Introductory statement with Q&A
Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB,
Frankfurt am Main, 11 January 2007
Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our first press conference in 2007. Let me therefore wish you all a very Happy New Year. I would also like to take this opportunity to welcome Slovenia as the thirteenth country to adopt the euro as its currency. Accordingly, Mr Gaspari, the Governor of Banka Slovenije, became a member of the Governing Council on 1 January 2007.
Let me now report on the outcome of our meeting, which was also attended by the President of the Eurogroup, Prime Minister Juncker, and Commissioner Almunia.
On the basis of our regular economic and monetary analyses, we decided at today’s meeting to leave the key ECB interest rates unchanged. The information that has become available since our last meeting has further underpinned the reasoning behind our decision to increase interest rates in December. It has also confirmed that very close monitoring of all developments is of the essence so that risks to price stability over the medium term do not materialise. This will permit medium to longer-term inflation expectations in the euro area to remain solidly anchored at levels consistent with price stability. Such anchoring is a prerequisite for monetary policy to make an ongoing contribution towards supporting sustainable economic growth and job creation in the euro area. Our monetary policy continues to be accommodative, with the key ECB interest rates remaining at low levels, money and credit growth very strong, and liquidity in the euro area ample by all plausible measures. Therefore, looking ahead, acting in a firm and timely manner to ensure price stability in the medium term is warranted.
Turning first to the economic analysis, quarter-on-quarter real GDP growth in the euro area was 0.5% in the third quarter of 2006, after very strong growth in the first half of last year. Domestic demand remained the main driver of economic growth, thus confirming the anticipated broadening of the recovery and pointing to the increasingly self-sustaining nature of economic expansion in the euro area. Drawing on the latest information, the evidence from various confidence surveys and indicator-based estimates supports the assessment that robust economic growth has continued and that the situation in labour markets has improved further. While some volatility in the quarter-on-quarter growth rates around the turn of the year may be observed – associated with the impact of changes in indirect taxes in a large euro area country – the information available continues to be in line with our baseline scenario.
Looking ahead, the medium-term outlook for economic activity continues to be favourable and the conditions remain for the euro area economy to grow solidly, at rates around potential. As for the external environment, global economic growth has become more balanced across regions, with some deceleration in the US and resilient growth elsewhere. Overall, global growth should remain robust and therefore continue to provide support for euro area exports. Domestic demand in the euro area is expected to maintain its momentum. Investment should remain dynamic, benefiting from an extended period of very favourable financing conditions, balance sheet restructuring, accumulated and ongoing strong earnings, and gains in business efficiency. Consumption should also strengthen further over time, in line with developments in real disposable income, as employment conditions continue to improve.
In the Governing Council’s view, the risks surrounding this broadly favourable outlook for economic growth over the coming years lie mainly on the downside. The main risks relate to fears of a rise in protectionist pressures, the possibility of a renewed increase in oil prices, and concerns about possible disorderly developments due to global imbalances.
With regard to price developments, according to Eurostat’s flash estimate, annual HICP inflation was 1.9% in December 2006, unchanged from the previous month. On account of their volatility over recent months, and owing to base effects, energy prices will continue to play an important role in determining the profile of annual rates of HICP inflation in early 2007, together with the impact of higher indirect taxes. Looking further ahead, annual inflation rates are projected to hover around 2% over this year and next.
In the Governing Council’s view, the outlook for price developments remains subject to upside risks, stemming in particular from a stronger than anticipated pass-through of previous oil price increases, increases in administered prices and indirect taxes beyond those announced thus far, and the possibility of renewed oil price increases. More fundamentally, given the favourable momentum of real GDP growth over the past few quarters and positive labour market developments, wage dynamics could be stronger than currently expected. It is therefore crucial that social partners continue to meet their responsibilities. In this context, wage agreements should take into account productivity developments, while recognising the still high level of unemployment and price competitiveness positions. As stated on previous occasions, it is also important that wage settlements move away from automatic, backward-looking indexation mechanisms.
