Introductory statement with Q&A

Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB
Frankfurt, 6 August 2009

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. We will now report on the outcome of today’s meeting of the Governing Council.

On the basis of its regular economic and monetary analyses, the Governing Council decided to leave the key ECB interest rates unchanged. The information and analyses that have become available since our meeting on 2 July 2009 confirm our view that the current rates remain appropriate. As anticipated, annual HICP inflation in July fell further into negative territory, reflecting mainly temporary effects. After a return to positive inflation rates during the second half of the year, we continue to expect price developments to remain subdued over the policy-relevant horizon. Recent data releases and survey information still suggest that economic activity over the remainder of this year is likely to remain weak, although the pace of contraction is clearly slowing down. This assessment takes into account adverse lagged effects, such as a further deterioration in labour markets, which are likely to materialise over the coming months. Looking ahead into next year, after a phase of stabilisation, a gradual recovery with positive quarterly growth rates is expected. Available indicators of inflation expectations over the medium to longer term remain firmly anchored in line with the Governing Council’s aim of keeping inflation rates below, but close to, 2% over the medium term. The outcome of the monetary analysis confirms the assessment of low inflationary pressure, as money and credit expansion continues to decelerate. Against this background, we expect the current episode of extremely low or negative inflation rates to be short-lived and price stability to be maintained over the medium term, thereby continuing to support the purchasing power of euro area households.

Let me now explain our assessment in further detail, starting with the economic analysis. The data and survey information that have become available since our meeting on 2 July 2009 have broadly confirmed our previous expectations. While uncertainty is still high, there are increasingly signs that the global recession is bottoming out. As regards the euro area, recent surveys suggest that the pace of contraction is clearly slowing down. However, economic activity over the remainder of this year is expected to remain weak. Looking ahead into next year, after a phase of stabilisation, a gradual recovery with positive quarterly growth rates is expected. The significant policy stimuli in all major economic areas should support growth globally, including in the euro area.

In the view of the Governing Council, uncertainty remains high and we have to be prepared for ongoing volatility in incoming data. Overall, the risks to this outlook remain balanced. On the upside, there may be stronger than anticipated effects stemming from the extensive macroeconomic stimulus being provided and from other policy measures taken. Confidence may also improve more quickly than currently expected. On the downside, concerns remain relating to a stronger or more protracted negative feedback loop between the real economy and the turmoil in financial markets, renewed increases in oil and other commodity prices, the intensification of protectionist pressures, more unfavourable than expected labour market conditions and, lastly, adverse developments in the world economy stemming from a disorderly correction of global imbalances.

With regard to price developments, annual HICP inflation was, according to Eurostat’s flash estimate, -0.6 % in July, compared with -0.1% in June. This further decline in annual rates of inflation was anticipated and reflects primarily base effects resulting from the peaks observed in global commodity prices a year ago.

Looking ahead, owing to these base effects, annual inflation rates are projected to remain temporarily in negative territory, before turning positive again later this year. However, such short-term movements are not relevant from a monetary policy perspective. Consistent with available forecasts and projections, looking further ahead, inflation is expected to remain in positive territory, while price and cost developments are expected to remain subdued in the wake of ongoing sluggish demand in the euro area and elsewhere. In this respect, indicators of inflation expectations over the medium to longer term remain firmly anchored in line with the Governing Council’s aim of keeping inflation rates below, but close to, 2% over the medium term.

Risks to the outlook for inflation are broadly balanced. They relate, in particular, to the outlook for economic activity and to higher than expected commodity prices. Furthermore, increases in indirect taxation and administered prices may be stronger than currently expected owing to the need for fiscal consolidation in the coming years.

Turning to the monetary analysis, the latest data confirm the ongoing deceleration in broad money and credit growth. The annual growth rates of M3 and of loans to the private sector recorded in June – 3.5% and 1.5% respectively – are the lowest since the start of Stage Three of EMU. These developments support the assessment of a slower underlying pace of monetary expansion and low inflationary pressures over the medium term.

The declining pace of monetary expansion since the last quarter of 2008 continues to be accompanied by volatility in the short-term developments of M3 and its components. This reflects to a large extent the impact that absolute and relative changes in interest rates have had on the allocation of funds between financial investments inside and outside M3 and between the different deposit categories within M3. In this respect, the shift in allocation from short-term time deposits to overnight deposits within M3 has led to a further substantial strengthening of annual M1 growth in June.

