Introductory statement with Q&A
Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB
Frankfurt am Main, 7 August 2008
Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. We will now report on the outcome of today’s meeting of the Governing Council.
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 has further underpinned the reasoning behind our decision to increase interest rates in July. It has confirmed that annual inflation rates are likely to remain well above levels consistent with price stability for a protracted period of time and that risks to price stability over the medium term remain on the upside. This assessment is underpinned by continued vigorous money growth, with so far no signs of significant constraints on bank loan supply. In such a context, it remains crucial to avoid broadly based second-round effects in wage and price-setting. The latest economic data point to a weakening of real GDP growth in mid-2008, which in part was expected after the exceptionally strong growth in the first quarter. Against this background and in full accordance with our mandate, we emphasise that maintaining price stability in the medium term is our primary objective and that it is our strong determination to keep medium and long-term inflation expectations firmly anchored in line with price stability. This will preserve purchasing power in the medium term and support sustainable growth and employment. On the basis of our assessment, the current monetary policy stance will contribute to achieving our objective. We will continue to monitor very closely all developments over the period ahead.
Allow me to explain our assessment in greater detail, starting with the economic analysis.
The information on economic activity that has become available since the July press conference suggests that real GDP growth figures for mid-2008 will be substantially weaker than for the first quarter of the year. As indicated on previous occasions, this represents partly a technical reaction to the strong growth seen in the first months of the year. In addition, it also partly reflects a weakening in GDP growth due to factors such as slower expansion at the global level and dampening effects from high and volatile oil and food prices. In order to assess the underlying momentum of euro area economic activity and to avoid being misguided by highly volatile quarterly outturns, it is necessary to look through the volatility in quarter-on-quarter growth rates and monthly indicators.
Taking this perspective, growth in the world economy, while moderating, is expected to remain relatively resilient, benefiting in particular from sustained growth in emerging economies. This should support external demand for euro area goods and services. As regards domestic developments, in a medium-term perspective the fundamentals of the euro area are sound and the euro area does not suffer from major imbalances. Investment growth in the euro area has provided ongoing, though moderating, support to economic activity. Moreover, employment and labour force participation have increased significantly, and unemployment rates remain low in historical terms. However, these developments, which support household disposable income and consumption, are unlikely to fully compensate the loss of purchasing power caused by higher energy and food prices.
In the view of the Governing Council, the uncertainty surrounding this outlook for economic activity remains high, owing to, among other things, the very high and volatile levels of commodity prices and the ongoing tensions in financial markets. Overall, downside risks prevail. In particular, risks stem from the dampening impact on consumption and investment of further unanticipated increases in energy and food prices. Moreover, downside risks continue to relate to the potential for the financial market tensions to affect the real economy more adversely than currently anticipated. The possibility of disorderly developments owing to global imbalances also implies downside risks to the outlook for economic activity, as do concerns about the emergence of protectionist pressures. In this respect, the failure of the recent negotiations in the context of the World Trade Organization’s Doha round on trade liberalisation is a major setback.
With regard to price developments, annual HICP inflation has remained considerably above the level consistent with price stability since last autumn, reaching 4.0% in June 2008 and, according to Eurostat’s flash estimate, 4.1% in July. This worrying level of inflation rates results largely from both direct and indirect effects of past sharp increases in energy and food prices at the global level. At the same time, while labour productivity growth has decelerated, there are some indications that labour cost growth has been rising in recent quarters.
Looking ahead, on the basis of current futures prices for commodities, the annual HICP inflation rate is likely to remain well above a level consistent with price stability for quite some time, moderating only gradually in 2009.
Risks to price stability at the policy-relevant medium-term horizon remain clearly on the upside and have increased over the past few months. These risks include notably the possibility of further increases in energy and food prices and of increasing indirect effects on consumer prices. There is a very strong concern that price and wage-setting behaviour could add to inflationary pressures via broadly based second-round effects. The Governing Council is monitoring price-setting behaviour and wage negotiations in the euro area with particular attention. Furthermore, there are potential upside risks from unanticipated rises in indirect taxes and administered prices.
