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,
6 March 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
Mr Bajuk, President of the ECOFIN Council, and Commissioner Almunia.
On the basis of our regular economic and monetary analyses, we decided at today's meeting
to leave the unchanged. The latest information has confirmed the
key ECB interest rates
existence of strong short-term upward pressure on inflation. It has also confirmed the
assessment that there are upside risks to price stability over the medium term, in a context of
very vigorous money and credit growth. The economic fundamentals of the euro area are
sound. Incoming macroeconomic data point to moderating but ongoing real GDP growth. Yet
the level of uncertainty resulting from the turmoil in financial markets remains high. Against
this background, we emphasise that maintaining price stability in the medium term is our
primary objective in accordance with our mandate. Indeed, the firm anchoring of medium to
longer-term inflation expectations is of the highest priority to the Governing Council. We
believe that the current monetary policy stance will contribute to achieving this objective. The
Governing Council remains strongly committed to preventing second-round effects and the
materialisation of upside risks to price stability over the medium term. 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 confirms the picture of moderating growth around
the turn of the year. According to Eurostat's flash estimate, the quarter-on-quarter growth
rate of euro area real GDP in the fourth quarter of 2007 was 0.4%, following 0.8% in the
previous quarter. Surveys of business and consumer confidence, which have followed a
downward trend since the summer of 2007, overall remain consistent with ongoing growth.
Looking ahead, in 2008 both domestic and foreign demand are expected to support ongoing
real GDP growth in the euro area, albeit at lower rates than during 2007. The fundamentals
of the euro area economy remain sound and the euro area economy does not suffer from
major imbalances. While being dampened by the global slowdown, investment growth should
provide ongoing support, as capacity utilisation is high and profitability has been sustained.
At the same time, as a result of the improved economic conditions and wage moderation,
employment and labour force participation have increased significantly and unemployment
rates have fallen to levels not seen for 25 years. While being dampened by higher
commodity prices, consumption growth should continue to contribute to economic expansion,
in line with rising employment.
These factors are also reflected in the March 2008 ECB staff macroeconomic projections.
Annual real GDP growth is projected to lie in the range of 1.3% to 2.1% in 2008, and to be
between 1.3% and 2.3% in 2009. In comparison with the December 2007 Eurosystem staff
macroeconomic projections, the ranges projected for real GDP growth in 2008 and 2009
have been revised downwards, reflecting weaker global demand, stronger pressure from
commodity prices and less favourable financing conditions than were foreseen in December.
Available forecasts from international organisations broadly confirm this outlook.
In the view of the Governing Council, uncertainty about the prospects for economic growth
remains unusually high. Downside risks to the outlook for economic activity continue to exist.
They relate mainly to a potentially broader than currently expected impact of financial market
developments. Further downside risks stem from the scope for additional commodity price
rises, protectionist pressures and the possibility of disorderly developments owing to global
imbalances.
With regard to price developments, according to Eurostat's flash estimate, the annual HICP
inflation rate was 3.2% in February 2008, unchanged from January. This confirms the strong
upward pressure on inflation in the short term, stemming mainly from the increases in energy
and food prices in recent months. Looking ahead, we expect a more protracted period of
relatively high rates of inflation than we did a few months ago. The annual HICP inflation rate
will most likely remain significantly above 2% in the coming months and moderate only
gradually later in the year.
The March 2008 ECB staff macroeconomic projections foresee annual HICP inflation of
between 2.6% and 3.2% in 2008, and between 1.5% and 2.7% in 2009. Compared with the
December 2007 Eurosystem staff macroeconomic projections, the projected ranges for HICP
inflation have shifted upwards, mainly reflecting significant additional increases in food and
energy prices.
It is important to recall that these staff projections are based on a number of assumptions
which are of a purely technical nature and unrelated to policy intentions. In particular, the
technical assumptions for short-term interest rates are taken from market expectations as at
mid-February.
