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Introductory statement with the Q&A

Jean-Claude Trichet, President of the ECB,Lucas Papademos, Vice President of the ECBFrankfurt am Main, 5 November 2009

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Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference today. We will now report on the outcome of today’s meeting of the Governing Council, which was also attended by Commissioner Almunia.

On the basis of its regular economic and monetary analyses, the Governing Council decided to leave the key ECB interest rates unchanged. The current rates remain appropriate. The incoming information and analyses that have become available since our meeting in early October have confirmed our expectations. While annual HICP inflation was -0.1% in October, according to Eurostat’s flash estimate, it is expected to turn positive again in the coming months and to remain at moderately positive rates over the policy-relevant horizon. At the same time, the latest information continues to signal an improvement in economic activity in the second half of this year. The Governing Council expects the euro area economy in 2010 to recover at a gradual pace, recognising that the outlook remains subject to high uncertainty. Medium to longer-term inflation expectations 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 over the medium term, as money and credit growth continues to slow down. Against this background, we expect price stability to be maintained over the medium term, thereby supporting the purchasing power of euro area households.

Let me now explain our assessment in greater detail, starting with the economic analysis. Available data and survey-based indicators continue to signal an improvement in economic activity in the second half of this year. In particular, the euro area should benefit from the inventory cycle and a recovery in exports, as well as from the significant macroeconomic stimulus under way and the measures adopted to restore the functioning of the financial system. Taking into account all available information, in the second half of this year, quarterly real GDP growth rates could be back in positive territory. However, uncertainty remains high as a number of the supporting factors are of a temporary nature. Looking through the volatility of incoming data, the euro area economy is expected to recover at a gradual pace in 2010, as it is likely to be affected over the medium term by the process of ongoing balance sheet adjustment in the financial and the non-financial sector, both inside and outside the euro area.

In the view of the Governing Council, the risks to this outlook remain broadly 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, the labour market deterioration may be less marked than previously expected and foreign demand may prove to be stronger than projected. On the downside, concerns remain relating to a stronger or more protracted negative feedback loop between the real economy and the financial sector, renewed increases in oil and other commodity prices, the intensification of protectionist pressures and the possibility of a disorderly correction of global imbalances.

With regard to price developments, annual HICP inflation stood at -0.1% in October, according to Eurostat’s flash estimate, compared with -0.3% in September. The current negative inflation rates are in line with previous expectations and reflect mainly movements in global commodity prices over the last year. In the coming months, annual inflation rates are projected to turn positive again, also relating to base effects. Thereafter, over the policy-relevant horizon, inflation is expected to remain positive, with overall price and cost developments staying subdued reflecting ongoing sluggish demand in the euro area and elsewhere. In this context, it is important to re-emphasise that 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 this outlook remain broadly balanced. They relate, in particular, to the outlook for economic activity and to the evolution of 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 annual growth rates of M3 and loans to the private sector declined further in September, to 1.8% and -0.3% respectively. These concurrent declines support the assessment of a moderate underlying pace of monetary expansion and low inflationary pressures over the medium term.

In the next few months, the annual growth rates of monetary aggregates will most likely be affected downwards by base effects that are associated with the intensification of the financial turmoil one year ago. More fundamentally, however, the growth of M1 and M3 continues to reflect the current constellation of interest rates. While the narrow spread between the rates on different short-term deposits fosters shifts in the allocation of funds to the most liquid assets contained in M1, the steep slope of the yield curve also encourages such shifts from M3 to longer-term deposits and securities outside M3.

The annual growth rate of bank loans to the non-financial private sector turned slightly negative in September, with annual loan growth to both non-financial corporations and households declining further and being negative. At the same time, the monthly flows of loans to households remained positive and even increased, while those of loans to non-financial corporations were negative. In the case of households, the latest data provide further confirmation of a levelling-off at low rates. In the case of non-financial corporations, the subdued levels of production and trade, as well as the ongoing uncertainty surrounding the business outlook, continue to dampen firms’ demand for bank financing, a tendency which is likely to prevail in the coming months. In this respect, it is worthwhile to note that the growth of loans to enterprises typically only picks up with some lag compared with the cycle in economic activity. At the same time, the ongoing improvement in financing conditions should support the demand for credit in the period ahead. Against the background of highly demanding challenges, 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 current rates remain appropriate. The incoming information and analyses that have become available since our meeting in early October have confirmed our expectations. While annual HICP inflation was -0.1% in October, according to Eurostat’s flash estimate, it is expected to turn positive again in the coming months and to remain at moderately positive rates over the policy-relevant horizon. At the same time, the latest information continues to signal an improvement in economic activity in the second half of this year. The Governing Council expects the euro area economy in 2010 to recover at a gradual pace, recognising that the outlook remains subject to high uncertainty. Medium to longer-term inflation expectations remain firmly anchored in line with the Governing Council’s aim of keeping inflation rates below, but close to, 2% over the medium term. Cross-checking the outcome of the economic analysis with that of the monetary analysis confirms the assessment of low inflationary pressure over the medium term, as money and credit growth continues to slow down. Against this background, we expect price stability to be maintained over the medium term, thereby supporting the purchasing power of euro area households.