Turning to the monetary analysis, annual M3 growth rose to 9.3% in November. This represents its highest annual rate of growth since the introduction of the euro and, indeed, its strongest aggregate growth in the euro area group of countries since 1990. While the significance of monthly figures should not be overstated, as they may also be influenced by temporary factors, the series of strong monetary data over the past couple of months underscore the continued very dynamic underlying rate of broad money expansion in the euro area. Rising short-term interest rates, in combination with low long-term interest rates, have exerted only a limited influence over monetary developments in recent months. This has mainly taken the form of shifts among the components of M3 rather than constraining the overall expansion of M3 itself. In particular, over recent months the annual growth rate of M1 has moderated somewhat, reflecting shifts from overnight deposits into other components of M3 that offer more market-related returns.
All in all, the rate of monetary and credit expansion remains rapid, reflecting the low level of interest rates and the strengthening of economic activity in the euro area. In particular, the annual growth rate of loans to the private sector was 11.2% in November, unchanged from the previous month. While – in the context of rising interest rates – the growth of household borrowing has shown signs of stabilisation in recent months, albeit at very high rates, the growth of borrowing by non-financial corporations continues to trend upwards. Thus, credit continues to expand rapidly and in a broad-based fashion, thereby remaining the main driver of the current strong monetary growth when viewed from the counterpart side of the MFI balance sheet.
Taking a medium to longer-term perspective, the latest developments are consistent with a continuation of the persistent upward trend in the underlying rate of monetary expansion. Following several years of robust monetary growth, the liquidity situation in the euro area is ample by all plausible measures. Continued strong monetary and credit growth in an environment of ample liquidity point to upside risks to price stability over the medium to longer term. Monetary developments therefore continue to require very careful monitoring, particularly against the background of improved economic conditions and continued strong property market developments in many parts of the euro area.
To sum up, annual inflation rates are projected to hover around 2% this year and next, with risks to this outlook remaining on the upside. Given the very strong monetary and credit growth in an environment 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. Hence, very close monitoring of all developments is of the essence in order to ensure that risks to price stability over the medium term do not materialise. This will permit medium to longer-term inflation expectations in the euro area to remain solidly anchored at levels consistent with price stability. Therefore, looking ahead, acting in a firm and timely manner to ensure price stability in the medium term is warranted.
As regards fiscal policy, almost all euro area countries have submitted their updated stability programmes. While these programmes generally indicate that governments plan to proceed towards sound budgetary positions, there are also indications that budget targets do not consistently imply sufficient consolidation and that concrete and credible measures have not yet been specified in all programmes. These indications are a cause of concern and entail risks for the future. Against the background of current good times, it is essential that sound budgetary positions are reached in countries with fiscal imbalances and that a pro-cyclical loosening is avoided in all member countries. Moreover, countries need to improve the quality of their tax and expenditure policies as part of a comprehensive medium-term strategy, so as to strengthen confidence in a growth and employment-friendly, and sustainable, fiscal policy environment.
With regard to structural reforms, over recent years euro area countries have become increasingly aware of the necessity to adjust to the challenges of increased global competition, ageing populations and accelerating technological change. In response, some have undertaken reform efforts to create more job opportunities. Both as a reflection of these reforms and as a result of wage moderation in some countries, the euro area has seen a remarkable dynamism in employment growth over the recent period. Notably, around 12 million new jobs were created in the euro area in the eight-year period since the start of Stage Three of EMU. This compares favourably with the little more than two million new jobs created in the same group of countries in the eight years before 1999. However, the Governing Council notes that significant structural impediments continue to exist and contribute to explaining why unemployment rates are still unacceptably high and participation in the labour market is still low by international standards. With other countries in the world also increasing the competitiveness of their markets, it is essential for each euro area country to minimise the market distortions induced by its particular regulations and for the euro area as a whole to remove remaining barriers to market integration. This requires the implementation of comprehensive reforms necessary to deepen market integration, soften labour market rigidities and improve wage flexibility in order to continue fostering growth and new employment opportunities.
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: I noticed that you used the phrase “monitor very closely” in a similar way to last month. And I was really wondering whether, on the basis of past experience, that means that people can broadly exclude the probability of an ECB rate move next month and whether, also, the ECB could remain in the pattern of “monitoring very closely” for several months in the future.
