European Central Bank: Press conference - introductory statement
Introductory statement by Mr Jean-Claude Trichet, President of the European Central Bank, at the
press conference following the meeting of the ECB Governing Council, Madrid, 8 June 2006.
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Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to the press
conference here in Madrid. I would particularly like to thank Governor Caruana for his kind hospitality
and express our special gratitude to the staff of the Banco de España for their excellent organisation.
Let me now report on the outcome of today's 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 have been identified
through both our economic and monetary analyses. The further withdrawal of monetary
accommodation will thus contribute to ensuring that longer-term inflation expectations in the euro area
remain solidly anchored at levels consistent with price stability. As stressed on previous occasions,
such anchoring is a prerequisite for monetary policy to make an ongoing contribution towards
supporting economic growth and job creation in the euro area. Overall, also after today's increase, the
key ECB interest rates are still low by historical standards, liquidity is ample and our monetary policy
remains accommodative. Given the outlook for price developments and the dynamism of money and
credit growth in the euro area, we will continue to monitor closely all developments to ensure price
stability over the medium and longer term.
Allow me to explain our assessment in greater detail, starting with the economic analysis.
All the main indicators of economic activity that have recently become available are positive.
According to Eurostat's first estimate, on a quarter-on-quarter basis, real GDP grew by 0.6% in the
euro area in the first quarter of 2006, compared with 0.3% in the previous quarter, with domestic
demand making a significant contribution. The expected re-acceleration of real GDP growth in the first
months of 2006 has thus materialised, confirming our view that economic growth is broadening and
becoming more sustained. This assessment is further supported by information on activity in the
second quarter - such as various confidence surveys and indicator-based estimates - which
continues to be encouraging.
Looking further ahead, the conditions are in place for growth in the euro area to remain close to its
trend potential rate, despite the impact of the rise in oil prices. Growth in the economies of the euro
area's main trading partners remains robust, providing support for euro area exports. Strong
investment growth is expected to continue, benefiting from favourable financing conditions, corporate
balance sheet restructuring, and gains in earnings and business efficiency. Consumption growth
should continue to strengthen gradually over time, in line with developments in real disposable
income, as the labour market situation gradually improves.
This outlook is also reflected in the June Eurosystem staff macroeconomic projections, which provide
additional input into our analysis of the prospects for economic activity. The projections foresee
average annual real GDP growth in a range between 1.8% and 2.4% in 2006, and between 1.3% and
2.3% in 2007. The growth projections for 2006 are broadly unchanged from the ECB staff projections
of March 2006, while those for 2007 are slightly lower, reflecting mainly the recent rise in oil prices.
Most recent forecasts by international organisations and private sector institutions give a broadly
similar picture. It is the Governing Council's view that risks to these projections for economic growth
are broadly balanced over the shorter term, while longer-term downside risks relate mainly to potential
further oil price rises, global imbalances and protectionism.
Turning to price developments, according to Eurostat's flash estimate, annual HICP inflation increased
to 2.5% in May, compared with 2.4% in April and 2.2% in March. Although no detailed information is
available as yet, this increase probably stems from energy price developments. In the months to come
and in 2007, inflation rates are likely to remain above 2%, the precise levels depending on future
energy price developments. While the moderate evolution of labour costs in the euro area is expected
to continue in 2007 - also reflecting ongoing global competitive pressures, particularly in the
manufacturing sector - indirect effects of past oil price increases and the announced changes in
indirect taxes are expected to have a significant upward effect on inflation. Against this background, it
is crucial that the social partners continue to meet their responsibilities.
Further input into our assessment of the outlook for price developments is provided by the June
Eurosystem staff projections. Annual HICP inflation is projected to lie between 2.1% and 2.5% in 2006,
and between 1.6% and 2.8% in 2007. Compared with the March 2006 ECB staff projections, these
ranges imply a slight upward shift to the profile for HICP inflation in 2006, largely reflecting the
assumption of higher oil prices.
