Introductory statement with Q&A
Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB
Frankfurt am Main, 6 March 2008
Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. Let me report on the outcome of our meeting, which was also attended by Mr Bajuk, President of the ECOFIN Council, 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 latest information has confirmed the existence of strong short-term upward pressure on inflation. It has also confirmed the assessment that there are upside risks to price stability over the medium term, in a context of very vigorous money and credit growth. The economic fundamentals of the euro area are sound. Incoming macroeconomic data point to moderating but ongoing real GDP growth. Yet the level of uncertainty resulting from the turmoil in financial markets remains high. Against this background, we emphasise that maintaining price stability in the medium term is our primary objective in accordance with our mandate. Indeed, the firm anchoring of medium to longer-term inflation expectations is of the highest priority to the Governing Council. We believe that the current monetary policy stance will contribute to achieving this objective. The Governing Council remains strongly committed to preventing second-round effects and the materialisation of upside risks to price stability over the medium term. We will continue to monitor very closely all developments over the coming weeks.
Allow me to explain our assessment in greater detail, starting with the economic analysis.
The latest information on economic activity confirms the picture of moderating growth around the turn of the year. According to Eurostat’s first estimate, the quarter-on-quarter growth rate of euro area real GDP in the fourth quarter of 2007 was 0.4%, following 0.8% in the previous quarter. Surveys of business and consumer confidence, which have followed a downward trend since the summer of 2007, overall remain consistent with ongoing growth.
Looking ahead, in 2008 both domestic and foreign demand are expected to support ongoing real GDP growth in the euro area, albeit at lower rates than during 2007. The fundamentals of the euro area economy remain sound and the euro area economy does not suffer from major imbalances. While being dampened by the global slowdown, investment growth should provide ongoing support, as capacity utilisation is high and profitability has been sustained. At the same time, as a result of the improved economic conditions and wage moderation, employment and labour force participation have increased significantly and unemployment rates have fallen to levels not seen for 25 years. While being dampened by higher commodity prices, consumption growth should continue to contribute to economic expansion, in line with rising employment.
These factors are also reflected in the March 2008 ECB staff macroeconomic projections. Annual real GDP growth is projected to lie in the range of 1.3% to 2.1% in 2008, and to be between 1.3% and 2.3% in 2009. In comparison with the December 2007 Eurosystem staff macroeconomic projections, the ranges projected for real GDP growth in 2008 and 2009 have been revised downwards, reflecting weaker global demand, stronger pressure from commodity prices and less favourable financing conditions than were foreseen in December. Available forecasts from international organisations broadly confirm this outlook.
In the view of the Governing Council, uncertainty about the prospects for economic growth remains unusually high. Downside risks to the outlook for economic activity continue to exist. They relate mainly to a potentially broader than currently expected impact of financial market developments. Further downside risks stem from the scope for additional commodity price rises, protectionist pressures and the possibility of disorderly developments owing to global imbalances.
With regard to price developments, according to Eurostat’s first estimate, the annual HICP inflation rate was 3.2% in February 2008, unchanged from January. This confirms the strong upward pressure on inflation in the short term, stemming mainly from the increases in energy and food prices in recent months. Looking ahead, we expect a more protracted period of relatively high rates of inflation than we did a few months ago. The annual HICP inflation rate will most likely remain significantly above 2% in the coming months and moderate only gradually later in the year.
The March 2008 ECB staff macroeconomic projections foresee annual HICP inflation of between 2.6% and 3.2% in 2008, and between 1.5% and 2.7% in 2009. Compared with the December 2007 Eurosystem staff macroeconomic projections, the projected ranges for HICP inflation have shifted upwards, mainly reflecting significant additional increases in food and energy prices.
It is important to recall that these staff projections are based on a number of assumptions which are of a purely technical nature and unrelated to policy intentions. In particular, the technical assumptions for short-term interest rates are taken from market expectations as at mid-February.
Moreover, it should be noted that the projections are based on the assumptions that the recent dynamism in commodity prices will diminish over the projection horizon, in line with futures prices, and that pressure from labour costs and profit margins will be limited.