As the transmission of monetary policy works with lags, we expect that our policy action will progressively feed through to the economy. Hence, with all the measures we have taken, monetary policy has been supporting the availability of liquidity and the recovery of the euro area economy. Looking ahead, and taking into account the improved conditions in financial markets, not all our liquidity measures will be needed to the same extent as in the past. Accordingly, the Governing Council will make sure that the extraordinary liquidity measures taken are phased out in a timely and gradual fashion and that the liquidity provided is absorbed in order to counter effectively any threat to price stability over the medium to longer term. By so doing, 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 contributing to financial stability. Accordingly, we will continue to monitor very closely all developments over the period ahead.

As regards fiscal policies, many euro area governments are faced with high and sharply rising fiscal imbalances. If not addressed by a clear and credible exit strategy, this could seriously risk undermining public confidence in the sustainability of public finances and the economic recovery. The very large government borrowing requirements carry the risk of triggering rapid changes in market sentiment, leading to less favourable medium and long-term interest rates. This in turn would dampen private investment and thereby weaken the foundations for a return to sustained growth. Moreover, high public deficits and debts may complicate the task of the single monetary policy to maintain price stability. The Governing Council therefore calls upon governments to communicate and implement in a timely fashion ambitious fiscal exit and consolidation strategies based on realistic growth assumptions, with a strong focus on expenditure reforms. Tax cuts should only be considered over the medium term, when countries have regained sufficient room for budgetary manoeuvre. In this regard, the recent ECOFIN Council conclusions, which call for consolidation to start in 2011 at the latest and to go well beyond the structural benchmark of 0.5% of GDP per annum, represent the minimum requirement for all euro area countries. The success of fiscal adjustment strategies will also depend crucially on the transparency of the budgetary procedures and the reliability and completeness of government finance statistics. This is an area in which quick and decisive progress is indispensable for the countries concerned and for the euro area as a whole.

Turning to structural reforms, in all countries more efforts are crucial to support sustainable growth and employment as it is likely that the financial crisis has affected the productive capacity of our economies. Moderate wage-setting, sufficient labour market flexibility and effective incentives to work are required in order to avoid significantly higher structural unemployment over the coming years. Policies that enhance competition and innovation are also urgently needed to speed up restructuring and investment and to create new business opportunities. An appropriate restructuring of the banking sector should also play an important role. Sound balance sheets, effective risk management, and transparent as well as robust business models are key to strengthening banks’ resilience to shocks, thereby laying the foundations for sustainable economic growth and financial stability.

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: Mr Trichet, you have just said that not all liquidity measures will be needed to the same extent and last week your colleague, Mr Weber, indicated that the ECB might not offer 12-month liquidity next year. Has that decision actually been taken and would that be the first step of your exit strategy?

And my second question is whether you will add a spread to the December 12-month repo, given that Sveriges Riksbank today raised interest rates on its longer-term loans to wean banks off its repo operations. I was just wondering what the ECB’s thinking on this is?

Trichet: We will have a rendezvous in a month’s time where we will inform you about the decision we will take on the one-year longer-term refinancing operation (LTRO). At this stage, I will only say that I do not think the market is expecting us to prolong the one-year LTRO beyond that which has already been decided, and I will say nothing to discourage this current market sentiment. But the decision will be taken by the Governing Council at its next meeting in one month’s time.

As regards your second question, I will not comment on the spread, the indexed rates or the absence of them that we may decide. We will examine the situation next month and make our decision then.

Question: I have also got a question on the liquidity provision. You said you might not have to continue all of the operations. Does that mean that when we see the calendar, there might also be fewer supplementary three-month and six-month liquidity-providing operations? Could you please give us an indication of when you will actually release that calendar?

And also, there are still concerns in the market that, while financing conditions are improving, there are still some banks that depend on your support for survival. Can you dispel these concerns?

