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,
10 January 2008.
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Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our first
press conference of 2008. Let me therefore wish you all a very Happy New Year. I would
also like to take this opportunity to welcome Cyprus and Malta as countries which have
adopted the euro as their currency. With Cyprus and Malta, the euro area now comprises 15
EU Member States. Accordingly, Mr Orphanides, the Governor of the Central Bank of
Cyprus, and Mr Bonello, the Governor of the Central Bank of Malta, became members of the
Governing Council on 1 January 2008.
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. According to the latest information, strong
short-term upward pressure on inflation has continued, with HICP inflation remaining at 3.1%
in December. As regards the medium term, and in a context of very vigorous money and
credit growth, our assessment of upside risks to price stability has been fully confirmed. The
Governing Council remains prepared to act pre-emptively so that second-round effects and
upside risks to price stability over the medium term do not materialise and, consequently,
medium and long-term inflation expectations remain firmly anchored in line with price
stability. Reflecting its mandate, such anchoring is of the highest priority to the Governing
Council. The economic fundamentals of the euro area are sound. However, the ongoing
reappraisal of risk in financial markets is still accompanied by uncertainty about its potential
impact on the real economy and the risks surrounding the outlook for economic activity are
on the downside. We will continue to monitor very closely all developments over the coming
weeks.
Allow me to explain our assessment in greater detail, starting with the economic analysis.
The latest information on economic activity suggests that quarterly growth at the turn of the
year was at a more moderate pace than the quarter-on-quarter rate of 0.8% observed in the
third quarter of 2007 (revised upwards from 0.7%). This assessment is in line with indicators
for business and consumer confidence which, while declining over the past few months,
generally remain at levels that continue to point to ongoing growth.
Our main scenario remains that of real GDP growth broadly in line with trend potential. The
fundamentals of the euro area economy are sound, profitability has been sustained,
employment growth has been robust and unemployment rates have fallen to levels not seen
for 25 years. Consumption growth should therefore continue to contribute to economic
expansion, in line with real disposable income, and investment growth should provide
ongoing support. On the expectation that the global economy will, on balance, remain
resilient - with the slowdown in economic growth in the United States being mitigated by the
continued strength of emerging market economies - external demand should support euro
area exports.
That said, uncertainty about the prospects for economic growth remains high and the risks
surrounding the outlook for economic activity lie on the downside. The latter relate mainly to
a potentially broader than currently expected impact of the ongoing reappraisal of risk in
financial markets on financing conditions and economic sentiment, with a negative impact on
world and euro area growth. Further downside risks stem from the scope for additional oil
and other commodity price rises, concerns about protectionist pressures and the possibility
of disorderly developments due to global imbalances.
With regard to price developments, according to Eurostat's flash estimate the annual HICP
inflation rate was 3.1% in December 2007, unchanged from November. This confirms the
strong upward pressure on inflation in the short term, stemming mainly from strong increases
in oil and food prices in recent months.
Looking ahead, the annual HICP inflation rate is expected to remain significantly above 2% in
the coming months and is likely to moderate only gradually in the course of 2008. Hence, the
period of temporarily high rates of inflation would be somewhat more protracted than
previously expected. Moreover, it is important to stress that the expectation of a moderation
in the rate of inflation - which is embedded in the December 2007 Eurosystem staff
macroeconomic projections - assumes some reversal of the recent rises in commodity prices
- in line with what is currently captured by futures prices - and, more fundamentally, that
recent oil and food price dynamics and their impact on HICP inflation do not have
broadlybased second-round effects on wage and price-setting behaviour.
Risks to this medium-term outlook for price developments are fully confirmed to lie on the
upside. These risks include the possibility that stronger than currently expected wage growth
may emerge, taking into account capacity constraints and the positive developments in
labour markets. Furthermore, the pricing power of firms - notably in market segments with
low competition - could be stronger than expected. At this juncture, it is imperative that all
parties concerned meet their responsibilities and that second-round effects on wage and
price-setting stemming from current inflation rates be avoided. In the view of the Governing
Council, this is absolutely essential in order to preserve price stability in the medium run and
thereby the purchasing power of all euro area citizens. The Governing Council is monitoring
wage negotiations in the euro area countries with particular attention. Any indexation scheme
of nominal wages to prices should be eliminated. Finally, further rises in oil and agricultural
prices, continuing the strong upward trend observed in recent months, as well as increases
in administered prices and indirect taxes beyond those foreseen thus far, could materialise.
The monetary analysis confirms the prevailing upside risks to price stability at medium to
longer-term horizons. Money and credit have both continued to grow vigorously in recent
months. The annual growth rate of M3 in November, unchanged at 12.3%, is likely to have
been influenced by a number of temporary factors, such as the flattening of the yield curve,
the financial market turmoil and specific transactions associated with the restructuring of
certain banking groups. Nonetheless, even taking these special factors into account, the
underlying rate of monetary expansion remains strong. Moreover, the sustained expansion of
loans to the domestic private sector, which grew at an annual rate of 11.0% in November,
points to the continued vigour of underlying monetary dynamics. Monetary developments
continue to require very careful monitoring, both to detect underlying trends associated with
inflationary pressures at longer horizons and to form a better understanding of shorter-term
monetary dynamics.