In the view of the Governing Council, the risks to the outlook for inflation over the medium term are on the upside. These risks include further rises in oil and agricultural prices, continuing the strong upward trend observed in recent months. Furthermore, they include the possibility that stronger than currently expected wage growth may emerge, taking into account high capacity utilisation and tight labour market conditions. Moreover, the pricing power of firms, notably in market segments with low competition, could be stronger than expected. Increases in administered prices and indirect taxes beyond those foreseen thus far also pose upside risks to the inflation outlook.
At this juncture, it is imperative that all parties concerned meet their responsibilities and that second-round effects on price-setting, on the one hand, and on wages, on the other hand, stemming from current inflation rates be avoided. In the view of the Governing Council, this is of key importance in order to preserve price stability in the medium term and thereby the purchasing power of all euro area citizens. The Governing Council is monitoring wage negotiations in the euro area with particular attention. In this context, the Governing Council is concerned about the existence of schemes in which nominal wages are indexed to consumer prices. Such schemes involve the risk of upward shocks in inflation leading to a wage-price spiral, which would be detrimental to employment and competitiveness in the countries concerned. The Governing Council therefore calls for such schemes to be avoided.
The monetary analysis confirms the prevailing upside risks to price stability at medium to longer-term horizons. Annual M3 growth remained very vigorous at 11.5% in January, supported by the continued strong growth of MFI loans to the private sector. A number of temporary factors suggest that M3 growth currently overstates the pace of the underlying monetary expansion. The relatively flat yield curve in particular has made holding monetary assets more attractive. However, even after taking such effects into account, a broad-based assessment of the latest data confirms that the underlying rate of money and credit growth remains strong.
The growth of household borrowing has moderated over recent months, reflecting the impact of higher key ECB interest rates since December 2005 and cooling housing markets in several parts of the euro area. However, the growth of loans to non-financial corporations has remained very robust. Bank borrowing by euro area non-financial corporations grew at an annual rate of 14.6% in the year to January 2008. Overall, bank loans to the domestic private sector have grown at around 11% on an annual basis for the past two years.
For the time being, there is little evidence that the financial market turbulence since early August 2007 strongly influenced the overall dynamics of broad money and credit aggregates up to January 2008. In addition, according to the available data, the turmoil has not led to substantial portfolio shifts into monetary assets, as were observed between 2001 and 2003. Notwithstanding the tightening of credit standards reported in the bank lending survey for the euro area, continued strong loan growth to non-financial corporations suggests that the supply of bank credit to firms in the euro area has not been significantly impaired by the financial turmoil thus far. Further data and analysis will be required in order to obtain a more complete picture of the impact of the financial market developments on banks’ balance sheets, financing conditions and money and credit growth.
To sum up, a cross-check of the outcome of the economic analysis with that of the monetary analysis fully confirms the assessment that there are upside risks to price stability over the medium term, in a context of very vigorous money and credit growth. The economic fundamentals of the euro area are sound. Incoming macroeconomic data point to moderating but ongoing real GDP growth. Yet the level of uncertainty resulting from the turmoil in financial markets remains high. We emphasise that the firm anchoring of medium to longer-term inflation expectations is of the highest priority to the Governing Council. We believe that the current monetary policy stance will contribute to achieving this objective. The Governing Council remains strongly committed to preventing second-round effects and the materialisation of upside risks to price stability over the medium term. We will continue to monitor very closely all developments over the coming weeks.
Regarding fiscal policies, the Governing Council welcomes the fact that the Berlin Eurogroup agreement of April 2007, including the consolidation targets, was confirmed in the ECOFIN Council’s opinions on the latest stability programme updates. There is no justification for delaying structural fiscal consolidation in countries with remaining fiscal imbalances. On the contrary, the challenges ahead call for particularly prudent and stability-oriented fiscal policies to support private sector confidence. Achieving and maintaining sound fiscal positions will also allow the free operation of automatic stabilisers and contribute to the smooth functioning of Economic and Monetary Union.
Structural reforms would not only be beneficial for employment and potential growth, but would also help to reduce inflationary pressures. Enhancing competition, especially in services and network industries, is essential at this juncture to support price stability and enhance productivity growth. Similarly, administered prices, indirect taxes, minimum wage legislation and public sector wage-setting should not add to inflationary pressures in the economy.
