Introductory statement with Q&A

Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB
Frankfurt am Main, 8 November 2007

Jump to the transcript of the questions and answers

Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to today’s press conference. Let me report on the outcome of our meeting, which was also attended by 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 previous meeting fully confirms that the outlook for price stability over the medium term is subject to upside risks. Against this background, and with money and credit growth vigorous in the euro area, our monetary policy stands ready to counter upside risks to price stability, as required by our mandate. The economic fundamentals of the euro area remain sound and support a favourable medium-term outlook for economic activity. However, the ongoing reappraisal of risk in financial markets has led to continued uncertainty. This warrants a thorough examination of additional information before drawing further conclusions for monetary policy in the context of our medium term-oriented monetary policy strategy focused on maintaining price stability. Accordingly, the Governing Council will monitor very closely all developments. By acting in a firm and timely manner on the basis of our assessment, we will ensure that risks to price stability over the medium term do not materialise and that medium and long-term inflation expectations remain firmly anchored in line with price stability, which is all the more important at times of financial market volatility and increased uncertainty. This will favour an environment conducive to sustained economic growth, well-functioning markets and job creation. As regards the financial markets, we will continue to pay great attention to developments over the period to come.

Allow me to explain our assessment in greater detail, starting with the economic analysis. On the basis of the available data, it appears that the sustained real economic growth experienced in the euro area in the first half of 2007 has continued through the third quarter, as reflected in the data for industrial production and retail sales that have been released since our meeting in early October. While financial market volatility seems to have contributed to a decline in euro area consumer and business confidence indicators in the past few months, these indicators generally remain above their historical averages and continue to point to ongoing sustained growth. Overall, the fundamentals of the euro area remain sound, including in particular sustained corporate earnings and profitability, robust employment growth and falling unemployment to levels not seen for 25 years.

Available forecasts for 2008 continue to confirm our main scenario of real GDP growing at around trend potential. This scenario is based on the expectation that the global economy will remain resilient, with the slowdown of economic growth in the United States partly offset by the sustained strength of emerging market economies. Continued strong external demand should provide ongoing support to euro area exports and investment. Consumption growth in the euro area should also contribute to economic growth, in line with developments in real disposable income, as continued employment growth provides supportive conditions. That said, in view of the potential impact of prolonged financial market volatility and the re-pricing of risk on the real economy, the level of uncertainty surrounding this broadly favourable outlook for economic activity remains high.

On balance, risks to the outlook for growth are judged to lie on the downside. These downside risks relate mainly to the potential for a broader impact from the ongoing reappraisal of risk in financial markets on confidence and financing conditions, further oil and commodity price rises, as well as concerns about protectionist pressures and possible disorderly developments owing to global imbalances.

As regards price developments, according to Eurostat’s flash estimate, the annual HICP inflation rate increased very strongly to 2.6% in October 2007, from 2.1% in September. This sharp increase is a matter of particular concern and it is essential that it does not affect medium to longer-term inflation expectations. To that effect, we have already indicated on previous occasions that we are now in a period during which unfavourable effects from energy prices will have a strong upward impact on annual HICP inflation rates, owing mainly to the marked decline in energy prices a year ago. In addition, these effects have been strengthened by recent substantial further increases in oil, non-oil commodity and, in particular, food prices. Overall, we expect the HICP inflation rate to remain significantly above 2% in the coming months before moderating again in the course of 2008.

Risks to the medium-term outlook for price developments are fully confirmed to lie on the upside. These risks include the possibility of persistently high oil and agricultural prices, continuing the strong momentum observed in recent months, as well as unanticipated increases in administered prices and indirect taxes. Moreover, taking into account the existence of capacity constraints, the favourable momentum of real GDP growth observed over the past few quarters, and the positive signs from labour markets, stronger than currently expected wage developments may occur. Furthermore, an increase in pricing power in market segments with low competition could materialise. Such developments would pose upward risks to price stability. It is therefore crucial that all parties concerned meet their responsibilities and that second-round effects be avoided. In addition, the explicit or de facto indexation of nominal wages to prices should be reduced and ultimately eliminated.