Trichet: You have been very observant in noting that I used that sentence, which is very close to what I had said in December, and my statement also holds true of other parts of our overall assessment and judgement. You will also have noted, perhaps, that I did not use the words “strong vigilance”. I will let you draw the appropriate conclusions from these observations. As far as we are concerned, it must be said that we are very much in the same mood, and that we came to very much the same judgement as that we had made last December. In this regard, it is not surprising that the wording of the introductory statement is quite close to that used in December.
Question: Against the backdrop of all the positive economic data that has come out – and you have just said that 12 million jobs have been created in the euro area – you said that, looking ahead, acting in a firm and timely manner to ensure price stability in the medium term is warranted. Does that also include a further withdrawal of monetary accommodation? And, in terms of timing, the market expects you to move in a firm and timely manner in the first quarter of this year. Do you have any comments regarding this sentiment from the market?
Trichet: I have always said that we never pre-commit ourselves on a medium-term basis. We never pre-commit ourselves to doing, or not doing, something in two months, in three months, in four months, in five months and so forth. We are of the opinion that we have to assess the situation, make our judgement and do what is necessary to ensure price stability. You are right in noting that we have said that acting in a firm and timely manner to ensure price stability is warranted, something which is certainly important. You have also noted that we also said that we were in a situation in which close, very close, monitoring was warranted. That is clear on its own. I would not say anything here that would change expectations in the market that we could do something at the end of the first quarter. I would certainly not say anything that would contradict that. It seems to me that the expectations have has not necessarily been made on the basis of what I say on behalf of the Governing Council, but rather on the basis of the figures that are available, the facts that are given and the assumptions made. Everybody knows, because we are totally transparent, that we have to deliver price stability in line with our definition, namely a rate of inflation that is below 2%, close to 2% but less than 2% over the medium term. That is total transparency which everybody can appreciate.
Question: Mr Trichet, to look beyond the code words for a minute, we have seen record high M3 growth since the changeover to the euro, we see inflation likely to nose up over 2 %, strong growth prospects, improving unemployment, etc., etc. Could you talk to us a little bit about why the Council has decided to leave, or is likely to leave, rates on hold in February? Was that a unanimous decision, and was there any significant discussion of a 50 basis point rate hike?
And, a separate topic altogether: I was wondering if you could comment on whether there are basic qualifications among Eurosystem banks for central bank governors, and on what your opinion might be on Poland’s nomination yesterday?
Trichet: As I have said, we have made an assessment that comes down to very much the same judgement, the same appreciation of the situation that we had in December, so that you should not be surprised that the introductory statement is similar. Second, we had a great deal of information at our disposal, and these bits of information very much confirmed our baseline scenario and very much confirmed what I said last time with regard to the overall projections we have in mind. That having been said, we are observing some parameters that also have an influence in the short run, of course, on the CPI, and these include the oil prices. Once again, you know that we are reasoning over the medium term, that we consider the medium term.
As to your question on Poland, our position is very clear – it was made public - that it is essential to fully ensure the independence of the central bank. And everybody knows we attach the utmost importance to the Treaty provisions being fully respected in this regard. This has also been said by other institutions.
Question: … Was there a significant discussion about a 50 basis point rate rise in March?
Trichet: I am not saying anything on top of what I already said on future decisions. It is up to each of us to have in mind what it would mean taking all into account. I don’t want to confirm anything except what is in the market as regards future probability which, as I said, doesn’t seem to me aberrant on the basis of the present level of information.
Question: After your last meeting there was a lot of talk about whether or not the ECB had changed its communication strategy and, based on what you have said today, I suppose that question still remains for me - whether or not there is a question about your communication strategy and what you have decided to alter the way you let markets know what you might be thinking.
Secondly, I noticed that your analysis of the global scenario is a bit more nuanced than before with the detail of deceleration in the US and resilient growth elsewhere and wonder if you could say whether that reflects a more nuanced understanding of the Governing Council’s discussion on the global economy.
