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, 4 November
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.
Persistently high and rising oil prices have had a visible direct impact on consumer prices this year,
and inflation is likely to remain significantly above 2% in the coming months. This is a worrisome
development, but there is no strong indication as yet that medium-term inflationary pressures are
building up in the euro area. In particular, wage growth appears to remain limited, in the context of
ongoing moderate real GDP growth and weak labour markets. Against this background, we have
decided to leave the key ECB interest rates unchanged at their present levels, which are very low by
historical standards. However, there are upside risks to price stability over the medium term. Strong
vigilance is therefore warranted with regard to all developments which could increase such risks.
I shall now explain our assessment in more detail, turning first to the economic analysis. The economic
recovery started in the second half of 2003, and we saw positive developments in the first half of 2004.
Although short-term indicators have become more mixed, the basic determinants of economic activity
remain consistent with continuing economic growth in 2005. On the external side, we see some
moderation taking place following a period in which the world economy has experienced its strongest
dynamism in many years. Nevertheless, euro area exports should continue to benefit from positive
global demand conditions in 2005. On the domestic side, investment should be supported by the
global environment, the very favourable financing conditions in the euro area, improved earnings and
greater corporate efficiency gained through business restructuring. Furthermore, scope exists in the
euro area as a whole for private consumption to strengthen, particularly once labour market prospects
improve more visibly.
However, this outlook is surrounded by continuing uncertainty, in particular stemming from recent
developments in oil markets. On the one hand, the magnitude and nature of this shock differ from
earlier experiences, when oil price rises were much stronger and mainly due to supply constraints. In
addition, the oil intensity of production is significantly lower in the euro area. On the other hand, recent
oil price increases constitute a nonetheless sizeable adverse shock to the euro area economy. If oil
prices were to remain at current levels, or even increase further, they would dampen the strength of
the recovery both inside and outside the euro area. Under certain conditions, a smoother absorption of
the oil price shock can be ensured: in particular, second-round effects in wage and price-setting must
continue to be avoided, and fiscal authorities should refrain from taking measures which would prolong
the necessary adjustment process.
With regard to consumer prices, annual inflation increased to 2.5% in October, according to Eurostat's
flash estimate. This was a strong increase, after the decline to 2.1% in September from 2.3% in
August, and shows that oil price developments have had a sizeable direct impact on the euro area
HICP in recent weeks. Moreover, the oil price shock may feed through the economy and generate
further indirect effects, as indicated by developments in producer prices.
Looking further ahead, however, the information available so far does not suggest that stronger
underlying inflationary pressures are building up in the euro area. Wage increases have remained
limited since the last quarter of 2003, and this trend is expected to persist in the context of ongoing
moderate growth and weak labour markets.
Nevertheless, a number of upward risks to the outlook for price stability have emerged over recent
months. Risks are mainly associated with oil price developments, possible renewed increases in
indirect taxes and administrative prices, and potential second-round effects stemming from wage and
price-setting behaviour.
Further indications for the medium-term outlook are provided by the monetary analysis. The downward
trend in annual M3 growth in the first half of this year appears to have come to a halt in recent months.
The shorter-term dynamics of M3 have strengthened and its annual growth rates are rising. These
developments reflect the stimulative effect of the historically low level of interest rates in the euro area
on monetary expansion. Demand for the most liquid components of M3 contained in the narrow
aggregate M1 is particularly strong. The low level of interest rates is also fuelling private sector
demand for credit. In particular, the growth rate of loans for house purchase continues to rise and is
now approaching double digits. Yet loan demand is becoming more broadly based, and the annual
growth of loans to non-financial corporations is also picking up.
Given the continued strength of M3 growth over the past few years, there remains substantially more
liquidity in the euro area than is needed to finance non-inflationary growth. This could pose inflationary
risks in the future if the excess liquidity is not progressively reduced as a result of reverse portfolio
shifts. Moreover, persistently high excess liquidity and strong credit growth could become a source of
unsustainable asset price increases, particularly in property markets.
To sum up, the economic analysis suggests that underlying inflationary pressures are still contained,
but a number of medium-term upside risks to price stability need to be monitored closely. It is
particularly important that these do not affect long-term inflation expectations. Cross-checking with the
monetary analysis continues to support the case for strong vigilance with regard to the materialisation
of risks to price stability.
I would now like to make a few remarks on fiscal policies. Most countries have presented their budget
plans for 2005. In some cases there are encouraging signs that Member States are planning to correct
excessive deficits or make progress towards close-to-balance or in-surplus budgetary positions.
However, there are other cases where there are significant risks that commitments under the Stability
and Growth Pact will not be met, or where imbalances are on the rise and new breaches of the
3% reference value might occur. It is therefore imperative that 2005 budgets prioritise consolidation
where this is necessary. Moreover, it is of vital importance that the reliable compilation and timely
reporting of government finance statistics are ensured. Appropriate budgetary targets and compliance
with fiscal commitments and reporting requirements will help to build confidence, support the
economic upswing and prepare for the impact of population ageing.
As regards the European fiscal framework, the Governing Council remains convinced that
improvements in the implementation of the Stability and Growth Pact are possible and would be
beneficial. In this regard, the European Commission's proposals for improving the implementation of
the preventive arm of the Pact are useful. At the same time, the Governing Council warns against
changes to the Pact and, in particular, the excessive deficit procedure. It considers the credibility of the
3% deficit limit essential to anchoring expectations of fiscal discipline. Moreover, strict surveillance and
effective peer pressure on national budget policies are indispensable to preserving sound fiscal
policies.
Finally, I would also like to take this opportunity to reiterate the need for progress on structural reform.
Fiscal consolidation plans should be part of a structural reform agenda that favours growth,
competitiveness and employment. As regards labour and product markets, the mid-term review of the
Lisbon agenda - now being prepared for the European Council meeting in March 2005 - is a major
opportunity to increase momentum in these fields. Structural reforms are crucial to a better performing
EU economy, i.e. an economy with higher potential growth, more employment opportunities and
greater resilience to shocks. Efforts to accelerate key economic reforms are now more important than
ever.