The monetary analysis confirms the prevailing upside risks to price stability at medium to longer-term horizons. The strength of both money and credit growth in recent months – with the annual growth rates of M3 and MFI loans to the private sector both at more than 11% in September – may have been influenced by a number of temporary or special factors, such as the flattening of the yield curve and the recent financial market volatility. However, even taking into account these special factors, the underlying rate of money and credit expansion remains strong. Monetary developments therefore continue to require very careful monitoring so as to detect underlying trends on the one hand and to better understand shorter-term dynamics on the other. This monitoring will provide a more complete picture of the response of the private sector to the increased volatility in financial markets.

A broad assessment of underlying trends in money and credit growth is particularly important given recent financial market developments, since financial volatility may influence the short-term behaviour of money-holders and thereby affect monetary developments. Monetary and credit data can therefore offer an important insight into how financial institutions, households and firms have responded to the financial market volatility. Indeed, previous episodes of heightened financial market uncertainty have been associated with large portfolio shifts into safe and liquid monetary assets. For the time being, however, there is little evidence that such shifts have influenced the dynamics of broad money and credit aggregates since the onset of financial market volatility in early August, although specific balance sheet items, such as holdings of money market fund shares/units, may have been strongly affected.

The rate of growth of bank loans to households and non-financial corporations has remained robust in recent months, tentatively suggesting that there is no impairment in credit supply. However, it cannot be excluded that the strong loan flows partly reflect the re-intermediation of some financing onto bank balance sheets given illiquidity in some segments of the asset-backed securities markets. Further data and analysis will be required to develop a more complete view of the impact of the financial market volatility on bank balance sheets, financing conditions and money and credit growth.

To sum up, a cross-check of the information identified under the economic analysis with the outcome of the monetary analysis has fully confirmed the existence of upside risks to price stability over the medium term, with money and credit growth vigorous in the euro area, and against the background of sound economic fundamentals in the euro area. At the same time, given the continued uncertainty, additional information is needed before further conclusions for monetary policy can be drawn. Consequently, the Governing Council will monitor very closely all developments. Our monetary policy stands ready to counter upside risks to price stability, as required by our mandate. By acting in a firm and timely manner on the basis of our assessment, we will ensure that risks to price stability over the medium term do not materialise and that medium and long-term inflation expectations remain firmly anchored in line with price stability, which is all the more important in the current context. As regards the financial markets, we will continue to pay great attention to developments over the period to come.

Turning to fiscal policy, the Governing Council welcomes the ECOFIN Council’s agreement to strengthen the preventive arm of the Stability and Growth Pact. The Governing Council also welcomes the recent confirmation by the ECOFIN Council of a reinforcement of its commitment to the full implementation of the Pact. In particular, the provisions of the preventive arm, including the call for a structural adjustment of at least 0.5% of GDP per annum, need to be adhered to by all countries with fiscal imbalances. In this regard, 2008 budget plans in a number of countries point to a pro-cyclical fiscal stance and an unwarranted relaxation of consolidation efforts. This gives rise to concern as consolidation shortfalls undermine in particular the Eurogroup agreement to achieve sound budgetary positions by 2010 at the latest.

With regard to structural reforms, the Governing Council stresses that a key effect of well-designed structural reforms is a sustainable improvement in the employment and income situation of workers and households. Reforms which increase the incentives for firms and individuals to invest in human capital tend to enhance overall labour demand and productivity. Reducing non-wage labour costs would also enhance employment and the net income levels of workers. Moreover, labour market regulations should not discourage firms from offering jobs, or workers from accepting them. It is encouraging to see that past labour market reforms have contributed to job creation and reduced unemployment. It is important that governments continue in this direction and do not reverse past reforms just at the point when they are starting to bear fruit. Moreover, the Governing Council reiterates its full support for all efforts which foster market flexibility and enhance competition. This also applies to the agricultural markets. Against the background of a marked increase in international food commodity prices, further liberalisation and reforms in EU agricultural markets would help to enhance their efficiency and benefit European consumers through lower prices.

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: I have two questions. First question: is the financial market crisis over? Can we all relax? Second question, I mean, you are very optimistic with your forecast – that is the background for my question. I remember an interview with your chief economist at the beginning of the century when, after oil price rises, the ECB had admitted to having underestimated the effect of high oil prices on the economy. Are you about to make the same mistake again?