Trichet: On the first point: we did not change our communication strategy at all. We have always been extraordinarily keen on not pre-committing on a medium term basis. We never said that we would maintain rates at a certain level for a “considerable period of time”. We never said that everybody could expect an increase of rates every meeting, every two meetings or every three meetings. We always reserved the possibility to judge and assess the situation in line with our definition of price stability and our monetary policy concept. As regards the moves, the next moves or non-moves, it’s true that we try to be reasonably predictable, but never pre-committing. It’s a question of appreciation of probability. It’s true that we are happy to be predictable and we have been highly predictable according to all research that has been made. What is also true is that some observers had noted that in the second half of last year we increased rates every two months. It didn’t mean that we had pre-committed ourselves to increasing rates every two months. We never said that and we never pre-committed but the situation was such that we judged that it was appropriate. At that moment in time you refer to we slightly changed our message. Our message was: don’t forget we do what is necessary, what we judge appropriate to ensure price stability. We are not stuck with a regular automatic piloting. And this is fully in line with what we had always said, fully in line with our constant way of handling monetary policy and communication. And this time, I am telling you again exactly this: we are not pre-committed, we will do what will be necessary and I even went a little bit further in saying that I didn’t see the necessity to change present expectations as regards probabilities as regards the future. Again, we will do what is necessary and we decide when we meet, that’s absolutely clear.
As regards global growth there is no real change in our understanding of the situation. We have the sentiment that global growth is still very encouraging. We believe that what is likely to happen this year looks encouraging, of the order of magnitude of what has been observed last year. I think that the Fed has been vindicated, that the slowing-down in the US would be an orderly slowing-down and certainly not a sharp and abrupt slowing-down, this is recognised now quite well by observers on the basis of facts and figures. All the information we have is that the developing world, the emerging world, the world in transition are doing quite well and are likely to continue to do so. This does not mean that we have no risks, we have risks and those risks are clearly on the downside. These are low-probability risks but grave risks. I would mention three major risks that the Governing Council sees at the present juncture, the rise of protectionism, the possibility of oil price increases and the possibility of disorderly unwinding of global imbalances.
Question: Firstly, I am interested in your reaffirmation of the importance of predictability. Does that mean that the ECB would never find such a situation where an overwhelming majority of market observers expect a particular course of action for you as a central bank but we, on the day of interest rate decision, get something quite unexpected, as has happened in a country with which I am fairly familiar.
Secondly, I am just confused a bit about what you have been seeing about M3 and the monetary analysis. You had a conference last year in which you emphasised the importance of this pillar and the importance of monetary developments and in your statement today you say maybe it’s a one-off, we shouldn’t read too much into monthly figures, but point to an underlying strength and there are also worries about the liquidity at the global level. Yet somehow, it doesn’t seem to have had a bearing on your decision-making. Hence, I rather think that this might increase speculation about more action being required down the line, maybe 50 basis points in March, which some people seem to be speculating about now.
Trichet: I will certainly not comment on anything of the kind of the quantum of rate increases, at a certain period of time. I will confirm to you that we are very attached to the monetary pillar, we even organised a colloquium which was attended by a wide range of knowledgeable and remarkable practitioners and academics. We explained why we consider that the monetary pillar had served us very well. I said myself that, in my own understanding, the monetary pillar helped us considerably in three crucial moments in our own decision-making and so I would certainly confirm to you that again, the Governing Council considers that the monetary pillar has served the Council very well. As regards the figures I mentioned today, it’s true that we are working to understand better whether some observations that are explaining the jump in M3 are of a transitory nature or of a non-transitory nature. But as you know what we extract from all information is the trend and a medium-term sense of what is going on, and the sense of what’s going on is extremely clear, we continue to have a great dynamism, observed for a long time and which explains in part, of course, why we have embarked on our interest rate increase against many advices that we received at the time, in December 05. You remember that the OECD was advising us not to move, that the IMF was advising us not to move, that a number of market participants were giving us the same advice. We decided to move, we are now fully vindicated. The monetary pillar played an important role in this decision. The figures we have today, as I said, are very dynamic, I will give you on top of what I already said only one figure, the loans to the non-financial corporations in the euro area which are augmenting at a rate of 13.1% according to the last figure we have. Of course, you have in this increase, outstanding loans and the likely influence of dynamic private equity loans and of a number of M&A operations. We regard this information as important and it explains why, as I clearly indicated, we are in a posture, like we were last month, of very close monitoring, why we consider that acting in a firm and timely manner is of the essence.