Trichet: First of all, we will tell all banks, as we always have done, that the extremely bold and important enhanced credit support measures we are providing will not continue indefinitely – we have said that from day one. The language I have used regarding a progressive, gradual phasing-out of our non-conventional measures is exactly the same as we have always used. In any case, it will be gradual.

As regards your second question at the present moment, I will not say anything more than what I have already said in response to today’s very first question, namely that we will meet in one month’s time. At that point we will make a decision and then you will have the response to your questions, not only on the LTRO, but also on the other measures.

Question: Did the Governing Council discuss the recent value of the exchange rate of the euro in the context of financial conditions in the eurozone, and its effect on the outlook for the economy?

Trichet: As always, when we take a decision, we introduce all parameters to make our judgement on the appropriate measures to be taken. I said that present interest rates were appropriate – we have taken all elements into account to take that decision, including of course the information which comes from the exchange rate. You know our very clear position in this respect: we consider that excessive volatility is adverse from the standpoint of the stability and prosperity of the global economy, and of course of the euro area economy. And we appreciate the statements that are made by the Secretary of the Treasury, by the President, by the Chairman of the Federal Reserve (that is to say by the US authorities) on the fact that a strong dollar, vis-à-vis the euro and vis-à-vis the major floating currencies, is in the interests of the United States of America. And I echo these statements, as they are important in the present circumstances.

Question: To follow up that question, you have mentioned about worries of the euro’s fluctuations and high volatility, but would you think that some of the Asian countries’ central banks should attempt to intervene in the market in order to prevent their interest rates fluctuating?

Trichet: To complement our message, which is, I have to say, a joint message on behalf of the major floating currencies, with respect to the emerging economy currencies, particularly of Asia, I would say that we consider that an orderly and progressive appreciation of the currencies of the emerging economies, particularly in Asia, and of course the currency of China, vis-à-vis, again, the major floating currencies, is something which would be welcome for the overall prosperity and appropriate rebalancing of the global economy. But this is not new; it is a message that was included in the last G7 communiqué.

Question: On fiscal policy, you say that you are particularly worried about the budgetary developments in many of the Member States of the EU, considering the recent forecasts from the European Commission. Are you especially preoccupied with the capacity of these countries to finance their debts in the markets, particularly looking at the ones that have bigger spreads in the bonds market, and secondly, would you by now, looking at all these figures going up, debts and deficits, are you worried about the credibility of the Stability and Growth Pact?

Trichet: First of all, we are encouraging the European Commission and the Eurogroup to strictly apply the Stability and Growth Pact. We are in exceptional circumstances, and it is clear that the excessive deficit procedures are generalised. But we have a procedure, we have a joint examination of the situation, we have the recommendation of the European Commission and we have the peer surveillance. And that is something that has to be strictly applied. I echoed what the ECOFIN has said as regards the stepping up of the retrenchment in 2011 at the latest and also the fact that 0.5% was not a sufficient yearly rate of reduction for the structural deficit, in the present circumstances. That is very important. It is a position of the ECOFIN that we consider decisive. We have to understand the situation. If we are not credible – when I say ‘we’ I mean governments and parliaments – as regards the sustainability of the fiscal position in the medium and long term, then a very high price has to be paid. Confidence will be hampered and what we want right now is to improve confidence as much as possible. And the recovery will be hampered by the absence of confidence that would be associated with an absence of credibility on the part of the fiscal policy exit strategy. On top of that, I draw your attention to the cost of refinancing, which depends on the credibility of the strategy. This is something which we have to keep in mind. In practically all cases the signature of the Treasury, even inside the euro area, remains in the eyes of the market the best signature in that particular economy. So if the refinancing of the treasury depends on much higher interest rates then you are hampering most of the private signatures and private entities in the same country. So, good management of fiscal policies is also essential because it permits avoiding the hampering of the financial environment of the whole economy – public sector and private sector. That is the reason why we are so emphatic on this point. We consider that there is absolutely no contradiction between being credible in the medium term as regards sustainable policies, and the recovery itself. It would be a big mistake to consider that there is a contradiction. And of course, you have heard what we are saying in terms of tax alleviation, and what we are saying in terms of optimising the reduction of expenditure.

Question: Lending to the private sector decreased by 0.3% in September from a year earlier. This was the first such drop since records began. Could it hamper the recovery?