Trichet: As regards the financial market situation, I said that we have the same level of uncertainty as that we had mentioned after our previous meeting. I would say that this is an ongoing process, so we will continue to observe the evolution of the market very carefully. We are experiencing a multi-dimensional correction with episodes of turbulences, episodes with high level of volatility, episodes of overshooting, and again it is a complex, multidimensional phenomenon that we have to follow very carefully.

On the impact of this situation on growth, I have mentioned that, at this stage and taking into account all available information, and knowing that new information will be gained in the period to come, we did not – on the basis of the information we have at the moment – change our baseline scenario. This is not particularly original, because it seems to me that it is very much the attitude taken until now by most international institutions and observers. I also stated on behalf of the Governing Council that the balance of risks was on the downside. And I say that very clearly. Risks for growth are in our judgement clearly on the downside.

To your second question: I do not have any memory at all of any such declaration. Again, we are qualifying the situation as – without calling our baseline scenario into question at this stage – one of growth that would be around potential, but I also said that the risks were on the downside. And I would be surprised if the previous analysis you are referring to was not used on the same principles, because we are very consistent in the way that we, in the Governing Council, judge the situation and assess the developments.

Question: I have three short questions. Can you just give us a short flavour of the type of discussion in the Governing Council today. We have heard different views being echoed over recent weeks in terms of balancing the increased inflation risks versus the downward risks to growth. How do you propose to balance those? Can you briefly comment on your view on the euro-dollar exchange rate; at USD 1.47, it is rather high, but – at the same time – it blunts some of the effects of energy price spikes. And thirdly, inflation expectations have increased, and I believe at this stage you do have the forecast of your professional forecasters. Can you give us a flavour of what their inflation expectations for 2008 and 2009 are?

Trichet: Let me repeat that there is only one Governing Council and there is only one assessment of the Governing Council, which is enshrined in the introductory remarks. I know that none of us will start departing from the introductory remarks. There might be some communication phenomena, translation, a number of interpretations – in my opinion, very much over-interpretation. So, let us be careful – there is only one Governing Council; there is only one voice for the Governing Council in the introductory remarks. And I think that this is very important. You will not be surprised when I tell you that the meeting today was a meeting at which we have come to our judgement, as always, on the basis of a very thorough examination of all arguments, looking in all directions, but we were unanimous in coming to the decision we took today.

As regards the US dollar, first of all, we said in Washington in the G7 that disorderly movements of exchange rates are undesirable for economic growth. This is true, now more than ever. Secondly, we had, as you might remember, explicitly sent a clear message to a number of currencies of emerging Asian markets including the Chinese currency. Thirdly, we had noted the position of the US authorities as regards the strong dollar being in the interest of the United States. It seems to me that, in the most recent period of time, it has become even clearer that a strong dollar is in the interest of the United States. And, finally, as regards the yen, I said myself in commenting on the G7 communiqué that we appreciated what had been said by the authorities in Tokyo on the fact that the pick-up of the economy should be recognized progressively by the exchange markets. In the recent period, we have observed moves that, I would say, were undoubtedly sharp and abrupt. And I have said already that brutal moves are never welcome.

As regards your last question, I confirm once again that we consider the anchoring of inflation expectations to be absolutely decisive. It is because inflation expectations are solidly anchored that we can put the European economy in a favourable environment in the medium and long run with sustainable growth and job creation. We will do what is necessary to continue to ensure solidly anchored inflation expectations. We are looking very carefully at all survey data and all the other information we extract from the financial markets. We see reasons to solemnly reaffirm that we will not allow any de‑anchoring of inflation expectations, which is very closely associated with our call for there to be no second-round effects to be observed. Inflation expectations and the delivery of price stability over time are totally dependent on the absence of these second-round effects in a period in which we have a hump in headline inflation.

