European Central Bank: Press conference - introductory statement
Introductory statement by Mr Jean-Claude Trichet, President of the European Central Bank, Frankfurt
am Main, 7 December 2006.
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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.
At today's meeting, we decided to increase the key ECB interest rates by 25 basis points. This
decision reflects the upside risks to price stability over the medium term that we have identified
through both our economic and monetary analyses. Today's decision 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. After
today's increase, our monetary policy continues to be accommodative, with the key ECB interest rates
remaining at low levels, money and credit growth strong, 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. The Governing Council will monitor very closely all
developments so that risks to price stability over the medium term do not materialise.
Turning first to the according to Eurostat's first estimate, the quarter-on-quarter
economic analysis,
growth rate of real GDP in the euro area for the third quarter of 2006 was 0.5%. The data thus confirm
our assessment that economic activity continued to expand robustly, while moderating from the very
strong rates seen in the first half of the year. Domestic demand remained the main driver of economic
growth in the third quarter, confirming the anticipated broadening of the recovery and pointing to the
increasingly self-sustaining nature of economic expansion in the euro area. The information on
economic activity from various confidence surveys and indicator-based estimates supports the
assessment that robust economic growth has continued in the fourth quarter of this year.
Looking ahead, the conditions remain in place for the euro area economy to grow at solid rates around
potential. While some volatility in the quarterly growth rates is likely to emerge around the turn of the
year, associated with the impact of changes in indirect taxes in a large euro area country, the
mediumterm outlook for economic activity remains favourable. As regards the external environment, economic
growth has become more balanced across regions. Helped in part by lower oil prices, global growth is
robust, thereby providing support for euro area exports. Domestic demand in the euro area is
expected to maintain its relatively strong momentum. Investment should remain dynamic, benefiting
from an extended period of very favourable financing conditions, balance sheet restructuring,
accumulated and ongoing strong earnings, and gains in business efficiency. Consumption should also
strengthen further over time, in line with developments in real disposable income, as employment
conditions continue to improve.
This outlook is also reflected in the new Eurosystem staff macroeconomic projections. The projections
foresee average annual real GDP growth in a range between 2.5% and 2.9% in 2006, between 1.7%
and 2.7% in 2007 and between 1.8% and 2.8% in 2008. Most recent forecasts by international
organisations give a broadly similar picture. In comparison with the September ECB staff projections,
the ranges projected for real GDP growth in 2006 and 2007 have been revised upwards, largely
reflecting the assumption of lower energy prices and their impact on real disposable income.
In the Governing Council's view, the risks surrounding this broadly favourable outlook for economic
growth over the projection horizon lie on the downside. The main risks relate to the possibility of a
renewed increase in oil prices, fears of a rise in protectionist pressures, especially after the
suspension of the Doha round of trade talks, and concerns about possible disorderly developments
owing to global imbalances.
As regards price developments, according to Eurostat's flash estimate, annual HICP inflation rose to
1.8% in November 2006, from 1.6% in October and 1.7% in September. While no detailed breakdown
of the November HICP data is available as of yet, the lower annual HICP inflation rates recorded in the
two previous months reflected mainly the significant declines in crude oil prices from August onwards,
as well as base effects. While the outlook for energy prices remains uncertain, on the basis of the oil
prices currently implied by the futures market overall inflation rates are likely to increase again in early
2007 and then hover around 2% in the course of that year, also reflecting the impact of higher indirect
taxes.
The December Eurosystem staff projections see annual HICP inflation at between 2.1% and 2.3% in
2006, between 1.5% and 2.5% in 2007 and between 1.3% and 2.5% in 2008. Most recent forecasts by
international organisations give a broadly similar picture. Compared with the September 2006 ECB
staff projections, the ranges for 2006 and 2007 are somewhat lower, largely reflecting the assumption
of lower energy prices. In this context, let me remind you of the conditional nature of these projections,
which are based on a series of technical assumptions, including market expectations for short and
long-term interest rates as well as for oil and non-energy commodity prices.
In the Governing Council's view, the outlook for price developments remains subject to upside risks,
stemming in particular from a pass-through of previous oil price increases which is stronger than
assumed in the baseline scenario, the possibility of renewed oil price increases and additional
increases in administered prices and indirect taxes beyond those announced and decided thus far.
