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, 3 June 2004.
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Ladies and gentlemen, the Vice-President and I will now report on the outcome of today's meeting of
the Governing Council of the ECB.
However, I should first like to inform you about some decisions we have taken regarding the
publication of staff macroeconomic projections.
As you are aware, twice a year Eurosystem staff, that is, staff of the ECB and the euro area national
central banks, jointly produce a set of macroeconomic projections. These serve as one of the inputs
into the deliberations of the Governing Council. Subsequently, the projections are published in the
June and December issues of the Monthly Bulletin. As you also know, in the interim period, that is, for
March and September, ECB staff produce what is basically an update of the Eurosystem staff
projections. These projections also serve as input into the meetings of the Governing Council, but so
far have not been published.
The positive experience and familiarity gained over the past few years with the publication of
macroeconomic projections have given us the confidence to go a step further by also publishing the
interim ECB staff projections. Therefore, in the spirit of transparency and accountability, the ECB staff
projections will also be published from September 2004 onwards.
In all cases, that is, four times a year, the projections will be published in the appropriate form in the
Monthly Bulletin. In addition, as a further step towards providing relevant information in a timely
manner, we will from today onwards provide you with an advance copy of the Monthly Bulletin section
covering the projections. This advance copy will be made available shortly after the end of this press
conference, both in hard copy and on the ECB's website. The same procedure will be applied in
September and every three months thereafter.
The fact that we have decided to publish the interim ECB staff projections in future does not change
their role as one of the inputs into our deliberations. The Governing Council continues to base its
monetary policy decisions on a comprehensive economic analysis, which is cross-checked with the
monetary analysis.
Let me now turn to today's monetary policy discussion.
In summary, we noted that the economic recovery has strengthened over recent months. At the same
time, we have also witnessed stronger inflationary pressures over the short term. Nevertheless, we are
still of the view that the medium-term outlook remains in line with price stability. Accordingly, we left
the key ECB interest rates unchanged. The low level of interest rates continues to support the
economic recovery. We will remain vigilant with regard to all developments which could affect the risks
to price stability over the medium term.
I shall now explain our assessment in more detail.
In the context of our economic analysis, the latest data releases confirm that the economic recovery
in the euro area is under way. According to Eurostat, real GDP grew by 0.6% quarter on quarter in the
first quarter of this year, and quarterly real GDP growth for the fourth quarter of last year was revised
upwards from 0.3% to 0.4%. The more pronounced pace of real GDP growth mainly reflected both
stronger private consumption and buoyant exports. Latest survey data still provide mixed signals with
regard to the underlying strength of the recovery but remain fully consistent with ongoing growth in the
current quarter.
Looking ahead, the conditions for a continuation of the recovery remain in place. Economic growth
outside the euro area continues to be strong and should promote export growth. On the domestic side,
investment should benefit from the positive global environment as well as from the favourable
financing conditions. Improvements in corporate efficiency and higher profits are also supporting
business investment. Moreover, private consumption should gradually recover from the stagnation
witnessed during most of 2003, broadly in line with growth in real disposable income which, with the
usual lag, should be further underpinned by an increase in employment growth later on.
Accordingly, we expect an ongoing recovery in euro area economic growth over the coming quarters,
leading to a broader and stronger upswing in the course of next year. This is also reflected in the
Eurosystem staff projections, which envisage euro area real GDP growth of between 1.4% and 2.0%
on average in 2004, rising to between 1.7% and 2.7% in 2005. Available forecasts from international
and private organisations convey a broadly similar picture.
With regard to this scenario, there are risks and uncertainties in both directions. On the one hand, the
current rather robust pace of economic growth outside the euro area, the recent development in
private consumption as well as some survey data imply a potential for stronger growth dynamics,
particularly in the short term. On the other hand, high oil prices could pose a downside risk. Over a
longer horizon, concerns also remain about the persistence of global imbalances.
Concerning prices, recent oil price developments have created considerable upward pressure on
consumer prices. According to Eurostat's flash estimate, annual HICP inflation was 2.5% in May,
partly due to base effects, after standing at 2.0% in April. Markets expect oil prices to decline gradually
from recent peaks. If they were to remain at their recent high levels, it is to be expected that inflation
rates would continue to be higher than previously anticipated and stay above 2% for longer than just a
few months ahead. When assessing price trends over the medium term, however, the outlook remains
favourable. In particular, overall import price developments should remain moderate and inflationary
pressure from wages and unit labour costs should be contained. Both factors should help to bring
annual rates of consumer price inflation back to below 2% in 2005.
These views are in line with the Eurosystem staff projections, which put average annual HICP inflation
at between 1.9% and 2.3% in 2004 and between 1.1% and 2.3% in 2005. They are also broadly
consistent with recently released forecasts by international and private organisations. These forecasts
and projections are subject to a number of risks and uncertainties. Concerns relate in particular to oil
price developments. Moreover, there is insufficient knowledge today about future changes in indirect
taxes and administered prices; information on these items typically becomes available only towards
the end of the year. Against this background, the potential risk for second-round effects via wages
needs to be monitored closely. Finally, there has been an increase in measures of long-term inflation
expectations derived from financial market indicators. While these indicators should be interpreted with
caution, the recent upward trend calls for particular vigilance.
Moving on to the monetary analysis, we have seen increasing evidence of a normalisation of the
portfolio behaviour of private investors. As a consequence, annual M3 growth has fallen quite
significantly over recent quarters. Still, the low level of interest rates continues to fuel monetary growth
and the amount of excess liquidity remains high in the euro area. In an economic upswing, the
persistence of excess liquidity could lead to inflationary pressures over the medium term.
To sum up, the economic analysis indicates that the main scenario for the outlook for price
developments over the medium term remains in line with price stability. However, short-term pressures
on inflation have increased recently and some upside risks need to be taken into account.
Cross-checking with the monetary analysis also supports the case for vigilance with regard to the
materialisation of risks to price stability.
Given the signs that the economic recovery will continue, it is particularly important that fiscal policies
and structural reforms play their part in improving the economic fundamentals of the euro area. It is
regretful that recent fiscal developments have not been helpful in this respect. A growing number of
countries are reporting significant imbalances and fiscal consolidation efforts fall disappointingly short
of commitments. In order to strengthen confidence in a sustainable upswing, it is now essential that
clarity about the future course of consolidation of fiscal policies is re-established in all countries
concerned. This requires credible measures with an emphasis on structural expenditure reform so that
imbalances are redressed, tax/benefit systems become more growth-friendly and social security
systems are put on a sound financial footing. These measures, together with a revived momentum
towards effectively implementing structural reforms in labour and product markets, would provide very
valuable support to the current economic upswing.
We are now at your disposal for questions.