and credit growth in this environment continues to point to upside risks to price stability over the medium to longer term. Monetary developments, therefore, require careful monitoring, especially in the light of the strengthening of economic activity and, in particular, of strong asset price dynamics, especially in housing markets.
To sum up, annual inflation rates are projected to remain elevated in 2006 and 2007 and the economic analysis confirms that the risks to price stability continue to lie on the upside. Some of these risks appear to have increased in view of the renewed strength of oil prices. Given strong money and credit growth in a context of already ample liquidity, a cross-check of the outcome of the economic analysis with that of the monetary analysis supports the assessment that upside risks to price stability prevail over the medium to longer term. It therefore remains crucial to ensure that medium to long-term inflation expectations in the euro area are kept solidly anchored at levels consistent with price stability – a prerequisite for monetary policy to make an ongoing contribution to sustainable economic growth and job creation. Accordingly, particular vigilance is of the essence in order to ensure that risks to price stability do not materialise.
With respect to fiscal policies, there are some signs that the implementation of the Stability and Growth Pact and commitment to the rules have improved since last year’s revision. However, fiscal targets in a number of cases are rather lenient and their attainment is still subject to considerable risks. The Governing Council therefore supports any further reinforcement of fiscal consolidation efforts that also takes full advantage of a more favourable economic environment. Appropriately ambitious fiscal targets as part of a comprehensive structural reform programme would bring deficit and debt ratios down more rapidly. This is decisive in order to secure the sustainability of public finances. Such strategies would also boost confidence in the economic prospects of the euro area.
As regards structural reforms, the Governing Council again stresses the importance of undertaking comprehensive reforms to ensure open, competitive and well-functioning labour and product markets, including the promotion of wage and price flexibility and the fostering of an attractive environment for investment and innovation. The need for such reforms has again been highlighted by recent oil price developments, as they would enhance the resilience of the euro area economy to external shocks. There is a broad and firm consensus that openness and flexibility are beneficial in promoting growth and employment and it is now essential to turn the agreed reform plans into actions and to strengthen them where necessary. By pushing forward with ambitious structural reforms, euro area countries will also lend support to the ongoing economic recovery.
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: Mr Trichet, were you maybe a bit premature in so firmly ruling out a rate increase this month at last month’s press conference? Because you are very vigilant, obviously you have a lot more information now that you said you were lacking last month, in terms of confirming the economic expansion of the euro zone. So was it a bit premature to rule it out so firmly? Could you have moved in May?
Trichet: I can only tell you that we took the decision of today on the basis of the analysis that I have exposed in detail, both the economic analysis and the monetary analysis, and our conclusion is again that we would be in a posture of strong vigilance, particular vigilance. I used the word several times, perhaps three times if you counted well. And this is our today’s sentiment.
Question: Could you please clarify for me whether this process of normalisation implies that there has now been a decision, a predetermined decision, to tighten monetary policy gradually?
Trichet: We have no predetermined decision. Everything that we do is conditional upon our own analysis based upon as robust as possible information, analysis, data, facts and figures, as I always say. I would say there is a lot of new information which came in until now, that confirms our main scenario. I could go back to our analysis in December and at the beginning of this year, because you might remember that we had not that good data in some respects. But we said that we were extracting all the information, and that the underlying growth trend in our own analysis was around potential, and we have been proved right, until now. So, if the main scenario is confirmed, further withdrawal of the present monetary accommodation will be warranted. But we do not commit or pre-commit to anything.
Question: I have two questions, one on the issue of inflation. As always we noticed how vigilant you are, but from your assessment of the present inflationary scenario would you say it has worsened since the last time we talked or it has improved or remained the same? And the second question. Evidently, before last month’s press conference many of us misunderstood you, as you pointed out rightly, in terms of the interest rate expectations. Have we understood you correctly? Should we all buy the ticket to Madrid because that is where it’s going to happen?