Against this background, it is imperative to ensure that medium to longer-term inflation expectations remain firmly anchored at levels in line with price stability. The shift in relative prices and the related transfer of income from commodity-importing countries to commodity-exporting countries require a change in the behaviour of companies and households. Therefore, broadly based second-round effects stemming from the impact of higher energy and food prices on price and wage-setting behaviour must be avoided. All parties concerned, in both the private and the public sector, must meet their responsibilities in this regard. In this context, the Governing Council has repeatedly expressed its concern 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. In line with our monetary policy strategy, we take the view that the sustained underlying strength of monetary and credit expansion in the euro area over the past few years has created upside risks to price stability. Over recent quarters, these risks appear to have become manifest as inflation has trended upwards.
Not least in the face of the ongoing tensions in financial markets, the monetary analysis helps to support the necessary medium-term orientation of monetary policy by focusing attention on the upside risks to price stability prevailing at medium to longer horizons. While the growth of broad money and credit aggregates is now showing some signs of moderation, also reflecting the policy measures taken since 2005 to address upside risks to price stability, the strong underlying pace of monetary expansion points to continued risks to price stability over the medium term.
The current yield curve has led to very rapid increases in time deposits and to a substantial decline in annual M1 growth. Such effects and other temporary factors must be taken into account in assessing monetary developments. Overall, a broad-based analysis of the data, taking the appropriate medium-term perspective, confirms the underlying strength of money growth.
One of the main factors leading to this conclusion is the still high growth of MFI loans to the private sector, which is underpinning the robust nature of monetary growth. The pace, maturity and sectoral composition of bank borrowing suggest that, at the level of the euro area as a whole, the availability of bank credit has, as yet, not been significantly affected by the ongoing financial tensions. Higher short-term interest rates and housing market weakness in several parts of the euro area have dampened the growth of household borrowing over the past few years. By contrast, and notwithstanding tighter financing conditions and moderating economic growth, the expansion of bank credit to non-financial corporations thus far remains very robust.
To sum up, a cross-check of the outcome of the economic analysis with that of the monetary analysis clearly confirms the assessment of increasing upside risks to price stability over the medium term. Annual inflation rates are likely to remain well above levels consistent with price stability, and monetary aggregates continue to grow vigorously, with so far no signs of significant constraints on bank loan supply. The latest economic data point to a weakening of real GDP growth in mid-2008, which in part was expected after the exceptionally strong growth in the first quarter. Against this background, it remains crucial to avoid broadly based second-round effects in wage and price-setting. In full accordance with our mandate, we emphasise that maintaining price stability in the medium term is our primary objective and that it is our strong determination to keep medium and long-term inflation expectations firmly anchored in line with price stability, thereby preserving purchasing power in the medium term and supporting sustainable growth and employment in the euro area. On the basis of our assessment, the current monetary policy stance will contribute to achieving our objective. We will continue to monitor very closely all developments over the period ahead.
Regarding fiscal policy, there are risks that some countries will not achieve their fiscal targets this year. In this situation a rigorous implementation of budget plans and the avoidance of expenditure slippage are of crucial importance. Budget plans for 2009, which are currently being finalised in a number of countries, need to reflect European commitments. In particular, countries with still large deficits must provide ambitious and concrete deficit reduction plans, backed by clearly specified measures, preferably on the expenditure side. Where budgetary scope is available, automatic stabilisers can contribute to the smoothing of cyclical economic fluctuations.
As regards structural policies, measures which reduce adjustment costs and promote moderate unit labour cost growth are of the utmost importance, particularly in the current climate of high inflation and slowing real GDP growth. These include the removal of impediments to competition in the services sector in general, and at the various stages of the food supply chain in the retail and distribution sectors, as well as in the energy sector, more specifically. Equally, making labour markets more flexible and enhancing investment in education and training would foster productivity, thereby increasing the scope for increases in real incomes.
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: Just a few short questions. Particularly on the growth outlook: I have not actually read the introductory statement yet, but am I right in picking up that you have dropped reference to data pointing to moderate but ongoing real GDP growth? Because you have always said you expected growth to be weak in the second quarter, that you basically expected a trough now, but you expected growth to pick up again towards the end of the year. Now data has come in worse than many people expected and some people would say that there is a real danger of a recession in the euro area economy. So, can you comment on that, can you comment on whether you see the risk of recession in the euro area?
