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,
4 September 2008.
* * *
Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our
press conference. 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 our regular economic and monetary analyses, at today's meeting we decided
to leave the unchanged. The information that has become available
key ECB interest rates
since the last meeting has confirmed that annual inflation rates are likely to remain well
above levels consistent with price stability for a protracted period of time and that upside
risks to price stability over the medium term prevail. While the growth of broad money and
credit aggregates is now showing some signs of moderation, the still strong underlying pace
of monetary expansion points to continued upside risks to price stability over the medium
term. The latest economic data also confirm the weakening of real GDP growth in mid-2008.
This reflects partly an expected technical reaction to the strong growth seen in the first
quarter as well as dampening effects from global and domestic factors, including direct and
indirect effects from high commodity prices. In this environment, it remains imperative to
avoid broad-based second-round effects in price and wage-setting. In full accordance with
our mandate, we emphasise that maintaining price stability in the medium term is our primary
objective and that we are resolute in our determination to keep medium and long-term
inflation expectations firmly anchored in line with price stability. This will preserve purchasing
power in the medium term and support sustainable growth and employment. On the basis of
our assessment, the current monetary policy stance will contribute to achieving our objective.
We will continue to monitor very closely all developments over the period ahead.
Allow me to explain our assessment in greater detail, starting with the economic analysis.
According to Eurostat's first estimate, following strong quarterly growth of 0.7% in the first
quarter, euro area real GDP contracted by 0.2% in the second quarter of 2008. In terms of
quarter-on-quarter growth, private consumption declined by 0.2% and there was a
perceptible weakness in investment, which fell by 1.2%. Growth in both euro area imports
and exports declined by 0.4%.
Taking into account all available information, the euro area economy is currently
experiencing an episode of weak activity characterised by high commodity prices weighing
on consumer confidence and demand, as well as by dampened investment growth. We
expect this episode to be followed by a gradual recovery. In particular, if persistent, the fall in
oil prices from their peak in July will help strengthen real disposable income, with the level of
employment remaining high and the unemployment rate low by historical standards.
Moreover, growth in the world economy is expected to remain relatively resilient, benefiting
mainly from sustained growth in emerging economies. This should support external demand
for euro area goods and services and thereby investment.
This outlook is also reflected in the September 2008 ECB staff macroeconomic projections
for the euro area. The exercise projects average annual real GDP growth in a range between
1.1% and 1.7% in 2008, and between 0.6% and 1.8% in 2009. In comparison with the June
Eurosystem staff projections, real GDP growth figures for 2008 and 2009 are lower.
In the view of the Governing Council, the uncertainty surrounding this outlook for economic
activity is particularly high at the current juncture and, generally, downside risks prevail.
Risks stem particularly from renewed increases in energy and food prices, which could
dampen consumption and investment. Moreover, downside risks continue to relate to the
potential for the financial market tensions to affect the real economy more adversely than
currently foreseen. The possibility of disorderly developments owing to global imbalances
also implies downside risks to the outlook for economic activity, as do concerns about rising
protectionist pressures.
With regard to price developments, annual HICP inflation has remained considerably above
the level consistent with price stability since last autumn, standing at 3.8% in August
according to Eurostat's flash estimate, after 4.0% in June and July 2008. This worrying level
of inflation is largely the result of both the direct and indirect effects of past surges in energy
and food prices at the global level. Moreover, wage growth has been picking up in recent
quarters, at a time when labour productivity growth has decelerated, resulting in sharp
increases in unit labour costs.
Looking ahead, on the basis of current commodity futures prices, the annual HICP inflation
rate is likely to remain well above levels consistent with price stability for quite some time,
moderating only gradually during the course of 2009. Consistent with this view, the
September ECB staff projections foresee average annual HICP inflation at between 3.4%
and 3.6% in 2008, and between 2.3% and 2.9% in 2009. The higher inflation projections for
2008 and 2009 mainly reflect higher energy prices and, to a lesser extent, higher food and
services prices than assumed previously.
In this context, it is important to recall the conditional nature of the ECB staff projections.
They are based on a number of assumptions that are of a purely technical nature and
unrelated to policy intentions. In particular, the technical assumptions for short-term interest
rates reflect market expectations as at mid-August. Moreover, it should be noted that the
projections are based on the assumption that oil and non-oil commodity prices, while
remaining at elevated levels, will exhibit greater stability over the projection horizon than has
been the case in recent months, in line with prevailing futures prices.
It is the Governing Council's view that, at the policy-relevant medium-term horizon, there are
upside risks to the outlook for price developments. These risks include the possibility of
renewed increases in commodity prices and of previous rises having further and stronger
indirect effects on consumer prices. There is particularly a very strong concern that the
emergence of broad-based second-round effects in price and wage-setting behaviour could
add significantly to inflationary pressures. Moreover, the upside risks to price stability could
be aggravated by unexpected rises in indirect taxes and administered prices.
