European Central Bank: Press conference - introductory statement
Introductory statement by Mr Jean-Claude Trichet, President of the European Central Bank, Frankfurt
am Main, 12 April 2007.
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Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to today's press
conference. Let me report on the outcome of our meeting, which was also attended by the President of
the Eurogroup, Prime Minister Juncker, and Commissioner Almunia.
On the basis of our regular economic and monetary analyses, we decided at today's meeting to leave
the key ECB interest rates unchanged. The information that has become available since our last
meeting has further underpinned the reasoning behind our decision to increase interest rates in
March. It has also confirmed that the medium-term outlook for price stability remains subject to upside
risks, so that very close monitoring of all developments is warranted. Indeed, it is essential to ensure
that risks to price stability over the medium term do not materialise. This will contribute to ensuring that
medium to longer-term inflation expectations in the euro area remain solidly anchored at levels
consistent with price stability. Such anchoring is a prerequisite for monetary policy to make an ongoing
contribution towards supporting sustainable economic growth and job creation in the euro area. Given
the favourable economic environment, our monetary policy continues to be on the accommodative
side, with the key ECB interest rates moderate, money and credit growth vigorous, and liquidity in the
euro area ample by all plausible measures. Therefore, looking ahead, acting in a firm and timely
manner to ensure price stability in the medium term is warranted.
Turning first to the economic analysis, recent information has underpinned our assessment of
ongoing robust economic growth dynamics in the euro area. Eurostat's second estimate has confirmed
quarter-on-quarter real GDP growth in the fourth quarter of 2006 at 0.9%. Over the whole year 2006,
real GDP grew by 2.7% in the euro area, unadjusted for the number of working days. On the basis of
the latest data, survey releases and various indicator-based estimates, it appears that robust growth is
continuing in the first half of 2007.
Looking further ahead, the conditions are in place for the euro area economy to grow solidly. As
regards the external environment, global economic growth has become more balanced across regions
and, while moderating somewhat, remains strong. External conditions thus continue to provide support
for euro area exports. Domestic demand in the euro area is also expected to maintain its relatively
strong momentum. Investment should remain dynamic, benefiting from an extended period of
favourable financing conditions, balance sheet restructuring, accumulated and ongoing strong
corporate earnings, and gains in business efficiency. Consumption should also strengthen further over
time, in line with developments in real disposable income, increasingly supported by employment
growth and improving labour market conditions.
The risks surrounding this favourable outlook for economic growth are broadly balanced over the
shorter term. At longer horizons, downside risks remain, stemming mainly from the external side. They
relate to fears of a rise in protectionist pressures, the possibility of further increases in oil prices and
concerns about possible disorderly developments owing to global imbalances.
As regards price developments, according to Eurostat's flash estimate, annual HICP inflation was
1.9% in March 2007, compared with 1.8% in the first two months of the year. A detailed breakdown of
the March HICP data is not yet available. Looking ahead, barring further increases in oil prices, last
year's volatility in energy prices will lead to significant base effects, thereby affecting the profile of
annual inflation rates this year. On the basis of the current level of oil prices and oil price futures,
annual inflation rates are likely to fall in the months to come, before rising towards the end of the year
to hover again at around 2%.
Over the policy-relevant medium-term horizon, the outlook for price developments remains subject to
upside risks. These relate to the possibility of further oil price rises and additional increases in
administered prices and indirect taxes beyond those announced and decided thus far. More
fundamentally, stronger than currently expected wage developments could pose significant upward
risks to price stability, not least in view of the favourable momentum in labour markets observed over
the past few quarters. It is therefore crucial that the social partners continue to meet their
responsibilities. In this context, wage agreements should take into account price competitiveness
positions, the still high level of unemployment in many economies, as well as productivity
developments. The Governing Council monitors the wage negotiations in euro area countries with
particular attention.