Trichet: It seems to me that you always got me right in the press conference. As you know, we have every month a rendez-vous here and it is that rendez-vous which allows us to present to you the conclusions and sentiment of the Governing Council. If you look at what happened between all the monthly rendez-vous we have had, you will see that I always stick to what I have said on behalf of the Governing Council. As regards the inflation risk we consider that this risk is going upwards and that is why we said vigilance is of the essence. For example on a short-term basis, obviously, the price of oil has gone up and that is something important. As regards the economic analysis, we have confirmation that our working assumption, our main scenario, is pertinent and with growth growing faster than before, it pushes up risks to price stability. And in the longer term, or medium to longer term, we have the monetary analysis which is pointing in the same direction.
Question: Are the risks to global imbalances rising because of the euro’s rise against the dollar? And, foreign exchange wasn’t cited necessarily in your statement as a particular risk, but certainly it seems to be being cited elsewhere. If foreign exchange adjustment is not needed to correct global imbalances, what kind of adjustment are you looking for?
Trichet: First of all, I would like to be absolutely clear: I will stick to the document I signed in Washington, the G7 communiqué – you are aware of. You also know that the paragraph it contains on exchange rates is not, in any respect, sending a message that would call for a change in our relationship with the US dollar. There has certainly not been any such message. Second, I have always mentioned on behalf of the Governing Council that the risk of a disorderly unwinding of global imbalances is a risk to growth that we have to be aware of. Our conclusion in Washington was very clear, namely that homework has to be done by all partners. And we were more explicit, as you know, than in the earlier G7 reflections with the publication of a full page listing the homework that has to be done by the United States, Japan, emerging Asia, the oil-producing countries and Europe. I have mentioned Europe’s homework in the last paragraph of today’s Introductory Statement – the structural reforms that we have to carry out. These will be our contribution, perhaps a modest one, because we are not largely imbalanced, as you know. But by increasing the growth potential of Europe, we would certainly contribute more actively to global growth and this would facilitate the orderly unwinding of these imbalances. And by raising labour productivity, particularly in the services sector and in the non-tradable sector we would also contribute to that unwinding. I mentioned this in particular at all the meetings we had in Washington, at the IMFC or at the G7.
Question: I have a problem in understanding one thing – maybe you can explain it to me: how can an economy grow over time if private consumption is as weak as it is in the euro area? I refer to today’s figures about retail sales and in Germany. Could you explain how that works?
Trichet: You know that there are a number of contributions to growth. We have in particular the consumption of households, we have investment, and we have the external side. And, in the case of the national economy, i.e. the largest economy in the euro area that you have mentioned, it is clear that the main drivers of growth are – at the moment, but that might change and I trust that it will change – exports, net exports, and investment. This is important, because it started in the middle of last year and was, of course, one of the signals that were very encouraging. As you also know, the normal sequence in any economy, in theory, and certainly historically in Germany, would be first exports, then investment and finally domestic consumption. It is clear that we still have mixed signals in domestic consumption, as you underlined with this morning’s figure. Again, what we have to extract from all this information –is the trend. We trust that there are very good reasons for the German economy, on the one hand, and the euro area as a whole, on the other, to gradually and progressively register a more dynamic growth of domestic consumption and household consumption. We will see how it develops. One good reason is certainly the improvement in the employment figures. Here we have had the clearly good news of the decrease in unemployment down to 8.1% at the level of the euro area. This is one of the elements that could argue in favour of a change in the overall behaviour of some of the consumers. That having been said, it must never be forgotten that we look at the euro area as a whole, not only at the largest economy, and that there are some economies in the euro area in which consumption is quite dynamic, even very dynamic. We have to take all of them into account.