And also, you said last month you have no bias in terms of your monetary policy stance. Is that still the case?
And also, in light of upcoming wage negotiations in some large euro area countries, were some members of the Governing Council of the opinion that you should be in a stance of heightened alertness, or strong vigilance?
Trichet: On the first question, you remember that last time, a month ago I said that we would have, at mid-year, a trough, in our own understanding, and that we should, in any case, add up the first quarter and the second quarter to take into account the fact that the first quarter was, in certain economies in particular and in the euro area as a whole, exceptionally robust. And I will certainly confirm that. We will see what our new forecasts, our new staff projections, are when we meet in September. Then I will display the new staff projections and I will be more in a position to comment on your question. At the present moment I would say that what we have seen is that as regards the risks that we have listed as the downside risks for growth in the euro area – I did that last time on behalf of the Governing Council, and also in the month before – there is some materialisation of these risks that were identified. But they were already identified: thus for us, it is not a surprise. We knew that there were risks, and those risks are materialising. I have already, last month, identified clearly the second and third quarter of this year as being particularly weak. Later on we will see, and it will be much better to discuss that during our next rendezvous in September with the new staff projections.
As regards your second question, what is important in what I have said is that, on the basis of our current assessment, the current monetary policy stance contributes to achieving our objective. And, I would say as candidly as possible, we have no bias. And, as you know, we are never pre-committed and we always do what we judge, at any time, appropriate to deliver price stability and be credible in the delivery of price stability.
On your third question, which was on the wage and salary negotiations in particular, again, you might have noted that when we are speaking, on behalf of the Governing Council, of wages and salary increases, we also mention the price-setting issue. And we are not making any difference between this particular price, which is wages and salaries, and the other prices, where we might judge that there is not sufficient competition between the firms and where some price-setting is abnormal. As regards wages and salaries, we have had a very clear message for a number of months or quarters, and I will repeat now very solemnly that we consider it absolutely essential that we have no second-round effects in this domain. It’s essential not only for price stability; it’s essential for medium-term sustainable growth and job creation and for preserving the substantial progress which has been made in this domain over the last years.
Question: I have very similar questions, but one thing I did not understand in what you have said. You were speaking of weakening growth in the middle of 2008, in part expected – does it mean that the other part was unexpected, and is growth going worse than you were expecting?
And I did not hear any comment on the oil prices, which decreased considerably in the last weeks. Do you think it will have an impact on inflation and will slow down inflation faster than you thought?
Trichet: Let me take your second question first. I have mentioned on a number of occasions, on behalf of the Governing Council, that the price of oil – and not only of oil, also of food – was high and volatile. I would say that “volatile” captures pretty well the evolution that we have seen in the most recent period. We have had a peak, and then it went down. We will see what happens. We are entirely pragmatic, and predictions of the future prices of commodities are probably the most difficult exercise you can imagine. Personally, I consider that the peak in the price of oil and commodities was abnormal and did not correspond to what would be an equilibrium price. But we will see what happens. We have to be, again, totally humble in the presence of facts and figures, and we will see what happens. I think “high and volatile” is a good description, a good way to capture things in the present situation.
As regards your first question on growth, again, what we are seeing is that you have the technical correction of the second quarter, after a first quarter which was extraordinarily robust, particularly in some countries, in Germany in particular. So since the very beginning it has been perfectly known that we would have a correction, a technical correction. And that is the reason why we always said that we had to take both the first and the second quarter together into account. Now, I have also mentioned other phenomena that are playing their role: in particular, but not exclusively, the slowing down at a global level, the dampening effect of the very high level of oil and commodities, which have added of course to the difficulty in this respect. But again, I give you a rendezvous for September as regards more precision in this domain with the new staff projections.
Question: This is just a “yes” or “no” question: Was the Governing Council surprised by the weakness of the data, the recent data?
The second question: Do you think that your actions in the money markets are enough to ease the tensions or do you think that you have to continue to do this and do everything … is there a point in the next few years when things will return to normal?
And also, when you say that “again, there is no bias”, can we read into that that things go either way, that it is equally balanced on one side to the other?