Question: Just to follow up and clarify on the inflation expectations’ question. My understanding from some of the main gauges in the bond market is that there has been a significant rise in inflation expectations over the last month or so. Is it then your position that this does not represent a “disanchoring” of expectations or even a move toward such? And then my second question is: would we be correct in writing that the external value of the euro is bound to help dampen both inflation and inflation expectations? And then my third question has to do with the financial market effects of what you are doing here. You are in an interesting position because you have to observe what is going on in the euro zone and be true to your mandate as regards the stewardship of the euro zone, and of course this also has ripple effects around the world, particularly when another large central bank is doing something differently as well. Could you give some sense of what message you would like us to take away from this press conference that would even out turbulence that might be caused by this reality, that you are moving in different directions?

Trichet: On the first question, as I said, we are capturing all the information available. As regards inflation expectations, we have a number of channels: we have the Survey of Professional Forecasters, we have other surveys and we have the financial markets. You referred to the financial markets. If I refer to the Survey of Professional Forecasters, we are at 1.9%, as we have been for a long period. As regards the information that we are extracting from the markets, you are absolutely right to say that we are observing a pick-up in an indicator that we consider very important to follow, which is the five-year break-even inflation rate five years ahead, because it captures very well the medium-to-long-term situation as regards expectations. But it is complex because a risk premium is also incorporated in the figures that you obtain when you extract the break-even inflation rate. So whether the observed pick up is reflecting or not something happening in the “pure” inflation expectations or whether there is an increase of this risk premium – which would not be surprising in the present period – is a complex issue. I would say at this stage that what we are observing would certainly reinforce our absolute determination to continue solidly anchoring inflation expectations.

On the external value of the euro, I have said what I have to say. And I can only confirm to you that when we take our decisions, (there is nothing new there) we look at absolutely all parameters. The exchange rate is one of the parameters amongst many, many others that we look at when reaching conclusions on the inflation risk and on our capacity in the medium term to deliver price stability in line with our definition.

With regard to your subtle last question, I have no advice for other central banks! I have noted since the beginning of the period of “turbulences” that we were all in different economies with various characteristics and with various instruments at our disposal, taking into account our own histories and our own structures. I take it that what has been done has been responsible and I think we could certainly prove that we – each of us, in our own environment – probably did what was required by the situation. In the Governing Council, we will continue to consider that we have a major responsibility, which is our primary goal in line with our mandate: to deliver price stability and to be credible – particularly in the eyes of our fellow citizens – in the delivery of price stability over the medium term. And that being ensured, we have to make sure that the money market in particular is in line with the monetary policy decisions that we would have taken in order to attain our primary goal. And this is what we have been doing since the start of the “turbulences”, which I would call a significant market correction, and of course, it is what we will continue to do. I have said, on behalf of the Governing Council, from the very beginning that we have our primary goal and everything that goes with it, and then that we also have our responsibility as regards the functioning of the money market independently of the primary goal and at the level of rates required by the primary goal.

Question: You said that on the one hand the risks to growth are on the downside and at the same time the risks for inflation are on the upside. Now, this is a bit confusing, isn’t it, because you would expect that if growth goes down, then also inflation goes down, so perhaps you could tell us which risks you judge higher at the moment? And a short second question, because there is speculation triggered by remarks from Chinese officials that the dollar might lose its position as the world’s leading currency and might be replaced by the euro. Do you have a position on this?

Trichet: You know that I never respond to the question “How do you balance the risk for inflation on the one hand and the risk for growth on the other hand?” because we have only one needle in our compass, not two needles. Of course, you were right in saying that the risks to growth have their own impact on the risks to inflation. I have been very clear that the needle of our compass is inflation, and this needle signals risks. And I have said that our new information fully confirms the risks that we had identified. One of the reasons – as I have already explained – is that we will have a hump in headline inflation because there is a base effect as we had foreseen very clearly. And on top of that, we have an additional pick-up of prices of oil and commodities, which is very substantial as you can see, and also a pick-up in prices of agro products and food, processed food in particular, which again adds to the headline inflation. And that is the reason why, as I said, we will have quite a series of months with inflation being much above 2%. It is an immediate consequence of what we are observing, coming from these two areas in particular, on top of what has already been observed and explained. And, as I said, it will then progressively moderate next year. To the fellow citizens – and through you the Governing Council is talking to 320 million fellow citizens of the euro area – we say we will do what is necessary to deliver to you price stability in line with our definition in the medium term. So, we will have this impact of the big pick-up that we are observing in a number of prices, which are global prices, on top of everything else here in Europe, and we consider it to be our duty to ensure that this pick-up is transitory and that inflation falls back progressively to our definition of price stability. This is extremely important. In our own remarks, we also call upon absolutely all parties concerned to assume their responsibilities. This is not new. You have heard it from the Governing Council when we had previous oil shocks or new unexpected, sharp and abrupt increases of commodity prices or oil prices. It is extremely important that all parties concerned – and this means all social partners and all economic agents which have pricing power – assume their responsibilities.

