European Central Bank: Press conference - introductory statement
Introductory statement by Mr Jean-Claude Trichet, President of the European Central Bank
and Mr Lucas Papademos, Vice-President of the European Central Bank, Frankfurt am Main,
7 February 2008.
* * *
Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our
press conference. Let me report on the outcome of our meeting, which was also attended by
Commissioner Almunia.
On the basis of our regular economic and monetary analyses, we decided at today's meeting
to leave the unchanged. This decision reflects our assessment that
key ECB interest rates
risks to price stability over the medium term are on the upside, in a context of very vigorous
money and credit growth. The current short-term upward pressure on inflation must not spill
over to the medium term. The firm anchoring of inflation expectations over the medium and
long term is of the highest priority to the Governing Council, reflecting its mandate. Against
this background, the Governing Council remains committed to preventing second-round
effects and the materialisation of upside risks to price stability over the medium term. As the
reappraisal of risk in financial markets continues, there remains unusually high uncertainty
about its overall impact on the real economy. While the economic fundamentals of the euro
area are sound, incoming data have confirmed that the risks surrounding the outlook for
economic activity lie on the downside. We will continue to monitor very closely all
developments over the coming weeks.
Allow me to explain our assessment in greater detail, starting with the economic analysis.
The latest information on economic activity around the turn of the year points to a more
moderate pace of growth in the euro area than the quarter-on-quarter rate of 0.8% observed
in the third quarter of 2007. This assessment is in line with indicators for business and
consumer confidence which, while having declined over the past few months, overall remain
consistent with ongoing growth.
Looking ahead, while the slowdown in the economies of some of the euro area's major
trading partners is likely to have an impact on euro area real GDP growth in 2008, both
domestic and foreign demand are expected to support ongoing growth. This assessment is
broadly in line with available forecasts from private and public-sector sources. The
fundamentals of the euro area economy remain sound. The euro area economy does not
have major imbalances . Profitability has been sustained and unemployment rates have
fallen to levels not seen for 25 years. As a result of the improved economic conditions and
wage moderation, the number of people employed and labour force participation have
increased significantly. Consumption growth should therefore continue to contribute to
economic expansion, in line with real disposable income, and investment growth should
provide ongoing support.
That said, uncertainty about the prospects for economic growth is unusually high and the
risks surrounding the outlook for economic activity have been confirmed to lie on the
downside. Risks relate mainly to a potentially broader than currently expected impact of
financial market developments on financing conditions and economic sentiment, with
negative effects on world and euro area growth. Further downside risks stem from the scope
for additional oil and other commodity price rises, concerns about protectionist pressures and
the possibility of disorderly developments due to global imbalances.
With regard to price developments, according to Eurostat's flash estimate the annual HICP
inflation rate was 3.2% in January 2008, compared with 3.1% in December 2007. This
confirms the continued strong upward pressure on inflation in the short term, stemming
mainly from strong increases in commodity prices, in particular oil and food prices, in recent
months.
Looking ahead, the annual HICP inflation rate will most likely remain significantly above 2%
in the coming months and moderate only gradually in the further course of 2008. This
confirms our expectation of a protracted period of temporarily high rates of inflation.
Moreover, it is important to stress that the moderation in the rate of inflation which is
embedded in the December 2007 Eurosystem staff macroeconomic projections is based on
the assumption that the recent rises in commodity prices will be partly reversed, in line with
futures prices. More fundamentally, the projections assume that recent oil and food price
dynamics and their impact on HICP inflation do not have broadly-based second-round effects
on wage and price-setting behaviour.
Risks to this medium-term outlook for price developments are confirmed to lie on the upside.
These risks include the possibility that stronger than currently expected wage growth may
emerge, taking into account high capacity utilisation and tight labour market conditions.