Question (translation): When Mr Duisenberg was in office, foreign-exchange reserves accounted for 14% of the various national central banks’ reserves. This percentage is now higher and a growing number of national central banks are topping up their euro reserves with foreign-exchange reserves. How high the percentage is now and what do you expect it to be in the coming years? Of course, you will receive dollars in return for euro. Do you want to maintain the same percentage of dollars, and then write them off later, or are you thinking of increasing the share of securities or gold in the reserves?
Trichet: You know that since the very setting-up of the ECB, it has been the policy of the Governing Council, expressed by my predecessor Wim and now by myself, not to encourage the international use of the euro. We are also not discouraging the international use of the euro. We consider that the decisions are up to the various parties concerned. I would say that as orderly and smooth evolutions as possible are certainly welcome in this respect. It is what we have observed since the setting-up of the euro, and all the information that I have from various sources, including the IMF, the BIS and other institutions, confirms that this evolution remains very smooth and very orderly. I have no other comments on that.
Question: The markets’ expectations of a rate hike of 25 basis points in June: Is this in line with the feelings of the Governing Council today? And second, could a rise in the euro exchange rate of the dollar delay, not stop, the process of interest rate normalisation in the euro area?
Trichet: Answering to your first question, I stick to what I have already said. Vigilance is of the essence. I have already used that word several times, and I have already said that, contrary to what some would think, there is no rule to exclude a decision when we are not in Frankfurt. As to your second question, as you know we include absolutely all elements in our analysis. We synthesise our understanding of what is happening, we examine various models of the economy and of the behaviour of the euro area economy to have as robust analysis as possible, and then we make up our mind on the basis of all this information. We do not have a mechanistic approach. Our decision is not triggered by any particular data, and what counts, is the overall judgement on the basis of all information.
Question: I have a question about the news from news agencies that the finance ministers of Japan, China and South Korea have agreed about currency cooperation, meaning that a regional currency unit should be researched and probably developed. Could you comment on that? And my second question is more concrete, I think. There are some reports about a cooperation between the ECB and the central banks of the Gulf countries. Could you comment on that?
Trichet: On your first point I have not studied the accord that you mention. I will refer to the fact that when we meet every year with our friends the governors of the central banks of the Asian continent, we always express our willingness to tell them what the European experience has been – particularly as regards monetary cooperation, ERM cooperation and the single currency endeavour. – They always show a lot of interest in what we can offer in this respect. Some ideas are being floated in Asia – some are very bold, others are more modest, and some are concentrating at this stage on deepening and reinforcing the financial markets in a pan-continental, pan-Asian model. But I will not comment on any bold moves that may have been decided. I have no information on that at this stage. As regards our technical cooperation with the Gulf, I can confirm to you that we are involved in a technical cooperation. The ECB and the Eurosystem have been asked by the Gulf Cooperation Council to pass on our own experience and understanding of what the appropriate requirements are for a single currency to be a success technically and economically. Obviously we have expressed our availability vis-à-vis all our friends, all over the world, who would like to have our views on our own experiences. I could also confirm to you that the Eurosystem has regular meetings with our Latin American friends –. We also have meetings with Mediterranean central banks – those to the south of the Mediterranean. We are very open to this kind of dialogue and exchange of experiences
Question: A couple of questions. First of all, did anyone at the Governing Council today propose an interest rate increase today? And secondly, you talked last month – I notice you haven’t this month, though – about the fact that you were in the process of normalising interest rates? That implies you have some idea what the normal interest rate would be at the moment. Could you tell us what it is? And secondly, how fast do you think the ECB needs to move towards this rate? You have obviously seen some speculation in the markets now that you might even consider a 50 basis point rise in June. Is that reasonable? And also, you haven’t mentioned the phrase “we envisage, ex ante, no series of rate increases”. Mr Papademos talked in Parliament last month about “increases” plural. Would you want to repeat that statement again? Thank you.
