Ladies and gentlemen, it is our pleasure to welcome you to this press conference. The Vice-President and I will now report on the outcome of today’s meeting of the Governing Council of the ECB.
All in all, the information which has become available since the last meeting of the Governing Council means that our assessment of price stability over the medium term is unchanged. While short-term HICP inflation rates remain subject to certain volatilities, particularly in relation to oil prices, there is no significant evidence of underlying domestic inflationary pressures building up in the euro area. Accordingly, we have left the key ECB interest rates unchanged at their historically low levels. However, upside risks to price stability over the medium term remain. Continued vigilance is therefore of the essence with regard to those risks.
I shall now explain our assessment in more detail.
Turning first to the economic analysis, recent data on economic activity, as well as survey information, suggest ongoing moderate growth in the fourth quarter of 2004 and a broadly unchanged situation around the new year. Looking ahead, the conditions remain in place for economic growth to pick up and become more self-sustained in the course of the year. Global growth remains solid, providing a favourable environment for euro area exports. On the domestic side, investment is expected to continue to benefit from very favourable financing conditions, improved earnings and greater business efficiency. Moreover, consumption growth should develop in line with real disposable income growth.
High and volatile oil prices and persistent global imbalances pose downside risks to growth. On the domestic side, reducing uncertainties associated with the extent and pace of fiscal and structural reforms would support consumption, as such uncertainties seem to be limiting private sector expectations of future real disposable income growth. As regards exchange rates, we confirm our position, expressed when the euro rose sharply, that such moves are unwelcome and undesirable for economic growth.
Turning to consumer prices, annual HICP inflation stood at 2.4% in December, up from 2.2% in November. Data for January are not yet available, but there are indications of a decline from December’s inflation rate. Over the coming months, volatility in annual inflation rates is likely to persist, reflecting in particular oil price developments. Looking further ahead, on the basis of the information available so far, HICP inflation is expected to fall below 2% in the course of 2005, provided no further adverse shocks occur. At the current juncture, the evidence does not suggest that stronger underlying domestic inflationary pressures are building up in the euro area. Wage increases have remained contained over recent quarters and, in the context of ongoing moderate economic growth and weak labour markets, this trend should continue in the future.
However, several upside risks to price stability need to be taken into account. Concerns relate in particular to future oil price developments and, more generally, to the potential risk of second-round effects in wage and price-setting throughout the economy. In addition, developments in indirect taxes and administered prices need to be monitored closely.
Further insight into the outlook for price developments at medium to longer-term horizons is provided by the monetary analysis. The latest monetary data confirm the strengthening of M3 growth observed since mid-2004. This increasingly reflects the stimulative effect of the historically very low level of interest rates in the euro area. As a result of the persistently strong growth in M3 over the past few years, there remains substantially more liquidity in the euro area than is needed to finance non-inflationary economic growth. This could pose risks to price stability over the medium term and warrants vigilance.
The very low level of interest rates is also fuelling private sector demand for credit. Growth in loans to non-financial corporations has picked up further in recent months. Moreover, demand for loans for house purchase has continued to be robust, contributing to strong house price dynamics in several euro area countries. The combination of ample liquidity and strong credit growth could, in some parts of the euro area, become a source of unsustainable price increases in property markets.
To sum up, the economic analysis suggests that underlying domestic inflationary pressures remain contained. However, medium-term upside risks to price stability persist and need to be monitored closely. It is important that higher inflation in the short term does not become entrenched in long-term inflation expectations and wage and price-setting behaviour. Cross-checking with the monetary analysis supports the case for continued vigilance with regard to the materialisation of risks to price stability over the medium term.
With regard to fiscal policies, a thorough assessment of the most recent updates of Member States’ stability programmes is under way. It is essential that Member States comply with their commitments under the Stability and Growth Pact in the implementation of 2005 budgets and in the setting of medium-term objectives. Where relevant, this implies a correction of excessive deficits this year and determined progress towards budgetary positions which are close to balance or in surplus. Such measures should prevent a repeat of past outcomes, when insufficient adjustments were made. In light of the need to prepare for population ageing, fiscal strategies should also be part of a comprehensive reform strategy aimed at raising Europe’s growth potential.
