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,
15 January 2009.
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Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our first
press conference of 2009. Let me therefore wish you all a very Happy New Year. I would
also like to take this opportunity to welcome Slovakia as the 16th country to adopt the euro
as its currency. Accordingly, Mr Šramko, the Governor of Národná banka Slovenska,
became a member of the Governing Council on 1 January 2009. Following the adoption of
the euro by Slovakia there are now 329 million citizens using the euro as their currency.
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 reduce the interest rate on the main refinancing operations of the Eurosystem by a
further 50 basis points, bringing the total reduction since 8 October 2008 to 225 basis points.
Today's decision takes into account that inflationary pressures have continued to diminish,
owing in particular to the further weakening in the economic outlook. Looking forward, we
continue to expect inflation rates in the euro area to be in line with price stability over the
policy-relevant medium-term horizon, thereby supporting the purchasing power of incomes
and savings. After today's decision we consider risks to price stability over the medium term
to be broadly balanced. This takes into account the latest economic data releases and
survey information, which add clear further evidence to the assessment that the euro area is
experiencing a significant slowdown, largely related to the effects of the intensification and
broadening of the financial turmoil. Both global demand and euro area demand are likely to
be dampened for a protracted period. Monetary expansion is moderating further, supporting
the assessment that inflationary pressures and risks are diminishing. All in all, the level of
uncertainty remains exceptionally high. The Governing Council will continue to keep inflation
expectations firmly anchored in line with its medium-term objective of inflation rates below,
but close to, 2%. This supports sustainable growth and employment and contributes to
financial stability. Accordingly, 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.
Since September 2008 the financial market turmoil has intensified and broadened. Tensions
have increasingly spilled over from the financial sector into the real economy. As a result,
economic activity throughout the world, including in the euro area, has weakened further. In
particular, foreign demand for euro area exports has declined, and euro area domestic
activity has contracted in the face of weaker demand prospects and tighter financing
conditions. The survey data and monthly indicators for November and December that have
become available since our last meeting clearly point to a further weakening of economic
activity around the turn of the year, indicating the materialisation of previously identified
downside risks to activity.
Looking further ahead, on the basis of our current analysis and assessment, we continue to
see global economic weakness and very sluggish domestic demand persisting in the coming
quarters as the impact of the financial tensions on activity continues. At the same time, we
expect the fall in commodity prices to support real disposable income in the period ahead.
Furthermore, the euro area should over time reap the full benefit from the effects of policy
measures announced over recent weeks.
In the view of the Governing Council, this outlook for the economy remains surrounded by an
exceptionally high degree of uncertainty. Overall, risks to economic growth remain clearly on
the downside. They relate mainly to the potential for a stronger impact on the real economy
of the turmoil in financial markets, as well as to concerns about the emergence and
intensification of protectionist pressures and to possible adverse developments in the world
economy stemming from a disorderly correction of global imbalances.
It is crucial that all parties concerned make their contribution to lay sound foundations for a
sustainable recovery. For this to materialise as early as possible, it is of the utmost
importance to maintain discipline and a medium-term perspective in macroeconomic
policymaking, pursuing a stability-oriented and sustainable approach. This is the best way to
preserve and enhance confidence. The significant measures being implemented by
governments to deal with the financial turmoil should help to ensure trust in the financial
system and to ease constraints on credit supply to companies and households.
With regard to price developments, annual HICP inflation has declined substantially since the
middle of 2008, when it peaked at 4.0%. HICP inflation was 1.6% in December, after 2.1% in
November. As we have emphasised on previous occasions, the significant decline in
headline inflation in the second half of 2008 reflects mainly the sharp falls in global
commodity prices over the past few months.
Looking forward, lower commodity prices and weakening demand confirm that inflationary
pressures in the euro area are diminishing. Owing mainly to base effects stemming from the
past behaviour of energy prices, headline annual inflation rates are projected to decline
further in the coming months, possibly reaching very low levels at mid-year. However, also
owing to base effects stemming from past energy price developments, inflation rates are
expected to increase again in the second half of the year. Hence it is likely that HICP inflation
rates will fluctuate sharply during 2009. Such short-term volatility is, however, not relevant
from a monetary policy perspective. Looking over the policy-relevant, medium-term horizon,
annual HICP inflation is expected to be in line with price stability. This assessment is
supported by available indicators of inflation expectations for the medium term.