Question: Mr Trichet, again in the interest of clarity. I just want to make sure that I have understood you correctly. My first question is that you have said on the exchange rate: “brutal moves are never welcome”. Are you saying that the recent moves have been brutal? Second, you have talked about this inflation hump, and you have mentioned that you have talked about that for several months now. Is the hump going to be bigger than you thought it was going to be and will it last longer than you thought it would, say on 4 October when we last discussed this hump? And third, with both inflation and inflation expectations rising, how long can you be ready to counter inflation risks without actually countering them by raising rates, or to put it another way: does a bias to raise rates lose credibility, the longer it is in effect as rates do not rise? Thank you.

Trichet: To your first question, I will not change anything in what I have already said. Second, we see, as I said, a number of reasons to have a hump: everything that we have previously observed, plus the most recent evolution of the price of oil and the most recent evolution of the price of food and processed food in particular and a large number of agro products. This puts us in a situation where the hump will probably be a little bit longer, and certainly bigger in terms of absolute magnitude, than what we would have had, had we not had to incorporate the two elements that I have mentioned. And the fact that headline inflation is higher than it should have been, had we not had this bad news, creates an additional element for which we have to be particularly alert as regards second-round effects. Certainly, our main message today would be: no second-round effects.

As regards the alertness of the ECB, I think that nobody has any doubts about our alertness. As you know, the ECB takes pride in the fact that it has never pre-committed itself for a certain period of time by saying that we will not increase rates for any period of time or that we will do this or that for a number of months and so on. We have always said and we have never changed our concept in this respect: we are constantly alert. We always reserve at any time the right to move when we judge it to be necessary in order to counter the inflationary risk in the medium term.

Question: A couple of points. You said in your opening statement that the financial market developments warrant a thorough examination of additional information. Can you give us some idea how long that is likely to last? Are we talking about many months yet before you can come to any sort of conclusions as regards the impact for monetary policy? And my second question: We do not get your forecasts formally until next month, but I am sure you have started to think about how euro area inflation might average in 2008, and also in 2009. Could you let us know what your latest intelligence is on that? And my third point, markets seem to be expecting no change in interest rates for quite a few months now and certainly nothing for next spring or next summer. Would you want to say anything to change those expectations? And I might just try again on the euro: I just wonder whether you can offer any reassurance to euro area exporters that the ECB will take steps as necessary to prevent brutal moves in the euro going forward.

Trichet: On the first point, I said that we were observing an ongoing process, and that process is under our eyes. We have the sentiment that it is a very significant market correction. The correction had been identified a long time ago as probably necessary, taking into account a number of phenomena that had been observed by the central bank constituency in particular, but not only by us: namely an underpricing of risks on a series of markets and for a large number of instruments. From that standpoint the sub-prime mortgage market has been emblematic. I would only say that we will observe and monitor all these developments on the financial markets very closely. I will not give you any date or embark on any kind of forecast for this phenomenon. You can perhaps extract the sentiment of the market itself as regards the future evolution of the present market anomalies. If you look at the three-month money market in particular, you can see the present views of the market participants as regards the progressive alleviation of the tensions and these can be observed on both sides of the Atlantic. I will not say any more than that. As regards our own monetary policy stance, we took a decision today, as we do at each of our meetings, based on what we judge to be appropriate in order to counter inflationary risks and to continue anchoring inflation expectations solidly. It is our mandate and we are constantly alert in that respect.