More fundamentally, given the favourable momentum of real GDP growth observed over the past few
quarters and the positive signs from labour markets, wage developments could be stronger than
currently expected. Therefore, it is crucial that the social partners continue to meet their
responsibilities. Wage agreements should take into account productivity developments in connection
with the still high level of unemployment and positions in price competitiveness. It is also important that
wage settlements move away from automatic, backward-looking indexation mechanisms.
Turning to the monetary analysis, annual M3 growth was unchanged at 8.5% in October, remaining
close to the highest rates observed since the introduction of the euro, which points to inflationary risks
at medium to longer horizons. Increasing interest rates have exerted some influence over monetary
developments in recent months, although as yet mainly by triggering shifts among the components of
M3 rather than constraining the expansion of M3 itself. In particular, the annual growth rate of M1 has
moderated somewhat, reflecting shifts from overnight deposits into other components of M3 which
offer more market-related returns.
More generally, the rate of monetary and credit expansion remains rapid, reflecting the low level of
interest rates and the strengthening of economic activity in the euro area. In particular, loans to the
private sector continue to grow at double-digit rates on an annual basis, their dynamism remaining
broadly based across the household and corporate sectors. In the context of rising interest rates, the
growth of household borrowing has shown signs of stabilisation in recent months, albeit at very high
growth rates. By contrast, the growth of borrowing by non-financial corporations continues to trend
upwards and has now reached rates of over 12% on an annual basis, the highest seen since the early
1990s. Thus, when the counterparts of M3 are considered, the main driver of strong monetary growth
remains the expansion of credit to the private sector.
Taking a medium to longer-term perspective, the latest developments are consistent with a
continuation of the persistent upward trend in the underlying rate of monetary expansion, identified by
the ECB's monetary analysis since mid-2004. Furthermore, following several years of robust monetary
growth, the liquidity situation in the euro area is ample by all plausible measures. Continued strong
monetary and credit growth in an environment of ample liquidity point 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 improved economic conditions and continued strong
property market developments in many parts of the euro area.
To sum up, annual inflation rates are projected to hover around 2% in the coming two years, with risks
to this outlook remaining on the upside. In addition, given the ongoing marked dynamism of monetary
and credit growth in an environment of 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 long term. It is essential that inflation expectations remain firmly anchored
at levels consistent with price stability. Indeed, acting in a firm and timely manner to ensure price
stability in the medium term is warranted. The Governing Council will therefore monitor very closely all
developments so that risks to price stability over the medium term do not materialise.
As regards fiscal policy, the European Commission's autumn forecasts suggest that deficits will fall
below 3% of GDP in most euro area countries by 2007. This is welcome. However, the projected
improvements in fiscal balances can only partly be attributed to substantial progress in structural
consolidation, as higher economic growth and revenue windfalls are playing an important role.
Moreover, in a number of countries with fiscal imbalances, adjustment efforts still fall short of what is
needed to meet their respective medium-term objectives in a timely manner and thus fulfil the
requirements of the revised Stability and Growth Pact. This is of major concern. It is therefore crucial
that forthcoming updates of the stability programmes not only envisage significant progress towards
the correction of excessive deficits in a sustainable manner but also make sufficient headway towards
safe budgetary positions in the countries concerned. For all countries it is paramount that pro-cyclical
policies be avoided in the current economic upswing. More progress is also needed with fiscal
structural reform as part of a comprehensive medium-term strategy to improve economic incentives
and the soundness of social security systems. This would be a crucial contribution of fiscal policies to
economic growth and fiscal sustainability as well as to confidence in the revised Stability and Growth
Pact.
As regards structural reforms, the Governing Council welcomed the 2006 progress reports submitted
by EU Member States on their 2005-08 national reform programmes, in line with the renewed Lisbon
Strategy. Although it is encouraging that many concrete reform steps are being taken or are planned,
there is still a considerable way to go to make the euro area a more dynamic economy, which is
crucial to meeting the challenges of globalisation, population ageing and rapid technological change.
Reform measures should foster more integrated, flexible and competitive economies in the euro area,
thus allowing more efficient adjustment processes and a stronger resilience to shocks. These are
essential conditions for the substantial benefits of the single currency to be better exploited and for the
economic performance to improve in both the euro area as a whole and in each member state.
We are now at your disposal for questions.