The flow of bank loans to the non-financial private sector remained subdued in June, albeit with differences across borrowing sectors. The flow of loans to non-financial corporations turned substantially more negative owing to a sharp contraction in short-term lending. At the same time, the flow of loans to households was slightly more positive than last month. The ongoing uncertainty seems to have dampened borrowers’ demand for financing. However, according to the latest euro area bank lending survey, lenders tightened their credit standards to a significantly lesser extent. Given the challenges that lie ahead, banks should take appropriate measures to strengthen further their capital bases and, where necessary, take full advantage of government measures to support the financial sector, particularly as regards recapitalisation.

To sum up, the information and analyses that have become available since our meeting on 2 July 2009 confirm the view of the Governing Council that the current key ECB interest rates remain appropriate. As anticipated, annual HICP inflation in July fell further into negative territory, reflecting mainly temporary effects. After a return to positive inflation rates during the second half of the year, we continue to expect price developments to remain subdued over the policy-relevant horizon. Recent data releases and survey information still suggest that economic activity over the remainder of this year is likely to remain weak, although the pace of contraction is clearly slowing down. This assessment takes into account adverse lagged effects, such as a further deterioration in labour markets, which are likely to materialise over the coming months. Looking ahead into next year, after a phase of stabilisation, a gradual recovery with positive quarterly growth rates is expected. Available indicators of inflation expectations over the medium to longer term remain firmly anchored in line with the Governing Council’s aim of keeping inflation rates below, but close to, 2% over the medium term. A cross-check of the outcome of the economic analysis with that of the monetary analysis confirms the assessment of low inflationary pressure, as money and credit expansion continues to decelerate. Against this background, we expect the current episode of extremely low or negative inflation rates to be short-lived and price stability to be maintained over the medium term, thereby continuing to support the purchasing power of euro area households.

As the transmission of monetary policy works with lags, our policy action should progressively feed through to the economy in full. Hence, with all the measures taken, including our covered bond purchases, monetary policy will provide ongoing support for households and corporations. Once the macroeconomic environment improves, the Governing Council will take care that the measures taken are quickly unwound and that the ample liquidity provided is absorbed. Hence, any threat to price stability over the medium to longer term will be effectively countered in a timely fashion. The Governing Council will continue to ensure a firm anchoring of medium-term inflation expectations. Such anchoring is indispensable to supporting sustainable growth and employment and contributes to financial stability. Accordingly, we will continue to monitor very closely all developments over the period ahead.

Regarding fiscal policy, we welcome the position of the Eurogroup that, given the current economic outlook and projected public deficit and debt developments, further fiscal stimulus is not warranted. Budget plans for 2010, which are currently being finalised in a number of countries, and medium-term consolidation strategies must reflect a commitment to a swift return to sound and sustainable public finances. Accordingly, governments should prepare and communicate ambitious and realistic fiscal exit and consolidation strategies within the framework of the Stability and Growth Pact. The structural adjustment process should start, in any case, not later than the economic recovery and in 2011 the consolidation efforts should be stepped up. Structural consolidation efforts will need to exceed significantly the benchmark of 0.5% of GDP per annum set in the Stability and Growth Pact. In countries with high deficits and/or debt ratios the annual structural adjustment should reach at least 1% of GDP. Given the risks of lower potential economic growth in the euro area for a prolonged period of time, governments should adjust public expenditures appropriately to the new macroeconomic conditions and reverse the sharp rises in public expenditure ratios as soon as possible. This is necessary also to prepare budgets for future ageing-induced expenditure burdens.

Turning to structural policies, there is a need to intensify structural reform efforts in order to support sustainable growth in the euro area. Appropriate wage-setting and sufficient flexibility to get the unemployed back into work are crucial to prevent the crisis from having a lasting negative impact on labour markets. It is therefore essential to create appropriate incentives to work. At the same time, policies to speed up restructuring and investment, in line with the principle of an open market economy and free competition, will create the business opportunities and productivity gains needed to spark a sustained recovery.

We are now at your disposal for questions.