As for our December forecast, we will have a rendez-vous at our next meeting and I will be able to explain it in detail. At this stage I do not think it would be reasonable for me to do so. I have said that the hump will be incorporated in our forecast, I would be very surprised if it were not the case, but I do not want to embark on any other remark at this stage. And on the euro, I have said all that I have to say on the exchange rate.

Question: I have two questions: First, with regard to the magnitude of the hump, the President of the Bundesbank, Axel Weber, said publicly that inflation rates could rise up to 3% – and I can exclude the possibility that this was a translation mistake. How serious do you think this threat is? Second, I would like to rephrase what a colleague just asked, but with reference only to price stability, your one needle. Do you think the disinflationary impact of the cooling down of the economy can compensate for the inflationary risk stemming from agricultural food prices and so on?

Trichet: First, with regard to the second question, if we do not have any second-round effects – which, fortunately, we have observed in the past, because we have already had to cope with sharp and abrupt increases in some global prices – then, after a period of around 12 months, these progressively disappear from the screen when calculating headline inflation. So in our analysis there should not be second-round effects. The cooling down or any kind of change in the evolution of the real economy itself as regards its own pace would have an impact of a different nature. You do not offset a short-term spike by means of a longer-term parameter. These are two different issues. We have to treat the spikes that we are observing in a number of prices as transitory phenomena and this is the reason why we have to prevent second round effects. Then we have to incorporate all pertinent medium-term observations regarding all the parameters that are relevant for inflation in order to define our own monetary policy stance, including of course the prevention of second-round effects.

As for the figure of the hump I will not say anything at this stage. What is absolutely clear is that, because we had this additional element coming from agro-food products, processed food and oil, we have a figure, which at the level of the euro area as a whole, could be from 0.2% to 0.3% over and above the previous hump. I have already said that we should be conscious of the fact that there is a hump, which should be observed for a number of reasons. I do not want to confirm any figure at this stage, but it is absolutely clear that it will be significantly over 2%, for a number of months. And I expect that it will progressively moderate in the course of 2008. We should not see it as being permanent. It will be transitory and we will treat it as transitory by preventing second round effects. I am telling you that and, through you, our fellow citizens.

Question: Can you give me a clear message about your monetary analysis? On the one hand, monetary liquidity is strong, too strong, with risks to price stability, but banking market liquidity is weak, with risks to financial stability. Isn’t this a problem for the credibility of your monetary policy?

Trichet: As I often say, we live in a multi-dimensional world. You are absolutely right to say that, we are observing this phenomenon simultaneously on both the financial side and the monetary side of our analysis, where we have a number of very dynamic figures. The most dynamic figures are for the loans to non-financial corporations. When the situation was last observed in September, the figure stood at 14.1%, coming after 14.2% in the previous month. However, I have to say that – and everybody knows how complex it is – we would certainly not be credible if we were to say that it was clear cut and very simple. We say that the situation is complex and we have to analyse and disentangle all the phenomena that are behind it, including the re-intermediation in the banking sector that I mentioned in the Introductory Remarks. However, in my opinion, it does reinforce our own monetary policy concept, namely that what we are observing in the economic analysis is confirmed by what we are observing in the monetary analysis and vice versa. So, it is clear from the cross-checking that the risks are there. There is no doubt about that.

Question: Do you think it is likely that the eurozone will enter a scenario with high inflation and low growth? How would the ECB respond to that? And the second question is about the liquidity injections of the ECB. This week’s has been the smallest since the start of the crisis, so can we say that the liquidity injections are over or not?

Trichet: On the first point, never forget that we are and have always been reasoning over the medium term. So in the medium term, we will deliver price stability in line with our definition, because it is our mandate, it is our duty, it is what has been called for by our democracies and it is also what the people of Europe are requesting very strongly, and they are right. So, again, my reasoning is that we will continue to deliver price stability in line with our definition. The hump is transitory. It is big, it is bigger than what was foreseen before, but we will ensure that it is transitory; we will not tolerate second-round effects and spiralling. On growth, I have already said that our baseline scenario has, at this stage, not been modified significantly; we consider that we would be around potential. We will see. There are risks, and they are risks that I have already mentioned.