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 have three short questions. Before this press conference started there were still expectations of rate cuts this year. With the mid-point of your 2009 inflation expectations at 2.1%, well above your 2% ceiling, are these expectations misplaced? Are rate cuts off the agenda?
My second question is: how worried are you about the euro’s recent very rapid appreciation?
And also, would you still regard your monetary policy stance as neutral?
Trichet: On the first question, I would say that the words I used on behalf of the Governing Council speak for themselves. We were unanimous in deciding to leave interest rates unchanged. We restated that maintaining price stability in the medium term is our primary objective. This is our mandate. The firm anchoring of inflation expectations is, as I have said, of the highest priority for the Governing Council. We trust that this solid anchoring allows us to deliver price stability in the medium term, as well as making a major contribution to sustainable growth and job creation. We believe that the current monetary pol icy stance will contribute to the achievement of this objective. I would also say that we are not underwriting the present future market interest rates. We never do that. Let me restate our constant position in this respect: first, we never pre-commit in the medium term, and that is a fundamental feature of our handling of monetary policy; and second, we always decide whatever is necessary, in line with our mandate, to deliver price stability in the medium term.
As regards your second question on the exchange markets, I would say again what I have said recently: I note with extreme attention the statements repeated on the other side of the Atlantic by the public authorities, including the President and the Secretary of the Treasury, that a strong US dollar is in the interests of the United States.
On your last point, I said already that we believe that the current monetary policy stance will contribute to the achievement of our objective.
Question: I would like to ask you two questions. First, how closely do these new staff forecasts tie in with your our own view of the European economy?
And second, have you considered providing more dollar liquidity? Are the market problems which made it necessary to do that last year still there?
Trichet: On the first question: I always say when we publish the staff forecasts that these are the staff projections. They are made under the responsibility of the staff, with a methodology that you know, and we at the level of the Governing Council do not underwrite the staff projections. They are an important element that we consider together with all the other informations that we have, including from international institutions and the private sector.
As regards your second question, as you will remember, we agreed with colleagues in the United States – together with the Swiss National Bank, in a framework that also included the Bank of England, the Bank of Canada and a number of other central banks – that we would provide dollar liquidity in December last year and in January this year. We said that we would not necessarily do so every month. If need be, we could certainly continue with such cooperation, but at the moment I have nothing else to say on that.
Question: First you mention that today’s decision was unanimous. Can you be a little more elaborate on that? Was there a discussion of raising or increasing rates, were options discussed?
Second, you made it very clear that you want us to take the expectations embedded in the staff forecasts for interest rates as a technical reality, but you stress that in terms of inflation. Would you also stress that in terms of the growth forecasts?
Finally, I wonder if you could tell us what you think is behind the resurgent credit tensions in Europe at the moment and whether you don’t ultimately expect that this will come through and start affecting the supply of credit to households and non-financial corporations, notwithstanding the contradiction you discussed between the bank lending survey and the money data.
Trichet: In answer to your first question, we were unanimous. Of course we always discuss the situation, which is particularly multi-dimensional in the present international and European circumstances. There was no call for either a decrease or increase in rates. We were unanimous. And again, we believe that the current monetary policy stance will contribute to achieving our objective of medium-term price stability and solidly anchoring inflation expectations.
As regards the ECB staff projections, I have already said that it was the staff projections and not the projections of the Governing Council. These projections are based on an assumption which is of technical nature and unrelated to policy intentions. That assumption is considered by a number of other institutions and our own staff to be appropriate, but we do not endorse that ourselves. As regards the other assumptions you know that they are based on assumptions related to the price of oil, the price of food and of other commodities. As part of the present methodology, they take the indications given by the future market when they exist.
Concerning the impact of the turbulence, I will say again that we are living in a multi-dimensional world. What I have noted on behalf of the Governing Council is the dynamism in the outstanding credit growth that we continue to observe, particularly in the field of non-financial corporations. In our last publication of monetary developments the growth of the non-financial corporate credit outstanding was 14.6%, which represents very dynamic growth. This process has still to be fully explained and it is necessary to disentangle all the various influences that are at stake. On the other hand, it is clear that outstanding credits to households are progressively decelerating in line with the previous series of increases in interest rates that we embarked on, which is in line with what should be expected.