Trichet: At today’s meeting we were unanimous in our attitude, decision and overall analysis, which I have explained to you at length. As regards what I have said, what others have said and what the Vice-President has said, we all agree that we see till now the confirmation of the main scenario that I have already mentioned. We will have next month the Eurosystem staff projections and the data and we will see whether this confirms this main scenario. Until now we have been very lucid and I want to go back to December and to March. Some people – including some in this very room – were telling us “Look, some of these figures are not that flattering!” You will remember that we had a poor last quarter of last year, and it was known during the first quarter of this year. And we said that if we extracted all information from what we had, the pertinent information remained that growth trend was around potential. Until now, all of this has been confirmed. Again, I remain prudent and cautious. We will not pre-commit in any respect, but I have to say that we are satisfied that we were right. We did not wait for other information; we thought that it was appropriate to increase rates in December and to increase rates in March. As I have said already to the extent that our scenario is confirmed, it is clear that further withdrawals of monetary accommodation will be warranted, and there is no doubt about that. What I said in December, in January and after was that we had not decided, ex ante, on the sort of series of interest rate increases which had been observed in other countries. But again, if our scenario is confirmed, it is clear that further withdrawals of monetary accommodation will be of the essence. As regards our next meeting we will take a decision when the time comes and you will see what the decision is at our June meeting.
Question: I would like to try my luck again on exchange rates. Do you think that the risk of a disorderly adjustment of global imbalances, which you just mentioned, has increased in recent weeks or months? We saw the euro rising.
Trichet: No, I think that this risk has not augmented. I would even be bold enough to say that, when I participated in the various “Gs”, including the G7 in Washington, I had the sentiment that all parties concerned were speaking for real when they said that they would do their best to implement what I call their “homework”, all partners including us, even if our contribution might not be very large. We are all in the same boat. We are a single global economy and we all have homework to do. What I also noted is that all partners are convinced, and that is true for John Snow and Ben Bernanke, as well as for ministers and central bank governors concerned including me, we are all convinced that this homework is not a burden that we have to accept for the sake of the greater interest of the global economy, which is true of course, but first and foremost it is something which is good for each economy. This is particularly true in our case, we would be much better off if we had more growth and more job creation through structural reforms. But it is also true for the United States and for emerging Asia.
Question: Which market interpretation of the ECB’s current position is correct: 100% certainty of a 25 basis point hike in June, or a 25% certainty of a 50 basis point rise in June? And related to that, would a 50 basis point hike in June be justified in getting you to the position of normalisation that you said you need to be at?
Trichet: Don’t expect any comment from me. The markets make their own judgement, and that is up to them. We take our decision, and what is important is that we take good decisions.
Question: What you were saying on the G7: were you saying, or trying to hint, that it was agreed that China hiked the interest rates? If you all have your homework, which other homework does China have?
Trichet: I did not say that. But I said that it was my firm understanding and conviction that each party concerned was convinced that their respective homework had to be done.
Question: Mr President, the recent wage agreements that we have seen in the euro zone, do you think they are compatible with price stability? The administered changes in prices and indirect taxes you are referring to for next year, which are those, and if you were to name the single biggest risk to price stability today, what would that be?
Trichet: As regards the administered price increases, I think that those that have already been decided for next year are well-known. A risk would be that further increases could be made. That is a risk that we always mention. As regards the most important risk, it’s the constant position of the Governing Council that the most important risk would be second-round effects. Let me remind you, that at some time in the past I heard analysts and perhaps even some media suggesting that we should wait for the second-round effects to materialise before increasing rates. It would have been the biggest mistake we could have made. We of course have to prevent this risk from materialising. We have to be ahead of the curve. That’s the reason why we increased rates in December and in March and why vigilance if of the essence today. We do not have second-round effects materialising and this is good. More, than that it is necessary. It is one of the conditions for sustainable growth. We strongly encourage social partners to continue to be highly responsible in this respect. And we have to remain vigilant. All partners have to remain vigilant in this respect. This was also my response to your third question: I do not see these second-round risks materialising at the present moment, including in wage and salary formation, but we have to remain vigilant.
