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,
8 November 2007.
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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
Commissioner Almunia.
On the basis of our regular economic and monetary analyses, we decided at today's meeting
to leave the unchanged. The information that has become available
key ECB interest rates
since our previous meeting fully confirms that the outlook for price stability over the medium
term is subject to upside risks. Against this background, and with money and credit growth
vigorous in the euro area, our monetary policy stands ready to counter upside risks to price
stability, as required by our mandate. The economic fundamentals of the euro area remain
sound and support a favourable medium-term outlook for economic activity. However, the
ongoing reappraisal of risk in financial markets has led to continued uncertainty. This
warrants a thorough examination of additional information before drawing further conclusions
for monetary policy in the context of our medium term-oriented monetary policy strategy
focused on maintaining price stability. Accordingly, the Governing Council will monitor very
closely all developments. By acting in a firm and timely manner on the basis of our
assessment, we will ensure that risks to price stability over the medium term do not
materialise and that medium and long-term inflation expectations remain firmly anchored in
line with price stability, which is all the more important at times of financial market volatility
and increased uncertainty. This will favour an environment conducive to sustained economic
growth, well-functioning markets and job creation. As regards the financial markets, we will
continue to pay great attention to developments over the period to come.
Allow me to explain our assessment in greater detail, starting with the economic analysis.
On the basis of the available data, it appears that the sustained real economic growth
experienced in the euro area in the first half of 2007 has continued through the third quarter,
as reflected in the data for industrial production and retail sales that have been released
since our meeting in early October. While financial market volatility seems to have
contributed to a decline in euro area consumer and business confidence indicators in the
past few months, these indicators generally remain above their historical averages and
continue to point to ongoing sustained growth. Overall, the fundamentals of the euro area
remain sound, including in particular sustained corporate earnings and profitability, robust
employment growth and falling unemployment to levels not seen for 25 years.
Available forecasts for 2008 continue to confirm our main scenario of real GDP growing at
around trend potential. This scenario is based on the expectation that the global economy
will remain resilient, with the slowdown of economic growth in the United States partly offset
by the sustained strength of emerging market economies. Continued strong external demand
should provide ongoing support to euro area exports and investment. Consumption growth in
the euro area should also contribute to economic growth, in line with developments in real
disposable income, as continued employment growth provides supportive conditions. That
said, in view of the potential impact of prolonged financial market volatility and the re-pricing
of risk on the real economy, the level of uncertainty surrounding this broadly favourable
outlook for economic activity remains high.
On balance, risks to the outlook for growth are judged to lie on the downside. These
downside risks relate mainly to the potential for a broader impact from the ongoing
reappraisal of risk in financial markets on confidence and financing conditions, further oil and
commodity price rises, as well as concerns about protectionist pressures and possible
disorderly developments owing to global imbalances.
As regards price developments, according to Eurostat's flash estimate, the annual HICP
inflation rate increased very strongly to 2.6% in October 2007, from 2.1% in September. This
sharp increase is a matter of particular concern and it is essential that it does not affect
medium to longer-term inflation expectations. To that effect, we have already indicated on
previous occasions that we are now in a period during which unfavourable effects from
energy prices will have a strong upward impact on annual HICP inflation rates, owing mainly
to the marked decline in energy prices a year ago. In addition, these effects have been
strengthened by recent substantial further increases in oil, non-oil commodity and, in
particular, food prices. Overall, we expect the HICP inflation rate to remain significantly
above 2% in the coming months before moderating again in the course of 2008.
Risks to the medium-term outlook for price developments are fully confirmed to lie on the
upside. These risks include the possibility of persistently high oil and agricultural prices,
continuing the strong momentum observed in recent months, as well as unanticipated
increases in administered prices and indirect taxes. Moreover, taking into account the
existence of capacity constraints, the favourable momentum of real GDP growth observed
over the past few quarters, and the positive signs from labour markets, stronger than
currently expected wage developments may occur. Furthermore, an increase in pricing
power in market segments with low competition could materialise. Such developments would
pose upward risks to price stability. It is therefore crucial that all parties concerned meet their
responsibilities and that second-round effects be avoided. In addition, the explicit or de facto
indexation of nominal wages to prices should be reduced and ultimately eliminated.