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Transcript of the questions asked and the answers given by Jean-Claude Trichet, President of the ECB, and Lucas Papademos, Vice-President of the ECB

Question: I believe you had the survey of professional forecasters at today’s meeting. And I was just wondering if you could give us a brief glimpse of the findings. Were the projections very different from three months ago and did they, maybe, make your own June projections look a bit pessimistic at this stage, particularly when it comes to growth next year?

My second questions is, have you decided today that 1% is the lowest limit, and if not, why not?

And my third question is, are you comfortable with the current level of excess liquidity in the system, because banks are still depositing well over €220 billion with the ECB overnight. Would you consider maybe curbing demand at the next 12-month tender, by maybe adding a spread to the rate?

Trichet: On your first point, what we noted in particular was that, as regards the anchoring of inflationary expectations, we had full confirmation of what I have said on behalf of the Governing Council, namely that we had a very solid anchoring of inflationary expectations, particularly on the longer-term basis. The remarkable coincidence between our own definition of price stability – less than, but close to 2% – and the result of the very professional survey remains remarkable. As I have said frequently, we consider that one of our major assets, particularly when I look at central banks the world over, is certainly that we have a very high level of credibility in delivering price stability over time, in line with our definition.

On your second point, we did not discuss the issue of whether or not this would be the lowest level. So I have nothing to tell you, except to refer to what I have said on previous occasions when I have been asked this question. There is no change in our previous position.

And on your third point, we consider the one-year LTRO a remarkable success. We obtained what we wanted in terms of appropriate impact, particularly on the term money market rates, namely the three-month, the six-month and the one-year money market rates. We see that the demand has been very strong. We have this liquidity which is extremely abundant and we are continuing to observe the situation at this stage, but we have not taken any particular decision associated with this situation. So I have no comment on your last question as to what we will decide.

Question: What about my question about the survey of professional forecasters, the growth forecasts for next year? Are they different from three months ago? Are they maybe more positive?

Trichet: There is nothing that I would like to comment on at this stage. What I have observed, in general, is that the overall mood is, rightly or wrongly, today a little bit better than it was before. And not surprisingly, because there have been a number of surveys that were a little bit better; some hard figures have been better. But as far as we are concerned, we are very prudent and cautious. We consider that we have to take everything into account. We are in an episode in economic history where uncertainty remains very high. I have stressed that several times on behalf of the Governing Council. So we have to remain very prudent and very cautious. I do not exclude bumpy roads. There are elements that are undoubtedly more positive now than they were before. But, again, I do not rule out that we could have contradictory signs and that we could again have confirmation that we are in an economically uncertain episode.

Question: There have been a lot of discussions about the possibility that the Italian Government will tax the non-realised profits of the gold reserves. You were against that twice in your Opinion. The law was passed with a clause that our Prime Minister guaranteed that the tax will be applied only if the ECB were to issue a favourable Opinion. So, my questions are: Is the law effective in your eyes, do you consider it a very dangerous precedent for Europe and for the European System of Central Banks and what are you going to do now?

Trichet: I confirm what you have said, that in view of the Governing Council this law’s provisions on the taxation of Banca d’Italia’s gold reserves raise very serious concerns as regards possible infringements of Community law. And, as you have mentioned yourself, we have a negative, an unambiguously negative opinion on this piece of legislation. This is the confirmation of what we have already published.

Question: You consider that it is not effective, then?

Trichet: Everybody has to draw appropriate conclusions, but our position is that we have a negative view of the proposed legislation. We judged it as negative.

Question: Are you going to appeal if the law is enforced?

Trichet: I am not going to embark into details. But, as you have said yourself, there is a commitment not to apply it if we consider it not to be appropriate. So, we will see what happens now. Again our views on this piece of legislation are unambiguously negative.

Question: During the last press conference, you said that, at that time, only around 55% to 56% of the recapitalisation capital available to banks had been utilised. I was wondering where you see that figure right now, and whether you are happy with the speed at which banks have been progressing with their recapitalisation since then.

And then also: you said that the bank lending survey showed signs of stabilisation. At the same time, however, a growing number of companies and industry associations have complained about increasing credit constraints, and warned about a credit crunch later in the year. I was wondering whether there was anything you would like to say to those companies and associations to reassure them.