Risks to price stability over the medium term are broadly balanced. Unexpected further
declines in commodity prices or a stronger than expected slowdown in the economy could
put downward pressure on inflation, while upside risks to price stability could materialise
particularly if the recent fall in commodity prices were to reverse or if domestic price
pressures turn out to be stronger than assumed. It is therefore crucial that price and
wagesetters fully live up to their responsibilities.
Turning to the the latest evidence confirms a moderating rate of
monetary analysis,
monetary expansion in the euro area. Monetary trends therefore support the view that
inflationary pressures and risks are diminishing.
In analysing monetary developments it should be recognised that the intensification of the
financial market turmoil since mid-September has the potential to affect the evolution of
monetary aggregates significantly. Recent money and credit data indicate that this has
already had a substantial impact on the behaviour of market participants. Both the broad
aggregate M3 and, in particular, the components of M3 that are most closely related to the
ongoing financial tensions - such as holdings of money market funds - have shown high
month-to-month volatility of late. Overall, however, looking to the extent possible through this
volatility, the rate of broad money growth continues to moderate in line with the trend
established over the past 18 months, with the intensification of financial tensions since
September leading to significant substitution among the components of M3, rather than, at
least so far, sharp changes in the trend of M3 itself.
Turning to the evolution of bank loans, the tightening of financing conditions resulting from
the intensification of the financial tensions has contributed to a slowdown in the flow of
monetary financial institution (MFI) loans to the non-financial private sector in recent months.
More data and further analysis are necessary to form a robust judgement about the severity
and scope of credit constraints and their possible implications for economic activity.
To sum up, we decided to reduce the interest rate on the main refinancing operations of the
Eurosystem by a further 50 basis points, bringing the total reduction since 8 October 2008 to
225 basis points. Today's decision takes into account that inflationary pressures have
continued to diminish, owing in particular to the further weakening in the economic outlook.
The Governing Council recalls its operational decision, taken on 18 December 2008, to
widen again the corridor formed by the rates on the Eurosystem's standing facilities as of 21
January 2009. Looking forward, we continue to expect inflation rates in the euro area to be in
line with price stability over the policy-relevant medium-term horizon, thereby supporting the
purchasing power of incomes and savings. After today's decision we consider risks to price
stability over the medium-term to be broadly balanced. This takes into account the latest
economic data releases and survey information, which add clear further evidence to the
assessment that the euro area is experiencing a significant slowdown, largely related to the
effects of the intensification and broadening of the financial turmoil. Both global demand and
euro area demand are likely to be dampened for a protracted period. A cross-check of the
outcome of the economic analysis with that of the monetary analysis confirms this view.
Monetary expansion is moderating further, supporting the assessment that inflationary
pressures and risks are diminishing. All in all, the level of uncertainty remains exceptionally
high. The Governing Council will continue to keep inflation expectations firmly anchored in
line with its medium-term objective of inflation rates below, but close to, 2%. This supports
sustainable growth and employment and contributes to financial stability. Accordingly, we will
continue to monitor very closely all developments over the period ahead.
Regarding fiscal policies, the Governing Council welcomes the European Council's
reconfirmation of its full commitment to sustainable public finances. In this respect, the
current economic situation calls for particular prudence with regard to the adoption of
extensive fiscal stimulus measures, taking into account the particular fiscal situation in each
country. The operation of automatic stabilisers will provide a relatively large and powerful
fiscal impulse to the weakening economy, in addition to already announced expansionary
fiscal policy measures and the government support for the banking sector. Taken together,
the additional measures decided so far put a considerable burden on public finances in a
large number of euro area countries. If not reversed in due time, this will negatively affect in
particular the younger and future generations. It is therefore essential to return to a credible
commitment to medium-term budgetary objectives as soon as possible. The significant fiscal
loosening and the implied increase in government debt should in any case not risk
undermining public confidence in the sustainability of public finances, thereby detracting from
the effectiveness of a fiscal stimulus.
Turning to structural policies, the ongoing period of weak economic activity and high
uncertainty about the economic outlook imply the need to strengthen the resilience and
flexibility of the euro area economy. Product market reforms should foster competition and
speed up effective restructuring. Labour market reforms should help to facilitate appropriate
wage-setting, as well as labour mobility across sectors and regions. The current situation
should therefore be seen as a catalyst to foster the implementation of necessary domestic
reforms in line with the principle of an open market economy with free competition.
We are now at your disposal for questions.