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 November
2003.
* * *
Ladies and gentlemen,
Today marks the first time that I had the honour and the pleasure of chairing the meeting of the
Governing Council of the ECB. I am delighted to now proceed with our well-established practice of
real-time communication and to report on the outcome of our meeting, together with the
VicePresident.
Following our regular economic and monetary analysis, we have decided to leave the key ECB
interest rates unchanged at their low levels. Overall, we anticipate some further stickiness of inflation
rates in the shorter term, while the medium-term outlook for price stability remains favourable. Against
this background, we continue to judge the current stance of monetary policy as appropriate. At the
same time, we see additional signs of a gradual economic recovery in the euro area. We will carefully
monitor all developments that might affect our assessment of risks to price stability.
Let me now explain our decision in more detail.
Starting with the economic analysis, new data and other information show that the recovery of the
world economy is clearly making progress. Also for the euro area, the indicators are increasingly
pointing towards some improvement in economic activity in the second half of this year. For the time
being, this is primarily reflected in business surveys and leading indicators, but we expect that
forthcoming data on euro area production and demand will confirm that a gradual recovery has
started.
Taken together, we see further confirmation of our main scenario of a gradual improvement in
economic activity this year, and a broadening and strengthening in the course of 2004. This
assessment has received support from recently published forecasts of official and private sources, as
well as from developments in financial markets. Externally, the expansion of global economic trade
and real GDP growth should counteract the changes in the effective exchange rate of the euro, which
is back to its level of early 1999. Domestically, the conditions for investment should improve further,
given the continued adjustment efforts of firms to enhance productivity and profitability, the low level of
interest rates and generally favourable financing conditions. Moreover, private consumption should
benefit from real disposable income growth, fostered by positive terms-of-trade effects stemming from
the past appreciation of the euro.
The short-term risks to our main scenario appear to be balanced. Over a longer horizon, we remain
concerned about the sustainability of global economic growth being undermined by persisting
imbalances. This relates, in particular, to the sustainability of public finances and to external
imbalances in some regions of the world.
Recent inflation rates, measured by the HICP, developed broadly as anticipated. The annual rate of
inflation was 2.1% in October, according to Eurostat's flash estimate. It thus remained unchanged from
August and September. When looking ahead over the shorter term, it appears that inflation rates may
continue to hover around this level for several months to come and, hence, may not fall as quickly and
strongly as had been expected up to the summer. Three factors can be identified as contributing to
this stickiness of inflation rates. First, in the remainder of 2003 and early 2004, unprocessed food
prices could imply some limited upward pressure as a consequence of this summer's heat wave.
Second, oil prices remain higher than expected, owing to political uncertainties in the Middle East. Last
but not least, in the course of 2004, planned increases in indirect taxes and administered prices in
some euro area countries will have an upward impact on inflation.
However, when taking into account more lasting factors, we continue to expect inflation rates to
moderate over the medium term and to develop in line with price stability. This expectation is based on
the assumption that wage developments will not be affected by the current inertia of inflation rates,
and will remain moderate in the context of a gradual economic recovery. Moreover, the past
appreciation of the euro should continue to dampen price pressures. These views are also reflected in
recently released forecasts. At the same time, inflation expectations warrant close monitoring.
Turning to the monetary analysis, after an extended period of strong M3 growth, liquidity in the euro
area remains ample, despite a certain slowdown in monetary expansion over recent months. This
situation of persistently more liquidity than is needed to finance non-inflationary economic growth
reflects past portfolio shifts, precautionary savings and the low level of interest rates. The low level of
interest rates also supported the annual growth of loans to the private sector, which fluctuated
between 41⁄2% and 5% in recent months. At the current juncture, the accumulation of excess liquidity is
not of concern for price stability, given the economic outlook. However, if it were to continue in
conjunction with a significant strengthening of economic activity, it could lead to inflationary pressures
in the medium term.
Cross-checking the information from the two pillars, our economic analysis indicates that the
medium-term outlook for price stability remains favourable, in the context of a gradual economic
recovery and moderate import price and wage developments. In view of the economic situation, the
strong monetary expansion should not, for the time being, be seen as adversely affecting this outlook.
Fiscal developments and the Stability and Growth Pact are now at a critical point at which the
credibility of the institutional underpinnings of EMU must be maintained. The Treaty and the Stability
and Growth Pact provide an appropriate framework for ensuring fiscal discipline, within adequate
bounds of flexibility. The deficit reference value of 3% of GDP, which is laid down in the Maastricht
Treaty itself, is the nominal anchor for the rules and procedures governing fiscal policies in the EU.
This anchor must not be placed in doubt.
Fully abiding by the rules and implementing them in every respect has very solid economic
justifications, and is not a mere procedural matter. Upholding trust in the soundness of public finances
enhances confidence of all economic agents and thereby contributes to sustainable growth in
consumption and investment. Stability and growth are thus not conflicting objectives, but rather
reinforce each other - a fact which is very well captured in the title of the fiscal framework called the
"Stability and Growth Pact". Concerning recent developments in the context of the excessive deficit
procedure, it is the view of the Governing Council that the proposals of the Commission push the room
for interpretation of the rules and procedures to the limit. As regards future decisions, which are
expected in the course of November, the Governing Council strongly urges each institution and
government concerned to live up to their responsibilities. It is the overall credibility of the fiscal
framework and, hence, the prospects for economic growth in the euro area that are at stake.
Fiscal consolidation plans are best placed within a comprehensive and credible medium-term strategy.
This requires strong emphasis on structural expenditure reforms and the adaptation of public pension
and health systems to the challenges arising from the ageing of the population. Moreover, structural
reforms in the labour and product markets are needed to allow a better allocation and utilisation of
capital and human resources, and to enhance the euro area's growth potential. The Governing
Council strongly supports current efforts by a number of governments in this direction and also
encourages social partners to fully commit themselves to the objective of making the euro area a more
dynamic and innovative economy.
We are now at your disposal for questions.