Trichet: On your first point, the order of magnitude that was mentioned here was around 55% utilised, and 45% not yet utilised. The order of magnitude must still be the same and we still feel that there is a case for further recapitalisation. But, as you know, recapitalisation can be done in two ways: it could be done with public money, but it could also be with private money through the issuance of new stocks and shares, as is being observed at a global level. And we would be more than happy if recapitalisation could be undertaken more actively in the euro area and in Europe in general. So, our message remains absolutely the same, telling the financial sector in general that it would be very appropriate to repair the damage as actively as possible and to make it possible for the financial sector and the banks to do their job, which is to lend. And you know that we ourselves have taken very innovative and bold non-standard measures, including that of the one-year refinancing, and expect these to be translated appropriately by the financial sector to the real economy.

Question: And my second question on companies, who have been complaining or warning about the credit crunch, is there anything you can…

Trichet: We tell the banks to do their job, but we have to accept that we are in a market economy. We cannot both tell the banks that in the past they took very abnormal risks, exhibited abnormal behaviour and so forth, and then tell them now to forget about their risk appreciation and their judgement. We have to understand fully how the market economy functions. But taking into account everything that we do, everything that the governments are doing, the extraordinary measures that have been taken, we expect that they will play fully their role in our market economy. This is a very clear message that we have for them. But we do not intend to set ourselves up as a substitute for the banks.

Question: Following on from that question: given what you know about the eurozone economy and bank lending, when would you expect bank lending to start picking up significantly? That is the first question.

The second question is: you mentioned in your statement today, you talked about a return to positive quarterly growth rates next year, you dropped the reference that you had last time to mid-2010, are you hedging and thinking that the pick-up is going to start sooner than you previously expected?

Trichet: On your first question, I will not give you – and you do not expect me to – any precise date. We do everything we can to alleviate what is due to the supply of credit in what we are observing, namely a very strong diminishing of the rate of growth of loans. Last month for the non-financial corporate sector, we were in negative territory over one month, even if we remain slightly positive as regards the one-year statistics. But we see the phenomenon before our eyes. A large part of this phenomenon is certainly due to demand, because we have a very significant slowing down of the economy. We have a slowing down of the investment and the financing that are needed for that purpose. They are much less buoyant than they were before. That is absolutely clear. I do not want to embark on an assessment of precise proportions, but the major part of what we are observing comes from the real economy and the fact that the demand for new credit is less and less dynamic. That being said, there are certainly also supply aspects, and we are as active as possible in trying to understand what can be done to alleviate these supply constraints. From that point of view the bank lending survey offers some comfort, because we observe clearly that the tightening of standards is progressively being alleviated from one survey to the next. So, we see that it is going in a better direction, even if we have to take into account all the tightening that already took place in the past, because the survey tells us where we stand in comparison with the previous survey. But it is going a little bit in the right direction. However, a lot remains to be done in order to have what we would expect, namely only constraints on the demand side, which are of course absolutely and clearly natural. We would like the supply side of the financing not to be a constraint, or as little a constraint as possible.

As regards your second point on the profile of growth, I will give you rendezvous at our next meeting, because we will have the new projections and we will be better placed to qualify the staff vision for next year. At this stage, I would only say that we do not exclude the possibility that we could have a profile next year which would be slightly different. I do not exclude that, but we are not in a position to confirm that now. We will see exactly how the work is done. It is work in progress now to be delivered at the beginning of September. So, we will see and do not over-interpret what I have said, the profile could remain very close and in any case uncertainty is unfortunately very high in the present circumstances.

Question: My first question is: the euro has been strengthening against the dollar to over 1.44 recently, and exporters are concerned that this strengthening might choke off nascent demand for euro area goods and hamper recovery. What do you think about this?

And the second question: you mentioned rising commodity prices – what do you think is driving them? And do you think they have potential to drive up headline inflation? And do you think that this might reach a level that unanchors inflation expectations?

Trichet: On the first question let me say, and it will not surprise you, that we appreciate enormously the fact that the US authorities, and particularly the Secretary of the Treasury and the Chairman of the Federal Reserve, are making the point that a strong US dollar is in the interest of the United States. I trust that this is important, and I also confirm that it is our own vision. I should say that this has also been said by the President of the United States of America.