Trichet: As you know, we do everything that we can for the supply of credit to be as forthcoming as possible. Not only our monetary policy and interest rates, but also the non-standard measures that we have decided upon and which have been extremely bold, are aiming at permitting the banking sector to continue to finance as well as possible the private sector and the economy in general. We see that our bank lending survey signals that the supply constraints are progressively alleviating, fully in line with our policy. The demand issue – and I mentioned that on behalf of the Governing Council a moment ago – remains, of course, an important issue. As everybody knows, the situation of the real economy has been extremely poor over the last quarters, even if we are now seeing stabilisation. Trade has also been diminishing. Inventories have shrunk. So it is not abnormal that we see demand for credit which is less dynamic than before. But we are doing everything that we can ourselves to continue to permit that there is no supply constraint. We call upon the banks – and it is a very strong call that you can find also in this message of the Governing Council – to do whatever is necessary to repair their balance sheets and to be able to do their job, which is to lend to the private sector and to the real economy; to lend to enterprises and to households. As regards the households, I noted that during the last month, and it has been made public, we have seen an augmentation of loans to households, and it was even a little bit more dynamic than the previous month. So we have the feeling on that point that we are seeing something which is somewhat encouraging. That does not change the fact that over 12 months the figure that you have mentioned is negative.

Question: My first question is: was the decision today to keep interest rates on hold unanimous?

The second one is: you have just been talking about the pick-up in monthly flows to households; do you now think we have reached a turning-point in the credit cycle?

And the final one is: does the ECB think it would be sensible to bring the EONIA rate back in line with the main policy rate before raising interest rates?

Trichet: On the first question, in the decision we took today we were unanimous.

On the second question, as I said, we have loans to households that are slightly more dynamic; monthly flows were positive in September, while they were less positive in August. So this is something that we appreciate of course. Whether it shows a change in the trend and whether we have attained the lowest point and will now be in positive territory month after month, I would remain prudent. But of course this is encouraging. We see a slight acceleration of the positive flows for loans to households month after month. As regards the loans to non-financial corporations, the flows are negative for this month, even if we are still observing the fact that the loans with a maturity of over five years are still positive. But again I am prudent and cautious. I consider that most of these observations come from demand and not from supply constraints. But this does not prevent us from being extremely strong in our message to the financial sector, and to all commercial banks in particular: we think that they still have to do their job as regards the repairing of their balance sheets. We still have in some cases the possibility of using the recapitalisation option that is offered by governments. Banks are far from utilising this option totally, because we are approximately at 60% utilisation of the overall option. So there is possibly room for manoeuvre there. The market now accepts issuance of stocks and shares. Banks can issue stocks and shares on the market and reinforce their capital base. This is also very important. They are making profits now. We call on them to put the profits in reserve and to reinforce through this normal channel their own strength and their own capacity to lend. And of course there is also the issue of bonuses. The more prudent and cautious banks are in this respect, the more they can put aside and reinforce their balance sheets. This is very important.

In response to your final question, it is not our intention at all at the moment to change the way the market is functioning. We are satisfied with the present functioning of the market. The EONIA is close to the deposit rate because of the way we are handling liquidity. It is not our intention to change that in the next period of time.

Question: Firstly, you are now talking about an improvement in economic activity in the second half of the year. Can we assume from that that perhaps you’ve become a bit more optimistic and that maybe you may be revising up your growth forecasts at the next rendezvous, maybe with implications for your monetary policy stance?

And secondly, you have talked about how some of your liquidity measures will not be necessary next year. I guess this subject was discussed today. Could you perhaps give us some idea about the risks that you see in continuing these operations, were they to continue? I imagine that there are worries about bubbles in asset markets or maybe excess profits in the banking sector – perhaps you could tell us what the Governing Council is thinking on that point?

Finally, just on your reference to tax cuts, you have this line which you have inserted this time about “tax cuts should only be considered over the medium term, when countries have regained sufficient room for budgetary manoeuvre”. Is that a reference to a particularly large euro zone country that recently re-elected its chancellor?

Trichet: First of all, we have noted some improvement in the situation. It is clear that week after week we see indications that are a little bit more encouraging than the previous ones. I cannot anticipate what our next staff projections are likely to be: I will comment on them to you in a month’s time. There is a certain probability that the confirmation provided by these better hard data and soft data will permit us to be a little bit more optimistic. I see that this was the case for the European Commission, and it is the case for a number of private sector organisations. But I remain prudent and cautious. As you have seen, we have had signs that are very encouraging recently, for instance the PMI for services, the manufacturing PMI last Monday and yesterday. Today we have the retail sales figures for September, which are less encouraging. I have always said that we have to be cautious and prudent, and that we probably have a bumpy road ahead of us. So, I think we have to remain cautious, even if there is a probability that we will have confirmation over the last half of this year that we are in positive territory. We will see what next year brings. That chapter has not yet been written. I would say that it depends on our capacity to improve the confidence of households and of enterprises, at the euro area level, but also at the European Union level and at the global level. We try to do all that we can to contribute to this improvement and to this better level of confidence in all constituencies. And I think that the people of Europe know that this is what is driving our decisions.