Moreover, it should be noted that the projections are based on the assumptions that the
recent dynamism in commodity prices will diminish over the projection horizon, in line with
futures prices, and that pressure from labour costs and profit margins will be limited.
In the view of the Governing Council, the risks to the outlook for inflation over the medium
term are on the upside. These risks include further rises in oil and agricultural prices,
continuing the strong upward trend observed in recent months. Furthermore, they include the
possibility that stronger than currently expected wage growth may emerge, taking into
account high capacity utilisation and tight labour market conditions. Moreover, the pricing
power of firms, notably in market segments with low competition, could be stronger than
expected. Increases in administered prices and indirect taxes beyond those foreseen thus far
also pose upside risks to the inflation outlook.
At this juncture, it is imperative that all parties concerned meet their responsibilities and that
second-round effects on price-setting, on the one hand, and on wages, on the other hand,
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 term and thereby the
purchasing power of all euro area citizens. The Governing Council is monitoring wage
negotiations in the euro area with particular attention. In this context, the Governing Council
is concerned 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 therefore calls for such schemes to be avoided.
The monetary analysis confirms the prevailing upside risks to price stability at medium to
longer-term horizons. Annual M3 growth remained very vigorous at 11.5% in January,
supported by the continued strong growth of MFI loans to the private sector. A number of
temporary factors suggest that M3 growth currently overstates the pace of the underlying
monetary expansion. The relatively flat yield curve in particular has made holding monetary
assets more attractive. However, even after taking such effects into account, a broad-based
assessment of the latest data confirms that the underlying rate of money and credit growth
remains strong.
The growth of household borrowing has moderated over recent months, reflecting the impact
of higher key ECB interest rates since December 2005 and cooling housing markets in
several parts of the euro area. However, the growth of loans to non-financial corporations
has remained very robust. Bank borrowing by euro area non-financial corporations grew at
an annual rate of 14.6% in the year to January 2008. Overall, bank loans to the domestic
private sector have grown at around 11% on an annual basis for the past two years.
For the time being, there is little evidence that the financial market turbulence since early
August 2007 strongly influenced the overall dynamics of broad money and credit aggregates
up to January 2008. In addition, according to the available data, the turmoil has not led to
substantial portfolio shifts into monetary assets, as were observed between 2001 and 2003.
Notwithstanding the tightening of credit standards reported in the bank lending survey for the
euro area, continued strong loan growth to non-financial corporations suggests that the
supply of bank credit to firms 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 fully 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. The economic
fundamentals of the euro area are sound. Incoming macroeconomic data point to moderating
but ongoing real GDP growth. Yet the level of uncertainty resulting from the turmoil in
financial markets remains high. We emphasise that the firm anchoring of medium to
longerterm inflation expectations is of the highest priority to the Governing Council. We believe that
the current monetary policy stance will contribute to achieving this objective. The Governing
Council remains strongly committed to preventing second-round effects and the
materialisation of upside risks to price stability over the medium term. We will continue to
monitor very closely all developments over the coming weeks.
Regarding fiscal policies, the Governing Council welcomes the fact that the Berlin
Eurogroup agreement of April 2007, including the consolidation targets, was confirmed in the
ECOFIN Council's opinions on the latest stability programme updates. There is no
justification for delaying structural fiscal consolidation in countries with remaining fiscal
imbalances. On the contrary, the challenges ahead call for particularly prudent and
stabilityoriented fiscal policies to support private sector confidence. Achieving and maintaining sound
fiscal positions will also allow the free operation of automatic stabilisers and contribute to the
smooth functioning of Economic and Monetary Union.
Structural reforms would not only be beneficial for employment and potential growth, but
would also help to reduce inflationary pressures. Enhancing competition, especially in
services and network industries, is essential at this juncture to support price stability and
enhance productivity growth. Similarly, administered prices, indirect taxes, minimum wage
legislation and public sector wage-setting should not add to inflationary pressures in the
economy.
We are now at your disposal for questions.