Question: Mr President, is it possible to have from today’s meeting a first glance at the ongoing or maybe closing economic and inflation projections that will be published in June because they are closed in the data projections today? And can we expect a clearly upward revision in this projection of the growth rate and inflation rate in the next month? Second question: We are discussing exchange rates internationally worldwide and at the G7. There is also a discussion about the reform of the IMF. Are you satisfied with your position merely as an observer in the IMF? There was a plan that you would be given speaking rights in the IMFC, is this correct and do you see the ECB having a positive, more direct, future role in the reform of the IMF?
Trichet: I would be cautious - as you might understand - on the projections. They are worked out by the staff. It is a very professional exercise and I do not want to prejudge in any respect what could be produced. All what I can say at the moment I am speaking - again I remain very cautious - by making the synthesis of all the information we have been receiving – information on growth, information on oil price increases, information on exchange rates, all kinds of information –is that it broadly confirms our baseline scenario, but I will not confirm anything that would suggest that our growth projection would be different from the present baseline scenario to the extent that you addressed explicitly the question of growth. We will see and we will look at the result of this professional exercise. Again our working assumption is that broadly our present assessment will be confirmed.
As regards the IMF, the meetings in Washington were good meetings in respects, in particular because partners were more and more convinced that they had a lot of homework to do. I had the possibility of expressing the view of the ECB in the IMFC meeting, so I respond to your question, it has been the case as we had called for. It was also the clear will of Gordon Brown, the President of the IMFC, to reinforce the capacity of the IMFC to embark on a real global surveillance exercise. The IMF has, as you know, also reflected a lot on its own reform and progressive and orderly transformation, and it is followed very carefully by the European side.
Question: Mr President, inflation expectations, as derived from inflation-linked bonds, have gone up quite significantly in the past two weeks and are at a year’s high now. Do you have an explanation for that?
Trichet: As you know, we look at inflationary expectations from a variety of angles. One angle is the financial markets and there are various angles because you can compute the forward, break-even, medium and long-term rates, and you can compute the break-even rate without going forward and so forth. We also have the surveys, which are steady in confirming the 1.9% inflationary expectations on a medium-term basis. This is certainly something which is good from the standpoint of the anchoring of inflationary expectations in a period where we have oil shocks that are succeeding oil shocks. We look very carefully at the information which we can extract from financial markets, and we have noted a tendency for break even inflation it to go up again. So it has to be looked at very carefully. This is one of the reasons why we mention vigilance three times.
Question: Do you have any concern that the current euro appreciation could damage the eurozone economy or do you think the currently favourable economic fundamentals can absorb that kind of shock and that the euro zone can accept a little stronger euro?
Trichet: I have already said what I have to say on exchange rates. I stick to the G 7 communiqué I commented on it already. We integrate into our overall judgement all pertinent information, including information on exchange rates. But no particular data trigger a mechanistic response from us.
Question: You have mentioned in the past that the inflation-dampening effects of globalisation are beginning to diminish and I would like to know what kind of role that played in the ECB’s decision to enter this process of normalisation, and also whether a process of normalisation implies that even if the headline inflation figure trend were to ease, we could still expect to see continued monetary tightening?
Trichet: I already responded on the way we look at this if our main scenario develops, as we believe it will. It seems to me that the other major institutions also believe it will. At the global level, it is not particularly the sentiment of the Governing Council of the ECB, it is perhaps rather the sentiment at the level of the G10 and of the global economy meeting that we regularly have in Basel - which I have the privilege of chairing - that progressively the very powerful dampening that you mentioned on global inflation stemming from globalisation itself, and the increase of the share in the global economy coming from very low unit labour cost economy, that this is perhaps gradually diminishing. This is one of the overall remarks that can be made and I already made that remark when I mentioned the sentiment of this particular central banks constituency.
Thank you very much indeed for your attention.