Discussions on the European fiscal framework now need to be brought to a convincing conclusion. With a view to fostering confidence, the Governing Council supports proposals that strengthen the preventive arm of the Stability and Growth Pact, which deals with the surveillance of budgetary positions. As regards the corrective arm of the Pact, the mechanisms in place must remain strong and credible in all respects. It would therefore be counterproductive to change the Regulations, dilute the 3% deficit limit or weaken the excessive deficit procedure. The fiscal framework enshrined in the Treaty on European Union and in the Stability and Growth Pact is a cornerstone of Economic and Monetary Union and thus of central importance for the cohesion of Monetary Union itself. It is important to avoid any doubts about the effectiveness of the surveillance process and the soundness of the fiscal policies of the single currency area in the long run, as such doubts would ultimately lead to higher risk premia and higher real interest rates in the euro area.
Regarding structural reforms, the ECOFIN Council has recently endorsed the Annual Report on Structural Reforms 2005, prepared by the Economic Policy Committee. The Governing Council fully supports the ECOFIN Council’s conclusion that “particular attention should be given to increasing employment rates, especially in the context of ageing populations, within the continuing need to increase growth by raising both employment and productivity.” To this end, we strongly support the Commission in its determination to promote the renewed Lisbon Strategy and we encourage national governments to show their determination in this regard by implementing structural reforms in Europe. Closing the existing implementation gap is essential in order to reap the benefits of reforms, in terms of both a higher growth potential in the medium term and improved consumer and business confidence in the short run.
We are now at your disposal for questions.
Question: I have two questions. The first question: did the Governing Council discuss raising interest rates at today’s meeting? And, secondly, looking ahead to the G7 meeting in London: if the Chinese do not signal a willingness to become more flexible in terms of their currency peg to the dollar, do you think that could be harmful for global growth prospects?
Trichet: On the first point, we were exactly in the same state of mind as we were three weeks ago when I reported on the previous Governing Council meeting. After a very thorough examination of the situation, including – as I have said – both economic and monetary analyses, we concluded that our current rates were in line with this overall analysis and that we had to remain vigilant. And I insist on this element of vigilance – it is something that is extremely important. It is because everybody knows that we are vigilant that expectations, which we have to look at very carefully, are in line with our definition of price stability. Furthermore, I would say that the permanent sentiment in some circles that there is a constant arbitrage between price stability, on the one hand, and growth and job creation, on the other, is not at all what we experience and trust. On the contrary, we believe that by being vigilant and credible on price stability, we are preserving a financial environment that is, as you know, extremely favourable in our view. And I think that, arithmetically, we can demonstrate very convincingly that this financial environment is historically favourable for growth and job creation when you look at the yield curve applying to 306 million inhabitants in the euro area. Now, on China, I will only say that I am not in the habit of announcing in advance what will happen, or not happen, at the next G7 meeting under the Presidency of Gordon Brown in London. We, and you, will see then exactly what the meeting produces – I will be giving a press briefing together with Jean-Claude Juncker on the outcome. Until now, our position has been pretty well known, and you have read the previous G7 Communiqué. So, you have seen what we have signed and what message we have sent.
Question: The US Fed seems to be afraid of excessive risk-taking in the financial markets. Do you see the danger of a bond – Treasury bond or corporate bond – bubble in the euro area? And, a second question, how high would you see the danger of the house price bubble in certain parts of the euro area?
Trichet: On the first question, I would say the following: it is an observation that we have made at the ECB, which is also largely shared by our colleagues, of whom you have mentioned the Federal Reserve. I would say that it is perhaps also the G10’s sentiment that we are currently observing quite a low level of spreads and volatility in financial markets and, in some cases a certain under-pricing of some risks. It seems to me that the remark you were alluding to is part of this overall sentiment. It is nothing alarming that we perhaps have such a phenomenon. With regard to our own bond market, as I have said very frequently, the fact that we are credible in delivering price stability in line with our definition over time is part of the fact that our benchmark in the euro area with respect to euro-denominated long-term instruments is low because it incorporates a relatively low level of inflationary expectations. That does not prevent us from being vigilant. And, as you know, when we extract the inflationary expectations from index bonds, we see – depending on our analysis – that we are at levels which call for vigilance even if they allow very low long-term rates. On top of that, of course, you might have the spreads I have mentioned, the different assessments of risks that are generally quite low at a global level. I do not want to be alarmist, but I must say that we have, perhaps, a rather low appreciation of risks by markets at the European and global level.
Your second question on house prices: we have said very clearly what our judgement was. In the euro area – and it is the euro area as a whole that we have to look at – we have signs that credit dynamism, might foster asset price increases in the real estate sector. And this calls for vigilance. We have already said that it calls for vigilance. I would say that, at the moment, at the level of the full body of the euro area, taking account of the full body of the euro area, we are not at a state of alarm. But there are risks that could materialise, and we have to be vigilant.