The monetary analysis confirms the prevailing upside risks to price stability at medium to longer
horizons. Annual M3 growth increased further to 10.0% in February, from 9.9% in January. At the
same time, the annual growth rate of loans to the private sector, while remaining very strong at 10.3%
in February, showed some further signs of moderation. Whereas in previous months this moderation
reflected a decline in the growth rate of household borrowing in an environment of rising mortgage
lending rates throughout the euro area and a slowing increase in house prices in some regions, in
February it was due to a moderation in the growth of loans to non-financial corporations. When
assessing such developments, it should be borne in mind that monthly figures can be influenced by
temporary factors and should thus not be overstated. Indeed, the strong growth in private sector credit
reflects the continuation of the strong trend in the growth of borrowing by non-financial corporations
seen since mid-2004.
When put in perspective, the latest data continue to point to vigorous dynamics in the underlying rate
of broad money expansion in the euro area. The continued robust expansion of money and credit
reflects the low levels of interest rates over a prolonged period of time and the strengthening of
economic activity in the euro area. Rising short-term interest rates, in combination with low long-term
interest rates, have had an impact on developments in the individual components of monetary and
credit aggregates, but have thus far had only a limited influence on the overall strength of monetary
developments. Following several years of robust monetary growth, the liquidity situation in the euro
area is ample by all plausible measures. In this environment of ample liquidity, the continued vigorous
expansion of money and credit points to upside risks to price stability over the medium to longer term.
Monetary developments therefore continue to require very careful monitoring, particularly against the
background of a solid expansion in economic activity and continued strong property market
developments in many parts of the euro area.
To sum up, in assessing price trends it is important to look through any short-term volatility in inflation
rates. The relevant horizon for monetary policy is the medium term. Risks to the medium-term outlook
for price stability remain on the upside, relating in particular to stronger than currently expected wage
developments in a context of ongoing robust growth in employment and economic activity. Given the
vigorous monetary and credit growth in an environment of already ample liquidity, a cross-check of
the outcome of the economic analysis with that of the monetary analysis supports the assessment that
upside risks to price stability prevail over the medium to longer term. Accordingly, the Governing
Council will continue to monitor very closely all developments. Indeed, it is essential to ensure that
risks to price stability over the medium term do not materialise. This will support the solid anchoring of
medium to longer-term inflation expectations in the euro area at levels consistent with price stability.
Therefore, looking ahead, acting in a firm and timely manner to ensure price stability in the medium
term remains warranted.
Concerning other policy areas, the Governing Council welcomed the recommendations addressed to
the euro area countries in the 2007 update of the Integrated Guidelines, which was endorsed by the
European Council at its meeting on 8 and 9 March, particularly to speed up fiscal consolidation, to
improve the quality of public finances, to foster competition and integration, and to promote labour
market reforms. Indeed, as regards fiscal policy, it is of the utmost importance to use the momentum
of the improved economic situation and to press ahead vigorously with budgetary consolidation.
Government deficit and debt-to-GDP ratios in euro area countries in 2006 have turned out to be
significantly better than anticipated. But this positive outcome largely reflects buoyant tax revenues in
the context of a favourable macroeconomic environment, offsetting in some cases higher than planned
public expenditure. The better than expected fiscal outcomes in 2006 should lead to more ambitious
targets for 2007 and beyond, allowing revenue windfalls to be fully allocated to deficit and debt
reduction. Furthermore, procyclical fiscal policies should be avoided in all countries. This is of vital
importance to ensure fiscal sustainability in preparation for the impact of ageing populations and is
fully in line with the revised Stability and Growth Pact. Reviewing public expenditure and taxation so as
to improve the quality of public finances would additionally foster economic growth and fiscal
sustainability. We also support ambitious structural reforms, which would further contribute to the
smooth functioning of Monetary Union and support growth potential and job creation. In particular,
improving labour market flexibility to better align wage and productivity developments and facilitating
labour mobility would further strengthen the resilience of countries to shocks and ensure their
competitiveness. We are now at your disposal for questions.