As regards your second question, the risks that are associated with our enhanced credit support measures are those you mentioned. But we concentrate very much, as you know, on the risks to price stability. We consider that the anchoring of inflation expectations has been a major asset for the ECB over this period. A major asset because it permits us to reassure people in the medium and long term, to tell them: “your purchasing power will be protected in the medium and long term”. This is extremely important for confidence, but it also worked extremely well to prevent the materialisation of deflationary risks. We were very happy to have this very solid anchoring, which helped us in the heat of the crisis. We will follow all aspects of the situation very carefully, and of course the market functioning. We will be gradual in our progressive phasing-out. We will do that in a timely and gradual fashion. But again, we will have a rendezvous in a month’s time.

As regards your question on the tax cuts: we are transmitting our message on fiscal policy very clearly to all countries of the euro area without exception, including, of course, the particular country that you mentioned – which, by the way, is not necessarily in the worst situation as regards the figures. So we do, of course, have a message for that country as regards tax cuts and the appropriate timing of tax cuts. We also have a strong message for all other countries, including those which have at present worse figures. There are a number of countries for which this is the case. Just to mention big countries, you certainly have France, you certainly have Spain. And we know, of course, that there are also other countries which are in a situation which is even worse. Again, it is an issue for the euro area as a whole, and we have exactly the same message for all, even if not all are in exactly the same situation. They all have to take into account the fact that a credible strategy for medium-term sustainability is absolutely of the essence and in their own interest to foster recovery. And that is something that we will say tirelessly, because I am not sure that it is fully understood that this is part of the necessary condition for the recovery.

Question: You just mentioned Spain as one of the examples. They are making, now, an effort in raising taxes to make fiscal consolidation, but there are some critics about this – reforms in the labour market, for example – and you know a little bit contradictory for a country like Spain, trying to reduce deficit but…?

Trichet: I responded to that question on one particular country but I don’t want to embark now on a series of questions and answers about individual countries. It was merely to demonstrate that we were not targeting one particular country. I mentioned the other countries only to be sure that not one country in particular is being targeted. The message is for all, and the message for structural reform is also for all. You mentioned structural reforms, we consider them to be a crucial part of our message. One of the lessons of the crisis is that structural reforms are even more of the essence than before the crisis.

Question: Axel Weber recently said that unlimited lending would continue for longer than the longest-term loans, so 12-month lending. Is the comment on unlimited lending representative of the Governing Council?

Trichet: I have already said what I had to say on that.

Question: Didn’t you have the Survey of Professional Forecasters at your Governing Council meeting today? I was just wondering what the results were on the economic forecasts and particularly inflation expectations – also which way they went. Did they differ from three months ago?

Trichet: All the information we have, coming from all surveys including that one, is that we have a solid anchoring of inflation expectations, which I mention as one of our main assets. And the information we are extracting from financial markets, which for a time were signalling some kind of pick-up of the inflation expectations, has now been confirmed as a movement explained by technical factors which is now corrected. So, full confirmation of the solid anchoring of our inflation expectations.


Let me only say that I am very happy that we have the Treaty of Lisbon, which is now ratified by all. Europe has demonstrated a capacity to surmount an immense difficulty in very demanding times, and this is very heartening from the perspective of one of the institutions of Europe which has had to cope with an exceptionally demanding environment over the past two years. We are heartened by the fact that we have found an appropriate way to get out of this situation. I would like to make special mention of those who prepared the Lisbon Treaty and particularly the members of the European Convention. You may remember we invited Chancellor Schmidt and President Giscard d’Estaing to speak about the birth of the ERM, the birth of the European Monetary System, which permitted, after a number of years, the creation of the euro area. Valéry Giscard d’Estaing, Giuliano Amato and Jean-Luc Dehaene were the Chairman and Vice-Chairmen of that Convention. Now Europe has a lot of hard work to do. We have a lot of hard work to do, ourselves. We will strive to continue to be up to our responsibilities and we are happy that the functioning of Europe will be improved in the European Parliament, in the European Commission and in the European Council.


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