Question: ….I would like to have a comment on the first part of my question, on the predictability of your decisions, nothing to do with the Bank of England?
Trichet: I will certainly not comment on Bank of England decisions, which I’m sure are excellent decisions in the context of the UK. I never comment, as you know, on Fed decisions either, which I trust are excellent when taking into account all information that the Federal Reserve has. As far as the Governing Council is concerned, we consider it extremely important to keep our options permanently open and never to pre-commit in the medium term. We consider that, unless there are exceptional circumstances, a reasonable level of predictability is not to be rejected. But it’s a question of probability; it’s never a question of 100% certainty and I do not exclude the possibility that we could surprise the market. That is clearly what a central bank must be able to do. But, at this stage and in the present circumstances, I think the rather high level of predictability that we have as regards decisions that are taken on the very day of the meeting – is appropriate for us.
Question: Has your decision anything to do with the criticism of the ECB we hear from France. It is across all parties in France. And, the latest data from France, today’s data I think, were not convincing – not as convincing as in other countries. So, my question is, could that have something to do with your decision?
And then I have a second question: You are quick workers here in the ECB. Have you already got any information about the profit or loss you made last year from your balance sheet and, if yes, could we know it please?
Trichet: You know that I had the same question in the European Parliament recently, and the response is very clear. Since 1 January we have been responsible for price stability in 13 countries. There are probably – at the moment we speak – more than 315 million people in the euro area including Slovenia; and it is for these more than 315 million people that we have to deliver price stability. We have always explained that we cannot take into account any particular situation, but we have to take into account the situation of the euro area as a whole, in the same way the Federal Reserve takes into account the situation of the US as a whole and not of South Carolina, Alaska, California or Florida in particular. There are big differences as well – as in Europe – in the USA as regards growth, inflation, evolution of unit labour cost and so forth. I will also say that the independence of the central bank is in the Treaty. A fundamental decision was taken by the European citizens in this respect. Responding to a question by a Member of the European Parliament, I said that independence of the central bank was decided in each democracy in Europe according to national rules, and in particular in France. But France is only one example because you mention France yourself in your question; I mention France only as an example of what has happened in all countries. In France, for example, at a joint meeting of the Upper and Lower Chambers at Versailles, it was decided, with a qualified majority of 3/5, to change the Constitution of the 5th Republic in order to permit the independence of the central bank. This was done in 1992, so it’s a decision which was taken a long time ago – very solemnly – and on the basis of a bi-partisan consensus: all major sensitivities had called for the approval of this decision. So my response to your question is “No”, absolutely not, we are only taking into account the situation of the full body of the euro area and not of any particular country. I have also mentioned – and this is something that has to be known – because from time to time, and not only in one particular country but here and there, we have some teasing about the euro and job creation since the start of the EMU. In fact, job creation has been so flattering with around 12 million new jobs created since 1999 compared with only 2 millions job created in the 8 years preceding stage III of the EMU. This speaks for itself and I do not want to add anything. I also said that to the European Parliament.
As regards our profit and loss it is very likely we will post a profit which will go to a reserve position in order to permit us to face up possible future challenges. We will publish all the precise figures we are computing now.
Question: Mr Trichet, you are in the land of the G7 now – I guess I should resist the temptation to ask about currencies as I am fairly familiar with the answers at this point, so I’ll stick to two questions. Does the Governing Council see any downside risks to price stability – things that might influence the inflation rate in a downward direction?
My second question is: Since you outlined your working hypothesis for the effect of the German VAT increase – I think this was at the Paris meeting in October – you have stuck to a very confident line that this will maybe have a one-time tick in the figures but things will return normal. I just wanted to ask if you could give us a sense of the Governing Council’s feelings on this – on how confident you are of this assertion because it is hard not to read the utterances of the last four or five months as an indication of rising confidence that the German VAT will have a very brief effect and then we will go on with the base- line scenario you have outlined.