Trichet: On the first question: as I have said we are totally pragmatic and humble in the face of facts and figures. We take them as they are. As regards the number of surveys that have come in and that we took note of, I would not say that we were surprised because we had already identified the risks and we had said clearly that the risks we had listed were on the downside. So, the fact that some of the survey data are very weak was for us the materialisation of risks that we had identified and made public. And again, we will see what happens, we will see what the second quarter and the third quarter bring. And, for what will come beyond the second and third quarters, I would refer you to the rendezvous I had already mentioned to your colleagues, to the meeting in September.
But let me add something. Do not forget that – to again use a metaphor that is familiar – we have only one needle in our compass. That needle is price stability, our definition of price stability. We take all the information that comes in as contributions to indicate what the situation is with respect to that needle in our compass. We do not compare two needles, one of which being price stability and the other business activity or cyclical development , or whatever. That is not the way we operate. Everybody knows that and I am only repeating what everybody knows.
As regards the money market, I have nothing special to say in this respect. I would only mention that we have taken recently decisions together with the Federal Reserve and also with the Swiss National Bank. We had made that public. I think that these are proof of transatlantic cooperation that has been welcomed by the markets. We will continue to follow the situation very carefully. As you know, we have felt from the very beginning that we had a responsibility to contribute to a smooth functioning of the money market. But the tensions that we have seen and we are still seeing on both sides of the Atlantic originated outside the money market. So that it was not up to us alone to eliminate these tensions, but to contribute to a smooth functioning of the money market.
On the bias, I will stick to what I have already said, that we have no bias.
Question: I also have a couple of questions and, if you forgive me, I am going to pressure you a little bit on this growth question because I am not quite sure I understand. The last time you expressed your vision of baseline growth for the euro area, you said that the trough would come in the second and third quarters. Would you say that again today?
Second, a colleague of yours on the Governing Council said recently, if I have got this quote right, that “it is a mistake to think that inflation will fall if the economy weakens”. Do you agree with that statement and is that the sentiment of the Governing Council?
And third: perhaps you have the results of the second quarter bank lending survey with you today. Would you be able to give us a glimpse of those results? If so, let us know whether there is a further tightening of lending standards and whether there is any more thought on the Governing Council on this apparent discrepancy between still strong non-financial corporation lending growth and tightening standards?
Trichet: I confirm that the trough that had been defined a month ago was a trough for the mid-year, for the second and third quarters. There is absolutely no reason not to confirm that. The information we have gained over the past month confirms that. Again, I will not say anything more than that at this stage. I will give you figures at the next meeting with our new staff projections. Our position is clear on the fact that we had identified risks, the fact that some of those risks are materialising and the fact that we see reasons for the materialisation of those risks that are, as I have already indicated, the slowdown of the global economy in particular, and the drain on our economy as a result of the development of the commodity, oil and food prices. All are elements that explain what we are observing at the moment.
As regards inflation, once again, we have only one needle in our compass and we take absolutely all information that is pertinent into consideration to identify the risk of inflation in the months and years to come. And, as always, we look at simply everything. The level of demand is part of this analysis, as is the monetary analysis, the level of exchange rates and so forth. So, we have to, as always, work out a synthesis.
On the bank lending survey, we will – as generally it is the case – publish the bank lending survey tomorrow. What I can tell you at this stage is that we have seen a somewhat lower net tightening of credit standards for loans to households for house purchase, but a somewhat greater net tightening for consumer credit and other lending to households, although starting from a lower level. We have, if everything is taken into account, a somewhat lower net tightening of credit standards for loans to enterprises than that observed in the first quarter. But these are not major changes and there is still a significant tightening of credit according to the bank lending survey. So, I would say, more or less the same level of tightening, but perhaps a little less net tightening. You mentioned the credit dynamism. We are still observing a level of dynamism as regards credit and counterparts of monetary aggregates that remains important. It has been published, so that there is nothing new for you there. But it is true, as high as these figures are that loans to non-financial corporations continue to grow at a rate – according to our last observation – of 13.6%. There has been a reduction in comparison with the previous month. We were at 14.2%, so that the rate is diminishing, but only slightly. We are seeing loans to households and loans to finance house purchase that are at a much lower rate of growth with a further reduction of outstanding credit because in the case of the loans for households we now have a level of 4.2%, after 4.9% in the previous month. So we have a significant slowdown. And for loans for house purchase, we – not surprisingly – have a strong decrease from 5.6% in the previous month to, most recently, 4.4%. But, if everything is taken into account, the dynamism of loans to non-financial corporations has given us an overall level of lending to the private sector that is still very dynamic and I would say again that, in that domain too, we have to be respectful and pragmatic and will have to see what the facts and the figures are. We will continue to look at them with extreme care.