Against this background, it is imperative to ensure that medium to longer-term inflation
expectations remain firmly anchored at levels in line with price stability. Broad-based
secondround effects stemming from the impact of higher energy and food prices on price and
wagesetting behaviour must be avoided. The Governing Council is monitoring price-setting
behaviour and wage negotiations in the euro area with particular attention. All parties
concerned - in both the private and the public sectors - must meet their responsibilities in
this regard. The Governing Council has repeatedly expressed its concern about the
existence of schemes in which nominal wages are indexed to consumer prices. Such
schemes involve the risk of upward shocks in inflation leading to a wage-price spiral, which
would be detrimental to employment and competitiveness in the countries concerned. The
Governing Council calls for these schemes to be abolished.
The monetary analysis confirms the prevailing upside risks to price stability at medium to
longer-term horizons. In line with our monetary policy strategy, we take the view that the
sustained underlying strength of monetary and credit expansion in the euro area over the
past few years has created upside risks to price stability. Over recent quarters, these risks
appear to have become manifest as inflation has trended upwards.
Not least in the face of the ongoing tensions in financial markets, the monetary analysis
helps to support the necessary medium-term orientation of monetary policy by focusing
attention on the upside risks to price stability prevailing at medium to longer horizons. While
the growth of broad money and credit aggregates is now showing some signs of moderation,
reflecting the policy measures taken since 2005 to address risks to price stability, the strong
underlying pace of monetary expansion points to continued upside risks to price stability over
the medium term.
The currently flat yield curve has given rise to a substitution from longer maturity assets into
monetary instruments, which offer similar remuneration but greater liquidity and less risk.
This substitution has led the current headline rate of M3 growth to overstate the underlying
pace of monetary expansion. At the same time, shifts out of overnight deposits drove the
annual growth rate of M1 down further in July. These effects, as well as other temporary
factors, must be taken into account when assessing monetary developments and their
implications. A broad-based analysis of the data, taking the appropriate medium-term
perspective and allowing for these considerations, confirms the underlying strength of money
growth.
In particular, the pace, maturity and sectoral composition of borrowing from banks suggest
that, at the level of the euro area as a whole, the availability of bank credit has, as yet, not
been significantly affected by the ongoing financial tensions. This notwithstanding, growth in
loans now shows signs of moderation, as previously anticipated, with corporate demand for
credit slowing. At the same time, the growth of loans to households continues to follow the
downward trend observed over the past few years, as a result of higher short-term interest
rates and housing market weakness in several parts of the euro area.
To sum up, a cross-check of the outcome of the economic analysis with that of the
monetary analysis clearly confirms the assessment of upside risks to price stability over the
medium term. The information that has become available since the last meeting of the
Governing Council has confirmed that annual inflation rates are likely to remain well above
levels consistent with price stability for a protracted period of time. The growth of broad
money and credit aggregates is now showing some signs of moderation, but the still strong
underlying pace of monetary expansion points to continued risks to price stability over the
medium term. The latest economic data also confirm the weakening of real GDP growth in
mid-2008. This reflects partly an expected technical reaction to the strong growth seen in the
first quarter as well as dampening effects from global and domestic factors, including direct
and indirect effects from high commodity prices. Against this background, it remains
imperative to avoid broad-based second-round effects in wage and price-setting. In full
accordance with our mandate, we emphasise that maintaining price stability in the medium
term is our primary objective and that we are resolute in our determination to keep medium
and long-term inflation expectations firmly anchored in line with price stability, thereby
preserving purchasing power in the medium term and supporting sustainable growth and
employment in the euro area. On the basis of our assessment, the current monetary policy
stance will contribute to achieving our objective. We will continue to monitor very closely all
developments over the period ahead.
Regarding fiscal policy, budget plans for 2009 should fully reflect existing policy
commitments. This implies that euro area countries with relatively large fiscal deficits need to
specify much more ambitious and concrete consolidation measures, especially on the
expenditure side. Countries that have already achieved their medium-term budgetary
objectives need to ensure that they maintain sound structural fiscal positions. At the current
juncture, the steady pursuit of stability-oriented fiscal policies would help to contain
inflationary pressures and provide the required budgetary room for manoeuvre to allow
automatic stabilisers to contribute to smoothing the business cycle.
Turning to structural policies, measures that reduce adjustment costs and promote
moderate unit labour cost growth are of the utmost importance in the current economic
circumstances. While this is crucial in all euro area countries, it is particularly pressing in
those that have experienced a significant loss of cost and price competitiveness over recent
years and where unemployment has already started to rise. Moreover, fostering productivity
through enhanced investment in innovation and education enlarges the scope for increases
in real incomes in the longer run.
We are now at your disposal for questions.