Trichet: On you first point the sentiment of the Governing Council is that the balance of risks to price stability is on the upside. Of course it is a balance, and you have a certain probability that things could also improve a little bit. I certainly don’t exclude that, particularly as regards the price of oil and of commodities. But, taking everything into account and with all due taking into account for the various probability distributions, we consider the balance of risks to be on the upside; that is absolutely clear.
On the VAT, just as the Fed has been vindicated by facts, figures and its own assessment of what was likely to be observed in the US as regards the conjuncture –as we ourselves were vindicated in respect of our judgement at the end of 2005 and in 2006 on what was going on – all the information we have until now more or less confirms that the reasonable assessment we had on the VAT impact on the German economy and, of course, on the economy of the euro area as a whole was probably well-founded. But we will see; we have to remain totally pragmatic and humble when faced with facts and figures. But until now I see nothing that would contradict these views.
Question: Just to return briefly to the strong corporate borrowing – you mentioned a strong growth rate. Is there concern among Council members about this growth rate and the implications for asset prices, for inflation, or are there generally believed to be more benign explanations for that growth?
And a second question on the recent oil blockade: do you feel that the unreliability, or perhaps increasing unreliability, of suppliers will augment or heighten inflationary risks?
Trichet: On the second question, we are clearly experiencing an episode where volatility is high and we have several illustrations of that. We nevertheless have to have a methodology – and I am speaking for us as well as for all other institutions – to incorporate these prices as parameters that are going up and down, and we are bound to freeze them at a certain level for our own projections. We also have to recognise, even if we do not have any other objective possibilities but to take future prices in account that these future prices are not a good predictor. We all know that and that adds up to the current uncertainty.
As regards your question on the counterparts of M3, one of the great advantages of our own methodology with the two pillars is that, when we look at the monetary pillar, we are bound to try to understand as thoroughly as possible the dynamics of all components, and not only M3 alone. This is a very complex dynamic in an environment where we have increased short-term rates – with long-term rates remaining at a very low level in Europe and throughout the world – and that creates different dynamics between M1 and M3 minus M1 in particular. We also are analysing the counterparts, and we have to understand what is happening at the level of the counterparts, and what is behind the different dynamics that we are observing. As regards credit to households, we see some kind of stabilisation at a high level. As regards the corporate sector we see a continuation of a very great dynamism of credit. There is a lot of meditation in the Governing Council on what is behind these developments. Taking all things into account, it is clear that, for us, it signals series of risks in the medium to longer term.
Question: I have a question about the German GDP figures that have come out today: 2.5% growth for 2006. What does that suggest, if anything, about the momentum of growth continuing into the first quarter of 2007? And, do you have any comments at all about the European Commission’s decision to slightly upgrade its growth projections for the first half of 2007 – I think to 0.4% to 0.8% for Q1 and 0.4% to 0.9% for Q2? Do you think that seems reasonable?
And secondly, there have been some comments from the central bank governor of the UAE earlier today suggesting that the Gulf Arab currencies might look towards re-pegging their currencies away from the dollar towards a basket of currencies, or a free-float Does something like this fit in with resolving global imbalances, and do you see that as a helpful step at all?
Trichet: As regards the most recent figures, they are fully in line with our own projections and understanding, and there is nothing in them that would lead us to modify our understanding of what happened last year and what is likely to happen this year. At the European level, last year was very good, because the first semester in particular was exceptionally good: obviously, the second semester was a little less dynamic, but overall as an average, it makes for a very flattering year. In the present year, the conditions remain for the euro area economy to grow solidly at rates around potential, so, at this stage, we do not project the exceptionally high levels of growth that were observed last year, but we consider that we have sustained growth at rates around potential. We will see what happens, but to answer your first question, clearly, we are fully in line with our previous understanding of the situation and the projections.
As regards the UAE’s declaration to which you refer, I did not see it, and I will not comment on it. Anyway – even if I had seen it, I would not have commented on it! I will only say that we are not campaigning ourselves for the international use of the euro. We do not discourage it, but we are not campaigning for it either. We let all participants and institutions assess the situation for themselves.
Thank you very much for your attention.