Question: First of all, as regards the increase in rates in July, could you elaborate a bit more on whether you believe you achieved your goals with this increase, particularly in relation to inflation expectations?
My second question is – and I just want to confirm that I’m reading this statement right: You noted in the risks to price stability “increasing indirect effects on consumer prices”, and I have in my mind that you used the word “pass-through” as well. I believe that this is a change from last month, and I was wondering if you could elaborate on why that went into the statement.
My third question, just to follow up on what my colleague asked, is: Why is slower growth – and as you’ve said, you anticipated the risks and they have materialised – not listed in the statement as a downside risk to inflation? That would seem to me to be, prima facie, a factor that we have to consider.
Trichet: First of all, as regards our decision last month, as I said on behalf of the Governing Council, all the information that has become available since our last meeting has, in our judgement, underpinned the reasoning behind our decision to increase rates in July. Everything that we have observed as regards inflationary risks has fully justified what we have done. I would say that, particularly as regards inflation expectations, all the information we have confirms that we were right to do what we did.
As regards inflation, I don’t see that there’s any comment to make. Our analysis is exactly the same as before, and you should not over-interpret any changes that you might have noticed. We are in a universe where we see all the risks that I have listed. They are exactly the same kinds of risk that were listed before. We see a pipeline effect in a number of other prices stemming from increases in the prices of inputs – particularly commodities – and that is something which is ongoing and undoubtedly creates more risks. We have the risk of second-round effects and the absolute necessity to avoid the materialisation of such risks. Again I see that we have a situation which is not of a different nature.
As regards your third question, again we had ourselves already priced in the fact that we would have a trough in the second and third quarters, so we will see what exactly happens. We are totally pragmatic, and this is one element which, of course, needs to be incorporated in our synthetic analysis. Let me nevertheless make one or two observations. Economists would tell you that the considerable changes we have observed in relative prices not only have the conjunctural effect of acting as a drain on the resources of the euro area and other consumer economies, but also change the overall growth potential of those economies, because you have a change in relative prices, which has a big impact on the productive sector itself and its capacity to produce. It seems to me that a number of effects in this respect are not taken into account by part of the analysis which is being done. So I would draw your attention to that point, too. There is not only a conjunctural effect, but also a structural effect.
Question: You’ve mentioned the financial market turmoil a number of times. It’s now a year since the very obvious onset of the credit crunch. How would you characterise the past year in financial markets? What will end the crisis and when, and do you think that more European banks are at risk of huge losses?
Trichet: As you know, from the outset we considered this to be a very serious market correction. We took decisions which were in line with the analysis that we were facing an important market correction with episodes of turbulence. We never considered that there was a “quick fix” that could allow us to resolve that situation, and everything that has happened since then has proved that our analysis was right. The central banks are cooperating. I’ve mentioned further examples of that cooperation. The Eurosystem has always been very alert in following everything that has happened as efficiently as possible. I am asked very frequently whether the worst is now over or whether we should expect further enormous difficulties in the future. I would stick to what I have always said, namely that it’s an ongoing, very important market correction with episodes of turbulence and high levels of volatility, and that it is absolutely no time for complacency. That, for me, would be the best definition. You have not mentioned the collateral issue but it is, of course, part of the interaction we have with the money market. I told you last time – and I will stick to that – that we consider that our collateral framework has served us pretty well since the beginning of this turbulence. In a way, we were perhaps more prepared for the turbulence than some others, because we had also the capacity to accept private paper as collateral, the primary difference between us and a number of other institutions. We had the capacity to refinance commercial banks over three months, which was not necessarily the case in other economic areas. We had, since the establishment of the Eurosystem and the euro, traditionally had a very large number of counterparts, which proved to be very useful in the circumstances, and we also, traditionally, had a large amount of outstanding of refinancing, which also proved useful in the circumstances. So, these were the various elements which allowed us to cope with this unpredictable situation from the outset. That being said, we are examining our rules with great care and watching developments carefully. And we will see what we have to do, if it proves necessary, to refine elements of our scheme – as we have done in the past, because we did that two years ago and four years ago. So, it’s just as I said last time, I have nothing new to tell you and that would be my comment on that.