Furthermore, the pricing power of firms, notably in market segments with low competition,
could be stronger than expected. At this juncture, it is therefore imperative that all parties
concerned meet their responsibilities and that second-round effects on wage and
pricesetting stemming from current inflation rates be avoided. In the view of the Governing
Council, this is of key importance in order to preserve price stability in the medium run and
thereby the purchasing power of all euro area citizens. The Governing Council is monitoring
wage negotiations in the euro area with particular attention. Indexation of nominal wages to
the consumer price index should be avoided. Finally, further rises in oil and agricultural
prices, continuing the strong upward trend observed in recent months, as well as increases
in administered prices and indirect taxes beyond those foreseen thus far pose upside risks to
the inflation outlook.
The monetary analysis confirms the prevailing upside risks to price stability at medium to
longer-term horizons. Annual M3 growth, although declining somewhat in December,
remained very vigorous at 11.5%, whereas M1 growth continues to moderate, reflecting the
dampening impact of higher interest rates. Broad money dynamics in recent quarters are
likely to have been influenced by a number of temporary factors, notably the flattening of the
yield curve, which may have supported some substitution into monetary assets. Overall,
taking these special factors into account, a broad-based assessment of the latest data
confirms that the underlying rate of monetary expansion remains strong.
This conclusion is supported by the sustained expansion of loans to the domestic private
sector, which grew at an annual rate of 11.1% in December. Although the growth of
household borrowing has moderated further over the past few quarters, reflecting the impact
of higher key ECB interest rates since December 2005 and cooling housing markets in
several parts of the euro area, the growth of loans to non-financial corporations has
remained very robust. Bank borrowing by euro area non-financial corporations was 14.4%
higher at the end of December 2007 than a year earlier.
For the time being, there is little evidence that the financial market turbulence since early
August 2007 has strongly influenced the dynamics of broad money and credit aggregates. In
particular, according to the available data, increased financial market volatility has not led to
substantial portfolio shifts into monetary assets, as was the case between 2001 and 2003.
Notwithstanding the tightening of credit standards reported in the bank lending survey for the
euro area, continued strong loan growth suggests that the supply of bank credit in the euro
area has not been significantly impaired by the financial turmoil thus far. Further data and
analysis will be required in order to obtain a more complete picture of the impact of the
financial market developments on banks' balance sheets, financing conditions and money
and credit growth.
To sum up, a cross-check of the outcome of the economic analysis with that of the
monetary analysis confirms the assessment that there are upside risks to price stability over
the medium term, in a context of very vigorous money and credit growth and sound
economic fundamentals in the euro area. The impact of the ongoing reappraisal of risk in
financial markets on the real economy is still surrounded by unusually high uncertainty.
Incoming data have confirmed that the risks surrounding the outlook for economic activity lie
on the downside. Accordingly, we will monitor very closely all developments. The Governing
Council remains committed to preventing second-round effects and the materialisation of
upside risks to price stability over the medium term. It is paramount that medium and
longterm inflation expectations remain firmly anchored in line with price stability. Reflecting its
mandate, such anchoring is of the highest priority to the Governing Council.
With respect to fiscal policies, a discretionary fiscal loosening in EU countries should be
avoided. There is ample evidence that activist fiscal policies were not effective in stabilising
European economies but rather led to sustained increases in the ratios of government
expenditure and debt to GDP. Allowing the free operation of automatic stabilisers in countries
with strong fiscal positions and safeguarding the long-term sustainability of public finances
are the best contributions that fiscal policy can make to macroeconomic stability. Countries
with fiscal imbalances are urged to make further progress with consolidation, in line with the
requirements of the Stability and Growth Pact. There is a clear risk that some countries will
fail to comply with the provisions of the preventive arm of the Pact, thereby undermining its
credibility.
Structural reforms help economies to adjust to adverse shocks, foster productivity growth
and increase employment and competition, thereby also helping to reduce inflationary
pressures. In particular, enhancing competition in the services sectors and network
industries, as well as applying adequate measures in the EU agricultural market, would be
conducive to price stability in the euro area.
We are now at your disposal for questions.