You had a second question on the liquidity injections: again, as I said, we ensure that money markets function as properly as possible; we did that in the past in a fashion that has been observed very carefully the world over. We will continue to do what is necessary, in line with our own decision as regards the main refinancing operations, which is at 4%. Let me only mention that today, in the Governing Council, we decided to renew the two supplementary longer-term refinancing operations – in our wording the LTROs – that had been allotted in August and in September (you will remember that there were two tranches), in order to further consolidate the progress that has been achieved so far in the normalisation of our euro money market. So we will have two new LTROs to be rolled over, each of EUR 60 billion. All details regarding dates and the way they will operate will be provided in a press release that you will receive at the end of this press conference.

Question: Given the readings for 2007, is the target level of close to 2% inflation unrealistic, and if so, have interest rates been too low this year?

Trichet: Certainly not unrealistic. It is our definition of price stability. We are credible in the delivery of price stability in the medium run and we have a transitory phenomenon. Full stop.

Question: I will take two more cracks at this. One is, you use many adjectives to describe the euro and foreign exchange moves. Would one of those adjectives be “undesirable” and would the ECB consider policy remedies such as an intervention in the currency markets? And two, on the liquidity crises we have seen new waves of write-offs from big US banks. How exposed are European banks? And, again, in the US, they are talking about the crisis lasting through 2008. Do you have any working hypothesis on how long this liquidity crisis will last?

Trichet: On the exchange rates, I have no other comments than those I have already made. On the interventions, I never comment. On the present market correction I will not say anything as regards timing. As I said before, it is a significant market correction with episodes of overshooting, of high volatility and turbulent periods and it is an ongoing process that we are looking at very carefully. I will only say that we have observed a progressive appeasement of tensions in the money market, and we had a responsibility in this respect. If you extract information from the market, you can have a view that it will continue over 2008 progressively. So, that is an indication that you might have, and I will not comment on any particular provisioning of commercial banks. I always ask all commercial banks – all financial institutions – to be as transparent as possible and as responsible as possible. It is a message for private financial institutions; it is also a message for absolutely all parties concerned, whether private or public and whatever their responsibilities are in any kind of regulation or banking survey and institution survey in general. There will certainly be lessons to be learnt from this episode and I think that a good set of lessons to be learnt is to treat absolutely all parties concerned without putting aside any one of them, because we certainly have to improve the situation in this respect.

Question: You specifically mentioned processed foods as being subject to some unexpected inflation. I was aware – we have all been aware – that the underlying commodities have risen in price and pockets of processed foods have substantially risen in price. By saying that, did you mean to say that you see a systematic price increase across the processed foods category? I wondered because you were mentioning that specifically.

Trichet: I do not want to embark on a discussion of all items. Some are not moving at all, and I am very happy with that. Some are perhaps even decreasing in price, because of strong competition. But it is true that in that category in particular we see increases, for a number of reasons that are very much associated with the increasing prices of inputs. That being said, we are asking for competition to be as intense as possible in the euro area. We are not at the appropriate level in the economies concerned or at the level of the euro area in terms of having a real, totally fluid and highly competitive single market. That can be seen from a number of observations in various national economies in the euro area. So we are calling for full liberalisation of markets and, particularly in this domain, we certainly need to have more intense competition across the board in the euro area. This would be in the interests of consumers, in the interests of our fellow citizens. It would also be in the interest of sustainable growth and job creation and help to keep inflation as low as possible. We would all benefit from an increase in competition and the implementation of the appropriate structural reforms. This is one of the messages from the Governing Council for today. This is true at the level of each individual economy and, of course, at the level of Europe as a whole, particularly in this domain.

Question: I have a question about your money market operations. Was there any debate in the Governing Council, now that you have decided to roll over the two LTROs, on perhaps looking at the asset classes that you accept from financial institutions as collateral, because some of the losses that banks have incurred in the third quarter, and look likely to incur in the fourth quarter, have to do with the fact that some of whatever they are holding in terms of paper has dropped, even what used to be graded as AAA and AA. So, was there any debate in the Governing Council on perhaps changing the asset grades, or are you happy to continue accepting whatever you’ve been accepting?

Trichet: Long question, short answer. No, we did not discuss this at the level of the Governing Council.

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