Question: Mr Trichet, the IMF has recently published a report on the euro area. It is somewhat critical of the monetary analysis, stating that it does not really contain much information on future inflation. The IMF report also suggests that the two pillars should be consolidated into one. What is your take on that?
And second question: Do you have any advice for the IMF concerning their global analysis?
Trichet: First of all, it seems to me that the IMF was cautious in mentioning this. However, we do not agree with the IMF on this. We consider our two-pillar strategy to have served us extremely well. On a number of occasions I have explained why we consider the information from the monetary analysis to be very pertinent and how it has helped us to take decisions in difficult times and at difficult moments. And, presently, I can say that these decisions are considered by everybody to have been fully vindicated. In particular, I mention our decision to refuse to decrease in rates in 2004 and our decision to increase rates in December 2005. These decisions were very significantly helped by our monetary analysis and were certainly very important in strategic terms. Let me also point out that there is a paradox in this position, because increasingly I have been hearing praise among economists for the monetary analysis and the two-pillar strategy. It seems to me that, at the current juncture, we are in a somewhat different universe to that of ten or even five years ago. Furthermore, it is paradoxical because, the European Parliament said that it judged the two-pillar strategy to be a very good concept. Reference was made to this in the European Parliament’s resolution which was adopted recently. So, to conclude, I would ask the IMF to do its very important job, and I am in no doubt that it will continue to do the job very well.
Question: If, in the course of your ongoing review of the collateral policy, there were to be a change, how would you let us know?
Trichet: We would be as public as possible. But, in any case, we regularly have to do some updating and there is nothing special to say in this regard, in terms of communication. So, you will see when the time comes.
Question: You mentioned the structural changes. And I wonder whether or not the Governing Council in fact reassessed its notion of potential growth in the euro area; before it was 2.5%?
Trichet: No, at this stage, I cannot refer to analytic work that would respond to your question.
Question: Monsieur Sarkozy recommended that the ECB publish the meeting. What is your position? The same as last year, I imagine, but probably…
Trichet: First of all, I am not sure at all that this is the position of the Head of State of France. I saw that in a paper, but referring to a conversation with aides. I myself do not comment on rumours or leaks that are not confirmed. The publication of minutes would be a paradox because the last resolution of the European Parliament (on the ECB) mentions that the European Parliament understands why we are not publishing minutes. They ask us to be as transparent as possible; they ask, in particular, that, in this candid exchange that we have, we be even more transparent. I try to be as transparent as possible, as you know, and we are proud that our predecessors, Wim Duisenberg and Christian Noyer, gave us – to Lucas Papademos and me – the concept of this interaction, because it did not exist before the setting up of the euro, as you are aware. There was no central bank in the world engaging in immediate, real-time communication after the decision of the Governing Council. So, in terms of transparency we have been bold since the very beginning of the euro. And we continue to try to be exemplary in this respect, as this interaction is demonstrating. But again, the European Parliament said that they understood why we were cautious as regards the publication of minutes.
Question: Just a quick question. After this press conference investors will have certainly priced out any possibility of a rate increase this year and early next year. Are you comfortable with that? Can you comment on that?
Trichet: We have no bias. We are never pre-committed. We do always what is necessary to deliver price stability in the medium term.
Question: Going back to the collateral rules. You say you will let us know because you are very transparent. Is there a possibility that you will let us know before we see you next month? And how soon can we expect….
Trichet: I have said no more today than what I said a month ago. So, do not assume anything, but see it as a reminder of the terms of reference that I have for this particular issue.