Question: I have two questions: first, did you revise down your inflation forecast given the fact that you also admitted that inflation was coming down a bit? And second, I would like to have your comments on this. It was written somewhere that, behind the scenes, European Central Bank officials are saying that they are now more at ease with the proposals to reform the Stability and Growth Pact and, moreover, that Juncker’s message is very comforting. The Stability Pact in fact “is in need of an update,” said another central banker. He proceeded to say that “the sanctions procedure especially had become overly formalised and rigid.” Do you agree with that? It is said that this is a high-ranking Central Bank official. Is it a topic for discussion at the Central Bank?
Trichet: On the first question regarding the inflation forecast, we have regular projections and we will tell you when we have the next quarterly projections. We have revised absolutely nothing at this stage. We have observed a high level of volatility. I mentioned the figures for the last month, and we expect the figures for this month to be lower, perhaps significantly lower. But we expect that there could again be ups and downs over the coming months. As you know, headline inflation depends arithmetically very much on shocks, in particular to the evolution of oil prices. If there are no new shocks, and with all other things being equal, we expect inflation to fall below 2% in the course of this year, which would bring it into line with our definition of price stability. I will not be more precise at the present moment. We should be conscious of the fact that there is volatility. We are reasoning in the medium term and our credibility is enshrined in the economic agents´ and market vision on a medium to long-term and even to very long-term basis. As regards the rumours, I never comment on rumours. If it is a quote, please tell me who said it. The ECB’s position is very clear – we are open to improvement in the preventive arm of the Pact. This has been our position for one year and we have said that very clearly. We think it is important. All the difficulties we have been observing stem from ignoring the fact that, as in the biblical reference during good times you had to put aside what was necessary to weather what would happen when you were in difficult times, and that is something which is very important. We are fully on board for the proposals made by the Commission. Any proposals that could emerge from the EU Council will certainly be examined very carefully by us, with the idea that we can improve things. As regards the corrective arm of the Pact, we have always thought it was a very important part of EMU (Economic and Monetary Union). The EMU has three letters: U stands for Union, that is clear. M means Monetary Union and E refers to Economic Union. And in Economic Union, the Stability and Growth Pact, and its corrective arm, is very important. You know the reasoning of the ECB. We do not have a federal government, we do not have a federal budget, but we have a single currency. Had we not had the Stability and Growth Pact, it could have been said that we were putting the cart before the horse, because we were very bold in introducing a single currency without having a federal budget. So we are very attached to that and we take it that it is something which is important. We are not responsible either for the proposal or for the final decision. Legally the Commission is responsible for the proposal and the Council is responsible for the final decision. They know what our position is and they know what our reasoning is. Each institution must assume its responsibility. We will see.
Question: Two questions: one is regarding the bond market. I wonder if you could elaborate a little bit on exactly how you would tackle this as a policy-maker. To some extent, you are simply a victim of your own credibility: if you ask a bond trader why they trade on such low yields and such low spreads, they say “because we trust Jean-Claude Trichet of the European Central Bank”. This is in essence the credibility trap that you are in. So I wonder if you could tell us, how you deal with that? My second question relates to a comment that you expect the recovery in the euro zone to be more self-sustained later in the year. You have outlined several factors for that, but I wondered whether you could also “colour” for us how those factors come together to make the recovery self-sustaining in a way that it was not in 2004.