In the view of the Governing Council, risks to the outlook for price developments remain on the upside
and include further increases in oil prices, a stronger pass-through of past oil price rises into consumer
prices than currently anticipated, additional increases in administered prices and indirect taxes, and -
more fundamentally - stronger than expected wage developments due to second-round effects of past
oil price increases.
Turning to the monetary analysis, the Governing Council again had a thorough discussion of
underlying developments in money and credit. In a context of already ample liquidity and very strong
monetary and credit growth, the annual growth rate of loans to the private sector has increased further
in recent months to reach double-digit levels. Credit growth has also been broadly based across
sectors. Borrowing by households - especially for house purchase - and by non-financial corporations
has been growing very strongly. At the same time, monetary growth has risen further over the past few
months, with the annual growth rate of M3 standing at 8.8% in April.
The rapid rate of monetary growth continues to be driven mainly by the expansion of its most liquid
components. Thus, the latest developments confirm that the stimulative impact of the low level of
interest rates remains the dominant factor behind the current high trend rate of monetary expansion,
which signals inflationary risks over the medium to longer term. The further acceleration of monetary
and credit growth in this environment of already ample liquidity points to increased upside risks to
price stability at longer horizons. Monetary developments, therefore, require careful monitoring, in
particular in the light of strong dynamics in housing markets.
To sum up, annual inflation rates are projected to remain elevated in 2006 and 2007, with risks to this
outlook on the upside. Given the strength of monetary and credit growth and the ample liquidity
situation, a cross-check of the outcome of the economic analysis with that of the monetary analysis
confirms that upside risks to price stability over the medium term prevail. A further adjustment of
interest rates was therefore warranted. By acting in a timely fashion, the Governing Council is helping
to keep medium and long-term inflation expectations in line with price stability, thereby making an
ongoing contribution to sustainable economic growth and job creation. Overall, our monetary policy
remains accommodative and the Governing Council will continue to monitor closely all developments
to ensure that risks to price stability do not materialise.
With regard to fiscal policies, the forecasts published recently by the Commission point to a broadly
unchanged situation in the euro area in 2006 and 2007; deficit ratios are expected to remain at around
the 2005 level of 2.4%, while debt ratios, after declining only marginally, are forecast at levels still
above 70% of GDP. This is disappointing against the background of the economic outlook. Most
countries with an excessive deficit have not corrected their position in a timely manner. Furthermore,
there is a risk of consolidation delays in other countries. It is crucial to avoid the mistakes of the past,
when many countries failed to consolidate sufficiently in good times. The Governing Council considers
that more determined progress is required towards sound public finances in a number of countries,
that concrete and credible measures should be implemented swiftly as part of a medium-term-oriented
strategy, and that it is vital to consolidate confidence in the revised Stability and Growth Pact by
ensuring the sustainability of public finances in the euro area.
In terms of structural reforms, the Governing Council reiterates its call for the implementation of firm
measures to ensure open, competitive and well-functioning product and labour markets, so as to foster
an attractive environment for investment and innovation and to promote flexibility in wages and prices.
There is a broad and firm consensus that such reforms are beneficial in promoting growth and
employment and in enhancing the resilience of the euro area economy to external shocks. At the
same time, these reforms would further facilitate intra-euro area adjustments by reducing rigidities that
contribute, in some economies, to wage developments that lead to high and persistent unit labour cost
growth, higher inflationary pressure and losses in competitiveness. Examples of such rigidities are low
productivity growth due to a lack of competition in some sectors and an explicit or de facto indexation
of nominal wages to prices. All in all, a comprehensive set of reforms is essential to strengthen the
foundations for sustained growth in output and employment across the euro area, to underpin the
ongoing economic recovery and to further smoothen the functioning of adjustment mechanisms in the
euro area, thereby facilitating the conduct of the single monetary policy.
We are now at your disposal for questions.