On your second point, I do not hide the fact that the volatility of commodity prices is an enormous problem for the global economy, for all economies in the world and certainly also for all central banks in the world. We have to live in an environment which from that standpoint creates a very high level of volatility. I mentioned the peaks and the troughs. We see the impact that it has on the CPI and of course through the CPI on all of the economy and on our fellow citizens, to whom we have promised to deliver price stability. It is not helpful to have these ups and downs, such a rollercoaster in the profile of those prices. Everybody knows that it is an extraordinarily complicated issue. I would say that, at the level of the “Gs” and the meetings of the central bank governors at a global level, this issue of the volatility of commodity prices is one of the major issues where we consider we have a lot of progress to make. First of all, on both sides of the Atlantic, understanding better how the market functions is a major issue. I have observed the debate also on the other side of the Atlantic, which I consider justified. At this stage we have to understand much better the interplay between supply, demand and all the financial aspects of the market. That being said and as you know, we have proved in the recent past as well as since the setting-up of the euro that we guarantee the delivery of price stability in the medium-term and that we are sufficiently credible for the medium-term inflation expectations extracted from surveys or from the financial markets to be in line with our definition of price stability. This solid anchoring of medium-term inflation expectations is our main asset in many respects, a major asset for the ECB, and we will continue to do everything to be sure we maintain that asset.

Question: I have got a question for Vice-President, Mr Papademos. Could you please comment on the success of your covered bond purchase programme and please respond to speculation that you may not use the entire €60 billion?

Papademos: The programme has been very successful. It has helped to revive activity in the primary market. It has contributed to a reduction of the spreads. Activity in the secondary market has not increased as much as we would have liked, but I expected that this would be the case. So overall our assessment has been quite positive. The programme will be implemented the way the Governing Council has announced. So what you referred to is just speculation.

Trichet: There is no intention at all to change our decision to go up to the €60 billion.

Question: Two questions. First of all, you have mentioned twice – to use the good economic formulation – that when the supply and demand curve both shift, it becomes difficult to disentangle what is what as regards the credit situation. Do you within the ECB have a rule of thumb as to how much is owing to supply constraints? The IMF will occasionally tell you it is between 30% and one-third. I was wondering whether you have a sense of that, from your perspective in the euro zone, and whether that number is increasing, decreasing or has been relatively stable this year?

And my second question relates to the lagging indicator of unemployment in the euro zone. It is probably pretty clear that it is going to spike significantly and much of that may have to do with the expiration of the various short-time, partial employment types of programme that simply delay this increase in unemployment and reduction in purchasing power. Would you rank that as one of the more significant uncertainties facing the euro zone economy, because it has tremendous ripple effects in terms of confidence and purchasing power and so forth?

Trichet: On the first question, I would say: no, I have no figure that I would consider pertinent to disentangle the supply and demand constraints that I was mentioning. My suspicion is that demand is certainly playing a much more important role than supply in the present situation where we have had a slowdown of the real economy that has been so dramatic, in particular on the investment side. We have seen recently a survey from the European Commission, which was interesting, where the question was asked “what are the constraints that are explaining the level of your activity?” From the answers given by firms it was obvious that the supply of credit was, I have to say, quite a meagre constraint in comparison with demand for products and services. It was clear that the slowing down of the real economy was explaining very largely the level of activity of the firms and only a very small proportion of the firms mentioned the constraint of the supply of credit. But we know that it is also clear that there are supply constraints and we have to, as I said, look at it very carefully which is what we are doing.

Question: To add another dimension to the question, would you say the same thing about longer maturities of credit because in some instances you can definitely not see where the reduction in credit, as it approaches the two-, three-, four- and five-year maturities, has been very significant. Is that something you have observed in the course of the year?

Trichet: What we have published in the monetary aggregate counterparts suggests that the diminishing of short-term credit is very important. If I take the last figures we had in front of us, we had a major diminishing of the monthly flow of credit to non-financial corporations coming from the “up to one year” component of the credit. That is something we are looking at very carefully. But we have also to distinguish between small firms, medium firms and big firms, which are not at all in the same situation. And we have also to take into account the fact that the various financial structures of the various economies that are making up the euro area are not the same and that the distribution of credit is not the same, even if we are making a lot of progress in this dimension. To give you very precise figures, if I look at the loans of up to one year to non-financial corporations, the monthly flow in June 2009 is minus €30 billion, which accounts for almost the totality of what we are observing at the level of the total outstanding amount, which is minus €35 billion. And for the loans over five years, we see that it is only minus €2 billion. This is confirmed by the annual growth rate, where for the loans up to one year we have now minus 5.4%, while we have still plus 5.7% for the loans over five years. These are the figures that we have in front of us and this has to be looked at very carefully.