Trichet: On the first point, I will not elaborate more on what I have already said. On top of the real interest rates, which explain what you are observing in the market, you have the inflationary expectations, which give you the benchmark for nominal interest rates. Then you have all the spreads corresponding to the risk assessment depending on the quality of the various signatures. And it is there that you might have the under-pricing of risks I mentioned. I will not comment on the real interest rates, which have to be analysed at a global level and not only at the level of Europe or the US. We are very proud of the credibility of the Governing Council, the ECB, the Eurosystem and the euro in delivering price stability. But, as you know, we have to be vigilant. There is no time for complacency. We would certainly not say that we are in a credibility trap, that we are “too credible” and are delivering too low long-term market interest rates. We are very proud of this credibility: we consider it a decisive element for us, confirming that inflationary expectations of economic agents are in line both with price stability and through price stability with what is best for European growth and job creation. So, to have these low levels of medium and long-term market interest rates is a major contribution to European growth and job creation, which is associated with our credibility. On your second question on sustainable growth, we consider it our responsibility to deliver price stability. As I have already said, there is no contradiction between price stability and the best environment possible for growth and job creation. We have proved that arithmetically, in a very convincing fashion to the extent that you even say, we are delivering too low market interest rates! The only thing I would say is that a good, credible monetary policy is necessary for growth and job creation. It is not sufficient per se – if it were, we would not need a good fiscal policy, appropriate structural reforms, and an appropriate handling of costs in general in the economy. So we are one of the elements which is contributing to growth and job creation. We are absolutely convinced of that. But fortunately it is also the conviction of the Council, and it is certainly the intimate conviction of the new Commission – President Barroso and Commissioner Almunia are very, very clear on that – that structural reforms are of the essence. It is the focus of the new Commission, if I have understood correctly, to facilitate and permit the delivery of effective reforms. That is the way to increase Europe’s growth potential and to produce more sustainable growth and more job creation. It is not a “magic of a fancy concept”! We know that economies that have embarked on these reforms have experienced higher growth and job creation and the effective fight against unemployment. So, that is the analysis at present. We are very much in agreement on that – the problem is how to deliver efficiently. That is why we are very happy with the work done by Wim Kok: we think that his proposals were important and we are very attentive to what will be done now. But to be efficient in the delivery, you have to convince people: we are living in democracies and that is why communication is essential. The day when the people of Europe are convinced that reforms will really produce higher growth and job creation, we will certainly be much more efficient and effective in this reform programme.
Question: Two questions, if I may. First, as you are aware, national regulators are investigating some of the euro area bond trading carried out by Citigroup last year and allegations that they were manipulating the market. Is the ECB also worried about the behaviour of this bank in this particular transaction? And the example that maybe it sets, and all the intentions that lay behind that deal? And secondly, on house prices, I just wanted to ask you again about your feelings towards this expansion in lending for house purchases. Because in a way, you should be welcoming it because it is one of the few things that is actually boosting consumer confidence and consumer spending in the euro area.
Trichet: On bond trading: we in the ECB have an enormous stake in markets functioning fairly and correctly. This is absolutely decisive. Market economies are based on market assessments, market price-setting, which is, and must be, fair. If it is not fair, we would be far from the optimum in terms of economic functioning. And all what we are aiming for would not function correctly. So I make this point very strongly. Second, regulators and surveillance authorities are doing what they have to do in the precise case you mentioned and we will see what the result is of this investigation. I do not want to pre-empt the result in any respect, but the principles I have mentioned are very strong, which calls, of course, for as thorough as deep and strict as possible an examination of what has happened. As regards house prices, I do not want to repeat what I said: at the level of the whole euro area we are not at a state of alarm. In some parts of the euro area we see phenomena that are not, in our view, unsustainable and certainly are not welcome and warrant vigilance.
Question: You said you are not alarmed about house prices and asset prices…
Trichet: …at the level of the euro area as a whole…
Question: … and in your statement you said that the combination of ample liquidity and strong credit growth could become a source of unsustainable price increases in property markets. What is the function of a forward-looking monetary policy and when do you have to react: before the bubble bursts or after the bubble has burst?
Trichet: No, before the bubble bursts, as you know pretty well. And that is the reason why I insist on continued vigilance, permanently. We also insist – although it wasn’t mentioned in the question – on the fact that the monetary analysis calls for vigilance, as I said, because we see dynamism of M3 and dynamism, by definition, of the counterparts of M3 which means that we – from that standpoint– can see that we could have an overhang of liquidity. And even if, in the short run, this does not necessarily materialise in inflation, in the long run we see– and this is the reason why we have a monetary analysis – that it can materialise in inflation. So I would say that we follow this evolution of the monetary aggregates with great care. We see phenomena that have to be monitored very closely. We could see that the explanation we had on the portfolio shifts and then the unwinding of portfolio shifts, which was a convincing element in understanding what was happening, does not seem now in our own analysis to be convincing in explaining the present dynamism of M3. So it really calls for vigilance. That is clear.
Question: I have a question concerning proposals to sell IMF gold or even revalue it to finance debt relief. What is the position of the Eurosystem?
Trichet: That is not something that we have discussed recently.
Question: I was asking whether you think that China can adjust its currency peg without undergoing banking and capital market reform first. If it did move to a basket of currencies, what would your reaction be if that included the euro?
Trichet: Again, we will be meeting the Chinese delegation in London this week. And I will certainly not mention anything in advance of our meeting other than say what we have already conveyed to the Chinese and they know exactly our sentiment on a possible better functioning of the global economy, if some moves were to be made. I will not say any more on that because, again, I will be more explicit in London later.
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