The monetary analysis confirms the prevailing upside risks to price stability at medium to
longer-term horizons. The strength of both money and credit growth in recent months - with
the annual growth rates of M3 and MFI loans to the private sector both at more than 11% in
September - may have been influenced by a number of temporary or special factors, such
as the flattening of the yield curve and the recent financial market volatility. However, even
taking into account these special factors, the underlying rate of money and credit expansion
remains strong. Monetary developments therefore continue to require very careful monitoring
so as to detect underlying trends on the one hand and to better understand shorter-term
dynamics on the other. This monitoring will provide a more complete picture of the response
of the private sector to the increased volatility in financial markets.
A broad assessment of underlying trends in money and credit growth is particularly important
given recent financial market developments, since financial volatility may influence the
shortterm behaviour of money-holders and thereby affect monetary developments. Monetary and
credit data can therefore offer an important insight into how financial institutions, households
and firms have responded to the financial market volatility. Indeed, previous episodes of
heightened financial market uncertainty have been associated with large portfolio shifts into
safe and liquid monetary assets. For the time being, however, there is little evidence that
such shifts have influenced the dynamics of broad money and credit aggregates since the
onset of financial market volatility in early August, although specific balance sheet items,
such as holdings of money market fund shares/units, may have been strongly affected.
The rate of growth of bank loans to households and non-financial corporations has remained
robust in recent months, tentatively suggesting that there is no impairment in credit supply.
However, it cannot be excluded that the strong loan flows partly reflect the re-intermediation
of some financing onto bank balance sheets given illiquidity in some segments of the
assetbacked securities markets. Further data and analysis will be required to develop a more
complete view of the impact of the financial market volatility on bank balance sheets,
financing conditions and money and credit growth.
To sum up, a cross-check of the information identified under the economic analysis with the
outcome of the monetary analysis has fully confirmed the existence of upside risks to price
stability over the medium term, with money and credit growth vigorous in the euro area, and
against the background of sound economic fundamentals in the euro area. At the same time,
given the continued uncertainty, additional information is needed before further conclusions
for monetary policy can be drawn. Consequently, the Governing Council will monitor very
closely all developments. Our monetary policy stands ready to counter upside risks to price
stability, as required by our mandate. By acting in a firm and timely manner on the basis of
our assessment, we will ensure that risks to price stability over the medium term do not
materialise and that medium and long-term inflation expectations remain firmly anchored in
line with price stability, which is all the more important in the current context. As regards the
financial markets, we will continue to pay great attention to developments over the period to
come.
Turning to fiscal policy, the Governing Council welcomes the ECOFIN Council's agreement
to strengthen the preventive arm of the Stability and Growth Pact. The Governing Council
also welcomes the recent confirmation by the ECOFIN Council of a reinforcement of its
commitment to the full implementation of the Pact. In particular, the provisions of the
preventive arm, including the call for a structural adjustment of at least 0.5% of GDP per
annum, need to be adhered to by all countries with fiscal imbalances. In this regard, 2008
budget plans in a number of countries point to a pro-cyclical fiscal stance and an
unwarranted relaxation of consolidation efforts. This gives rise to concern as consolidation
shortfalls undermine in particular the Eurogroup agreement to achieve sound budgetary
positions by 2010 at the latest.
With regard to structural reforms, the Governing Council stresses that a key effect of
welldesigned structural reforms is a sustainable improvement in the employment and income
situation of workers and households. Reforms which increase the incentives for firms and
individuals to invest in human capital tend to enhance overall labour demand and
productivity. Reducing non-wage labour costs would also enhance employment and the net
income levels of workers. Moreover, labour market regulations should not discourage firms
from offering jobs, or workers from accepting them. It is encouraging to see that past labour
market reforms have contributed to job creation and reduced unemployment. It is important
that governments continue in this direction and do not reverse past reforms just at the point
when they are starting to bear fruit. Moreover, the Governing Council reiterates its full
support for all efforts which foster market flexibility and enhance competition. This also
applies to the agricultural markets. Against the background of a marked increase in
international food commodity prices, further liberalisation and reforms in EU agricultural
markets would help to enhance their efficiency and benefit European consumers through
lower prices.
We are now at your disposal for questions.