Question: First, back to the euro. The euro went through 1.53 today and there has been quite an outcry from trade unions and also from business leaders. Would you go so far as to describe the recent movements as brutal?
Second, you’ve repeated several times today this statement ‘we believe that the current monetary policy stance will contribute to achieving this objective, the objective of anchoring inflationary expectations.’ Forgive me for not quite understanding the purpose of inserting that statement this time, but is that another way of saying that given this short-term rise in inflation, what you describe as a short-term rise in inflation, that a monetary policy stance that perhaps tends towards being restrictive might be appropriate. Is that the way we might interpret that statement?
A final third question, also on interpreting what you said today, just going back to the assumptions on interest rates, you make the point that these were taken from market expectations as of mid-February. Can I read that sentence as saying that actually what the markets were assuming at that point was tending towards wishful thinking?
Trichet: As regards the exchange market, I said that I noted with great attention what had been said on the other side of the Atlantic. You can deduce from that what you believe would be the right understanding from your standpoint. I am certainly sticking to what we agreed upon at a global level, at the level of the G7 in particular, i.e., that excessive movements, excessive volatility are undesirable for global growth.
Answering your second question the sentence speaks for itself as regards the fact that we believe that the current monetary policy stance will contribute to achieving our objective.
Regarding interest rates, I have already said that we do not underwrite the present future market interest rates, that we never underwrite medium-term future interest rates. It is a fundamental part of our handling of monetary policy in the medium term. And again, we never pre-commit, but always do what we judge necessary to deliver price stability, and be credible in that delivery, in the medium term.
Question: Perhaps I am playing devil’s advocate here, but if I look at your inflation forecasts, noting that the 2009 forecasts/2008 forecasts include interest rate assumptions…
Trichet: They are not our forecasts.
Question: Sorry, the staff’s forecasts – that you are not subscribing to interest rate assumptions, but they are still above your target. Could you think of a situation where you might even have to raise interest rates in order to achieve price stability in the coming months?
Trichet: As I have said, we always do what is necessary to deliver price stability and be credible in the delivery of price stability, and everybody knows that it is our position. As regards the present monetary policy stance we believe that it will contribute to achieving this objective.
Question: Two questions: First of all, whether or not your forecast or the Governing Council’s forecast is the same as the staff forecast, do you believe, from an economic point of view, that slower growth, or downside risks to growth, do bring down inflation in the near or medium term?
Second, to what extent do you believe that the frozen US credit markets are at risk of spreading to Europe in a similar fashion to the way that the turmoil broke out in August?
Trichet: On the first point, we have one needle in our compass, as I have said often enough, although I need to repeat it, because I see that there is a tendency to consider that we are in a two-needle universe. This is not the case. We have one needle in our compass, which is price stability. I have already said that price stability is also a prerequisite for sustainable growth and job creation, so that also has to be fully understood. I would say that this is the position of the very large consensus of economists. Slower growth has an impact, because it diminishes the inflationary pressure. To what extent, how, and through which channel is something which has to be fully understood, as well as all other parameters. We have a lot of parameters, and those together concur to influence inflation and price stability – instability – and that is, again, the needle of our compass. That is my response to your first question.
As for your second question, we are in a very largely interdependent world, so anything that happens in Europe has an influence on the United States and everything that happens in the United States has an influence on Europe. It is a relationship which is not necessarily asymmetric – we are all influencing one another. So, if any good or bad evolutions come from the United States, they have an influence on the rest of the world, as we are all in one universe, we are all interdependent. That being said, we have our own economies – they are not the same; our own shocks – they are not the same; our own flexibility – they are not necessarily the same on all continents and certainly not necessarily the same on both sides of the Atlantic. If you consider the various central banks some are moving, others are not, some are moving down, and others are moving up. In a way, we are all in close relation, because I trust that we all are doing what we judge, in the best of our analysis, in order to continue to solidly anchor inflationary expectations. But the reasoning, for example in Australia cannot be exactly the same as in Canada, here or in the United States, or in the United Kingdom. In that sense we are in a different universe. We have to judge, based on our own mandate, what is appropriate in the various economies in which we exert our responsibilities.