As regards unemployment, which was your second question, I can only say that you are right in mentioning the fact that it is one of the major points which calls for us to be prudent and cautious. It is clear that there are lagged effects in this domain and even when the economy picks up unemployment might continue to grow. We will still have the very great likelihood of figures for employment and unemployment that will not be flattering for a significant period of time. And of course this will have a bearing on the overall mood of the households as well as on the economy as a whole. So this is an element that we have very much in our mind when we are looking at our economy in the period to come, with a medium-term vision.

Question: If I understood you correctly, you sounded a little bit more optimistic about eurozone growth prospects going forwards, even if you acknowledged the possibility that you might change the profile next year. I just wondered to what extent the German economy, and the performance of the German economy in recent months, is playing a role in making you perhaps a bit more optimistic, because the numbers from Germany seem to be particularly good recently.

Secondly, the Bank of England has today announced the extension of its quantitative easing programme, although, if I understand it correctly, its assessment of the economy has not changed. Is an extension of your enhanced credit support programme still an option for the ECB?

And a third question. Looking at the pass-through of the one-year loans that you injected, you have given quite a lot of analysis of the numbers today. But, am I correct in summarising your thoughts in saying that basically, you haven’t seen any effect yet – no sign yet, at all – that the massive amounts of liquidity you pumped in for one year are being passed beyond the banking system?

Trichet: On your first point again, I would not like to be misinterpreted. I said that we will have a rendezvous on the profile of growth – particularly on the level of the projections for next year by our staff – at our next meeting at the beginning of September. At this stage, I would only say that we have seen a number of indicators – a lot of them “soft” and some, but only a few, “hard” – that confirm what our own understanding of the situation was, namely that the pace of the contraction was slowing down. I said on behalf of the Governing Council that it was “clearly slowing down”. So, that is a fact. But if I have to insist on an element, it would be prudence and caution. Prudence and caution is the main message in this respect. We will see exactly what the new projections are, but at this stage, again prudence and caution. And I would not comment particularly on one economy, because it seems to me that what we are observing in terms of surveys, as well as in terms of soft data and hard data, is by and large in line in the various national economies that make up the euro area. We are in the same environment. The business cycles are close, and even if the amplitude is not the same in all countries, for obvious reasons – but the profiles are very much parallel. So what I say is for the euro area as a whole.

As regards the intention that we have, we are satisfied with the measures that we have taken in terms of enhanced credit support, both regarding the LTRO – I mention again that, in the view of the Governing Council, what we have been doing is a success in this respect – and regarding the purchases of covered bonds. We could see the impact that they had on the markets themselves, which we consider – I am being prudent also on this point – had the kind of impact that we were looking for, even if we still have to – if it is possible – improve, in particular, the behaviour of the secondary market. It is not our intention to do anything at the moment I am speaking, unless to apply and implement previous decisions as effectively and professionally as possible.

On your last question on the pass-through, what we see clearly is that our reducing of interest rates is having an impact. We are following that very carefully. We see the pass-through in terms of rates and we are quite happy with what has been done so far, even if we consider that progress has still to be made, particularly for some segments of the economy. As regards the volumes, we see what effect there has been. Of course, what we are talking about is quite recent, so we do not expect to see immediate or significant changes in our own figures. After all, my comments refer to the figure for the month of June. We are now at the beginning of August and some of the decisions were taken very recently. So, we will see. We will monitor that very carefully. At this stage, I would only say that the figures we have in front of us in terms of outstanding loans to non-financial corporations, on a twelve-month basis, is +2.8% for June. But as I mentioned a moment ago the most recent evolution is clearly negative. For us, it is clear that a very large part of this comes from the economy, which slowed down very significantly, but we are doing all that we can to alleviate the supply constraints.

