European Central Bank: Press conference - introductory statement
Introductory statement by Mr Jean-Claude Trichet, President of the European Central Bank, Mr Lucas
Papademos, Vice-President of the European Central Bank and Mr John Hurley, Governor of the
Central Bank & Financial Services Authority of Ireland, Dublin, 10 May 2007.
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Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to today's press
conference here in Dublin. I would like to thank Governor Hurley for his kind hospitality and to express
our special gratitude to his staff for the excellent organisation of the meeting of the Governing Council.
Let me now 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 key ECB interest rates unchanged. The information that has become available since our last
meeting has further underpinned the reasoning behind our decision to increase interest rates in
March. Strong vigilance is of the essence in order to ensure that risks to price stability over the
medium term do not materialise. In turn, this 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. Given the favourable
economic environment, our monetary policy continues to be on the accommodative side, with the key
ECB interest rates moderate, money and credit growth vigorous, 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.
Turning first to the economic analysis, the latest indicators and survey data confirm that the
expansion of economic activity continued in the first quarter of 2007 and remains solid and
broadbased. Looking ahead, the medium-term outlook for economic growth in the euro area continues to be
favourable. Conditions are in place for the ongoing expansion to proceed at sustained rates. Global
economic growth has become more balanced across regions and, while moderating somewhat in
recent quarters, remains strong. External conditions thus continue to provide support for euro area
exports. Domestic demand in the euro area is also expected to maintain its momentum. Investment
should remain dynamic, benefiting from an extended period of favourable financing conditions,
balance sheet restructuring, strong corporate earnings and gains in business efficiency. Consumption
should also strengthen further over time, in line with developments in real disposable income,
increasingly supported by employment growth and improving labour market conditions.
The risks surrounding this favourable outlook for economic growth are broadly balanced over the
shorter term. At longer horizons, the balance of risks remains on the downside, stemming mainly from
external factors. Such factors include fears of a rise in protectionist pressures, the possibility of further
increases in oil prices and concerns about possible disorderly developments due to global imbalances.
With regard to price developments, according to Eurostat's flash estimate, annual HICP inflation was
1.8% in April 2007, after 1.9% in March. Looking at the coming months, barring further increases in oil
prices, significant base effects deriving from last year's energy price volatility will strongly influence the
profile of annual inflation rates. On the basis of the current level of oil prices and oil price futures,
annual inflation rates are likely to fall somewhat in the months to come, before rising again towards the
end of the year to hover at levels around 2%.
Over the policy-relevant medium-term horizon, the outlook for price developments remains subject to
upside risks. These relate notably to the increasing capacity utilisation in the euro area economy, the
possibility of further oil price rises and additional increases in administered prices and indirect taxes
beyond those announced and decided thus far. More fundamentally, stronger than currently expected
wage developments could pose significant upward risks to price stability, not least in view of the
favourable momentum in labour markets observed over the past few quarters. The Governing Council
is monitoring wage negotiations in the euro area countries with particular attention. It is crucial that the
social partners meet their responsibilities so as to continue to avoid wage developments that would
eventually lead to inflationary pressures and harm the purchasing power of all euro area citizens. In
this context, it is also important to point out that wage agreements should be sufficiently differentiated
and take into account price competitiveness positions, the still high level of unemployment in many
economies and productivity developments across sectors.
The monetary analysis confirms the prevailing upside risks to price stability at medium to longer
horizons. The underlying rate of monetary expansion remains strong, in a context of already ample
liquidity. The ongoing strength of monetary expansion is reflected in the increasingly rapid growth of
M3, which in March reached an annual rate of 10.9%, as well as in the ongoing high levels of credit
growth. Monetary and credit expansion is due partly to the moderate level of interest rates and solid
economic growth.
Short-term monetary and credit developments can be affected, inter alia, by the shape of the yield
curve and external factors, and be subject to some degree of volatility. Looking through such transitory
aspects, there are, however, several indications that higher short-term interest rates are influencing
monetary dynamics, although they have not, as yet, significantly dampened the overall strength of
these dynamics. For example, increases in short-term rates have served to moderate the expansion of
the narrow aggregate, M1, in recent quarters, but its annual growth is still robust. Equally, the annual
growth rate of loans to the private sector has shown some signs of stabilising since mid-2006, albeit at
double-digit levels.
All in all, taking into account both short-term factors and the underlying trend of the continued vigorous
expansion of money and credit, there are clear indications of upside risks to price stability at medium
to longer-term horizons. In fact, following several years of robust monetary growth, the liquidity
situation in the euro area is ample by all plausible measures. In this environment, monetary
developments continue to require very careful monitoring, particularly against the background of a
solid expansion in economic activity and still strong property market developments.
To sum up, in assessing price trends it is important to look beyond any short-term volatility in inflation
rates. The relevant horizon for monetary policy is the medium term. Risks to the medium-term outlook
for price stability remain on the upside, relating in particular to stronger than currently expected wage
developments in a context of ongoing robust growth in employment and economic activity. Given the
vigorous monetary and credit growth in an environment of already 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 longer term. Accordingly, the Governing
Council will continue to be strongly vigilant in order to ensure that risks to price stability over the
medium term do not materialise. This will support the solid anchoring of medium to longer-term
inflation expectations in the euro area at levels consistent with price stability. Therefore, looking
ahead, acting in a firm and timely manner to ensure price stability in the medium term remains
warranted.
In relation to fiscal policies, the Governing Council welcomes the recent commitment by the euro
area finance ministers - at the Eurogroup meeting in Berlin on 20 April - to make full use of the
current economic growth and better than expected tax revenues to pursue sound fiscal policies and to
avoid procyclical policies in line with the provisions of the Stability and Growth Pact. In the view of the
Governing Council, this requires a rigorous implementation of 2007 budgets, the avoidance of
expenditure overruns and the full allocation of unexpected extra revenues to deficit and debt
reduction. For 2008, countries with remaining fiscal imbalances are expected to pursue more
ambitious than planned budgetary targets . As a result, all euro area countries should achieve their
medium-term objective of sound budgetary positions as soon as possible and by 2010 at the latest.
Moreover, all countries should avoid fiscal policies that feed macroeconomic imbalances. This would
allow euro area countries to prepare themselves for less favourable economic conditions.
As repeatedly stressed, the Governing Council fully supports structural reforms that enhance
competition, increase productivity and foster economic flexibility, thus promoting the potential for real
GDP growth and employment. Increased productivity also allows for increases in real wages without
negatively impacting on employment, thereby supporting the income growth of the euro area work
force. In recent years, average wage increases in the euro area as a whole have been rather
moderate, making a vital contribution to job creation and lower unemployment. It is important that this
favourable trend in labour markets continues, so contributing to a prolonged and robust upswing. In
this respect, sufficient wage differentiation is required so as to improve employment opportunities for
less skilled workers and in sectors and regions with high unemployment. Furthermore, the removal of
impediments to labour mobility would help to address local imbalances in labour markets and to
enhance the adjustment flexibility of euro area economies to economic shocks. The euro area could
reap major benefits from these policies in terms of economic dynamism, more job creation, lower
unemployment and increased per capita income.
We are now at your disposal for questions.