Question: Given the contribution of commodity prices to inflation pressures, does the Governing Council think that dollar weakness is to blame for these commodity prices or do you think that there is a structural problem that is perhaps more difficult to solve?
Trichet: We have no particular theory on that. We are certainly living in a universe where the weakness of some currencies can be associated with the weakness of domestic features, but I will not comment on particular currencies. With regard to commodities, there are various ways to look at it. They are not the same. Oil is perhaps of a different nature. However, there is no doubt that we can see the effect of supply and demand and the encountering of supply and demand, as well as the effect of fairly high levels of cartelisation in the various markets.
Let me only make a general remark: if it is confirmed that the global economy is slowing down, it would be a normal feature of the global economy that a number of commodity prices, including oil, would be pushed up less or would go down. This would be a normal feature of the functioning of the global economy and would form part of the automatic stabilisation at the global level. I make this remark as an economist.
Question: You said a couple of times that this situation is particularly multi-dimensional compared with others you have faced. Does it require you as central bankers to use different methods or can you rely on the needle in your compass in the same way as you have done in previous situations that were less multi-dimensional and easier to sort out?
Trichet: There is absolutely no doubt that we must be faithful to our mandate, and our mandate is clear. Moreover, if I had to interpret our mandate from the perspective of the people – our 320 million fellow citizens in Europe – they would tell us: be faithful to your mandate. That is very clear. So, we are in a situation which is, as always, multi-dimensional, but which is perhaps unusually multi-dimensional. We must continue to be scrupulously faithful to our mandate and sure that by being credible in delivering price stability, we continue to solidly anchor inflationary expectations. There is no contradiction between price stability and growth and job creation – on the contrary. If inflationary expectations were unanchored, what would happen? All medium and long-term market interest rates would increase, rather than diminish because these higher levels of expected inflation would be incorporated in the medium and long-term interest rates. This demonstrates once again that we have two elements that we should never forget: when we are faithful to our mandate, we are paving the way for sustainable job creation.
Question: I am intrigued by your comment about the state of the global economy and the relationship between commodity prices. You have said that that is how the global economy functions normally – in a slowdown commodity prices would fall. Are we in a normal world?
Secondly, does the present level of the euro reflect economic fundamentals?
And this sentence that we all keep coming back to: “We believe that the current monetary policy stance will contribute to achieving this objective”. Does that mean that the monetary policy stance is equally likely to be restrictive or accommodative in future as circumstances warrant?
Trichet: I have already responded to the third question so I will not comment further. We will do what is necessary to deliver price stability.
On the first question, I said it was an economist’s remark. When we have a buoying global economy, we see the prices of commodities accelerating. This was easily explainable by the fact that demand was getting stronger and stronger. If – and I repeat if – there is a slowing down of growth in the global economy, we should see a symmetrical evolution, namely a deceleration of those prices. But I have already mentioned that we have a number of cartels that could explain why these evolutions may not be as symmetrical.
On your second question: I have already said all I have to say on the euro.
Question: You have just sent the euro up again so – you know, it just hit a new record – so I just thought, I would let you know. I just have a fundamental question: What do you think it will take to bring inflation to below 2% on a sustained basis because next year will be the tenth or the eleventh year basically that the ECB has failed to achieve price stability. And if it might be the case that you cannot actually raise interest rates, would you have to accept a period of basically growth below potential for a number of years and would you be willing to do that?
And I have another question: As credit markets are tightening again and you may have to intervene again, how closely are you monitoring the creditworthiness of the asset-backed bonds you are accepting as collateral because you know there have been some questions marks over some of the collateral that you have been accepting.