Question: I have two questions. The first relates to the potential rate of growth, which is not unimportant for your policy, and I remember that before the crisis you said that it was about 2%. Mr Papademos then said that you expect that it might be a lot lower now. Do you already have new estimates as to how big it is now? This is something I would like to know.

The second question is on the next one-year tender. You left it open in June in terms of the rate at which it will be issued. Will it be 1% again? This is something that the markets would really like to know.

Trichet: In answer to your second question, the market will find out when the time comes, and I have already responded to this question. We will not change the way in which we operate for such possible spreads, which could be decided for all the term refinancing that we are carrying out. When the time comes you will find out the position of the Governing Council.

As regards your first question, the Governing Council does not have a position on the potential rate of growth for the euro area or for Europe as a whole. If we look at the state-of-the-art methodologies for determining the potential growth rate – and the European Commission I believe has published documents in this respect – you see that the most recent observed data have a big influence: you might suddenly discover that the potential rate of growth for a large number of previous years was overestimated at the time the calculations were made. It is therefore not entirely satisfactory to be the prisoner of methodologies that might change significantly past estimates. This is one of the reasons why the Governing Council of the ECB has always been extremely cautious vis-à-vis rules of monetary policy based on estimates of growth potential, because you know in advance that the estimate of potential growth will differ, in some cases very significantly, from the estimates produced in real time. That being said, I fully accept the consensus of economists that the potential growth of all economies of the industrialised world is probably now significantly lower than the previous estimate. This would be true for the United States, for the euro area and for the bulk of the industrialised economies. This is one of the areas in which we have to work very hard from a research and methodology standpoint. We all agree on that and discuss it including with the European Commission, which has made report to the Eurogroup.

Question: I understand that it is quite early to be talking about an exit strategy for credit enhancement, but on the other hand a lot of people are afraid of inflation. Could you therefore provide some details of a possible strategy? For example, is it possible that you will start an exit strategy before the money market is functioning normally again?

Trichet: First of all, we believe it is very important to have an exit strategy, and you heard what I said on behalf of the Governing Council just a moment ago: the Governing Council will ensure that the measures taken are quickly unwound and that the ample liquidity provided is absorbed. This applies to the way in which we are supplying liquidity and the full allotment fixed rate mode which is currently being used. It also applies to the interest rates themselves. We are the master of the rates and we never pre-commit. We are viewed by observers as being one of the central banks which undoubtedly has all the means to implement an effective exit strategy when we believe it to be necessary and appropriate. Our credibility is very strong in this respect and stems from the very solid anchoring of inflation expectations. We are very credible in terms of the exit strategy and there is no public debate on whether or not we will be able to exit. Let me also remind you that we did not hesitate to increase rates when the situation was not that easy, namely mid-2008. This contributes to our credibility today and this is one of the reasons why we have this very solid anchoring of inflation expectations. We are credible, and when we decide that it is appropriate to exit our enhanced credit support programme we have all the appropriate tools and we were very careful not to use any tools or instruments whose effect it would be difficult to unwind.

Question: I was actually going to ask the same question, but now I am a bit flabbergasted by your answer. Up to now the markets had kind of understood that, in terms of an exit strategy, the ECB would favour an unwinding and scaling-back of the non-conventional measures followed by a rise in rates. You have me a bit confused now. Could you actually envisage a scenario whereby you would do that in combination? My understanding is that, in terms of the exit strategy, Ben Bernanke said that the Federal Reserve System would embark on a combination of scaling back and raising rates at the same time. So, could you envisage….

Trichet: We never pre-commit in any respect on the timing of the various measures that we will take.

Question: So you do not see it necessary to scale back..

Trichet: Certainly no pre-commitment in any respect.

Question: So you could see a scenario where you would raise rates at the same time as…

Trichet: We have not taken any decisions yet. We can do whatever we want and whatever we judge to be appropriate, especially in terms of the order in which we do things. I never said on behalf of the Governing Council that we will first unwind all the non-conventional measures that we have taken and then change rates. Our position is clear on this.

Question: Did the Governing Council discuss today any other options than leaving interest rates unchanged?

Trichet: No. As always we discussed the pros and cons of the situation in many respects and we were unanimous in our decision that the present level is appropriate.

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