Trichet: On the first question: observers and economists – the mainstream of the analysis – consider that what we have done in the past was right. Prices were countered by a succession of shocks, but that did not hamper the credibility of our medium-term delivery of price stability. That is clearly the way we are perceived. We have observed a succession of shocks in this period, particularly in the domain of oil and commodities. The latest shock we have to cope with is a food shock which struck us in the fourth quarter of last year and which is having an important impact on prices in the present period. We will do what is necessary to deliver price stability in the medium term. You can deduce whatever conclusion you judge appropriate from that. It seems to me that we have proved in the past that we were able to do whatever was necessary to deliver price stability, including in two periods in particular. In one period, namely in 2004, we were at the level of 2% for short-term interest rates, while others were at the level of 1% and we were called upon constantly to decrease rates. We believed that our monetary policy stance at the time was in line with the delivery of price stability. In another period, namely in December 2005, everybody was asking us not to start increasing rates and we did it.
As regards the collateral, we have not changed our collateral policy since the introduction of the euro. Since 1 January 1999 we have had the same collateral policy, which we have not changed, and we are certainly eager to have the best possible collateral checking at all times.
Question: Mr Trichet, I am not so happy with what you said. You said that you always do what is necessary to deliver price stability. And then you said that we are in a more prolonged period with inflation rates over and above the target of the ECB. And probably you know that there are a number of people around, including economists from banks who cannot really say what they think, and ask not to be quoted on this, who say that the ECB is supporting the banks when they should actually be giving more support to the pensioners in the street. Because, if you keep on with these inflation rates of 3% and more, that means a cut of 10% in three years in pensions, and that could put many people in poverty. This is not a nice questions for me to have to ask, but are you sure that you, as the ECB, have the people in mind which you should have in mind regarding your mandate or are you placing too much importance on the banking sector? And the whole thing connected to this. You have a good reputation, but to my mind you are endangering your reputation right now.
Trichet: I have already said - anticipating your remark - that our 320 million fellow citizens are asking us to be faithful to our mandate. It seems to me that a number of observers, including market participants, often forget that we have a mandate, and that this mandate is clear. If we need any confirmation that we have to be faithful to our mandate, this would certainly come from the 320 million fellow citizens of the euro area, who are asking us to deliver price stability. They know very well that we are not ourselves able to modify the price of oil when there is a commodity price shock at the global level. However, they are asking us to deliver price stability in the mediumterm. This is our mandate. So, I will very much echo what you said. That said we believe that the present monetary stance is precisely in line with this objective.
Question: A very quick one, on collateral policy. You have been quite proud of the range of collateral that you have accepted and how useful it has been in recent months to be able to accept such a wide range of collateral. But I wonder if it has been discussed at all within the Governing Council whether we are now in a situation where maybe some banks are developing an unhealthy dependency on your collateral system and whether there is any debate starting or discussion as to whether the collateral policy might have to be reviewed going forward?
Trichet: To my knowledge, we are the only central bank among those which have had to cope with exceptional tensions that has not changed its collateral policy since the very beginning of its existence. We regularly review the processes, see how they evolve, but we have not changed our concept. We have been lucky enough to have the possibility of 3-months refinancing since the very beginning, which was not the case on the other side of the Atlantic or over the Channel. Since the very beginning, we have had the capacity to take private paper, which was not necessarily the case for other central banks. That said, as we intended from the outset, we are very cautious and take pains to have the best collateral fully in line with our initial, unchanged concept.
Question: In the past week, the spread between Italian and German bonds widened to its highest since the launch of the euro, and the Portuguese, Spanish and Greek yields are also higher. Does this show that there are pockets in the euro area where economic fundamentals are actually quite weak?
Trichet: I think that it is certainly a wake-up call, and caution is required as far as fiscal policies are concerned. I trust that what I said on behalf of the Governing Council is important. I mentioned that the Eurogroup had confirmed the Berlin Agreement that was approved last year. It is very important that this commitment by the Eurogroup and ECOFIN is fully respected. It is, as you know, our constant position. There are other elements that we also have to take into consideration, elements that are probably associated with differences in various bonds liquidity, as well as the across-the-board correction that we see in spreads in financial markets in general. I think that it is too early to draw definitive conclusions from this observation, which could also be made in respect of a very large area of markets, certainly treasuries, as you just said, but also, private paper, across the board. Again, we are closely observing this ongoing correction, which is affecting all markets, and is a sign of the times.