Such monitoring will also 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 at present given recent financial
market developments. Heightened financial volatility may influence the short-term behaviour
of money-holders and thereby complicate the extraction of the underlying trend monetary
developments. At the same time, monetary and credit data can also offer an important insight
into how financial institutions, households and firms have responded to the financial market
turmoil.
For the time being, however, there is little evidence that the financial market turbulence since
early August 2007 has strongly influenced the dynamics of broad money and credit
aggregates. Indeed, the growth of bank loans to the domestic private sector has remained
robust in recent months, which may suggest that the supply of credit has not been impaired
thus far. The growth of M1 and household borrowing have moderated further over the past
few quarters, reflecting the impact of higher key ECB interest rates since December 2005
rather than the influence of the financial turmoil. Borrowing by non-financial corporations
remains very strong. Further data and analysis will be required in order to obtain a more
complete picture of the impact of the financial market developments on banks' balance
sheets, financing conditions and money and credit growth.
To sum up, a cross-check of the outcome of the economic analysis with that of the
monetary analysis fully confirms the assessment that there are upside risks to price stability
over the medium term, in a context of very vigorous money and credit growth and sound
economic fundamentals in the euro area. At the same time, the potential impact on the real
economy of the ongoing reappraisal of risk in financial markets remains uncertain.
Consequently, we will monitor very closely all developments. The Governing Council remains
prepared to act pre-emptively so that second-round effects and upside risks to price stability
do not materialise and, consequently, medium and long-term inflation expectations remain
firmly anchored in line with price stability. Reflecting its mandate, such anchoring is of the
highest priority to the Governing Council.
Turning to fiscal policy, most euro area countries have submitted their updated stability
programmes. On this basis, after a reduction in the euro area aggregate deficit ratio in 2007,
an increase in the ratio is projected for 2008 despite many countries not having achieved
sound fiscal positions. There is a clear risk that some countries will fail to comply with the
provisions of the preventive arm of the Stability and Growth Pact, thereby undermining the
credibility of the Pact. In 2008 some countries with fiscal imbalances will consolidate by less
than the required minimum of 0.5% of GDP in structural terms. In these countries, much
more ambitious policies will be necessary to ensure that they achieve their medium-term
objectives by 2010 at the latest, in accordance with their commitment of April 2007.
With regard to structural reforms, the new three-year cycle of the Lisbon Strategy for
growth and jobs has started. While the achievements made over the last three years of the
relaunched Strategy are encouraging, it is important that governments step up their reform
efforts to deliver enhanced knowledge and innovation, competitiveness and labour market
flexibility. Such reforms are crucial to raising productivity and fostering employment
opportunities in the euro area.
We are now at your disposal for questions.
Amando M Tetangco, Jr: The Central Bank of the Philippines in 2008 -
one dynamic team
New Year's message by Mr Amando M Tetangco, Jr, Governor of the Central Bank of the
Philippines (Bangko Sentral ng Pilipinas), to BSPers, at the BSP Flag Raising Ceremony,
BSP Complex, Malate, Manila, 7 January 2008.
* * *
Magandang umaga at maligayang bagong taon sa inyong lahat!
Fellow central bankers. I am very pleased that I am the first speaker this year for our
traditional weekly flag-raising ceremony.
Alam po ninyo, gusto ko pong magpasalamat muli sa inyong lahat dahil talagang maganda
ang naging resulta ng 2007 para sa atin sa Bangko Sentral ng Pilipinas. We were able to
keep inflation at low and stable rates, our banking system is stronger, we have record high
international reserves, record high balance of payments surplus, and our peso is the best
performing currency in Asia. For this, let us give ourselves a well-deserved round of
applause!
If you recall, the Monetary Board improved our salary scheme and incentives program in
2007 in recognition of our good performance. Kaya ba nating ulitin ito?!!! Kaya!!!
I agree with you; especially if we resolve individually and collectively to find even better ways
of doing things in our respective sectors. While we have been performing well in terms of our
mandate, you and I know there is always room for improving our performance.
It can be as simple as using recycled paper for our draft reports, completing our assignments
well ahead of time, conserving water and electricity, finding more cost-effective ways of doing
our work, setting higher standards for the quality of work we do, and contributing to the
overall effort to transform the Bangko Sentral ng Pilipinas into a world-class monetary
authority.
Fellow BSPers. The months and years ahead hold a lot of challenges that demand new and
better ways of doing things. Our operating environment continues to evolve and change.
Therefore, it is not feasible to remain static and continue to depend on old systems and
procedures.
Thus, while we have become good inflation targeters, we still continue to seek third party
expert evaluation of the tools we use to craft and implement responsive monetary policies.
The Monetary Stability Sector will also implement more streamlined cash management
operations system this year, among others.
At the same time, we are reorganizing our Supervision and Examination Sector to adopt to a
rapidly changing environment and implement reforms that will make our banking system
stronger, more efficient, at par with international standards, and more responsive to the
needs of our economy and our people.
The Resource Management Sector, on the other hand, will ensure that BSPers are properly
equipped with the appropriate skills and expertise required by our institution. 2008 also
marks our shift to a more meaningful appraisal system in accordance with our merit system
for salary adjustments and promotions.
Even the way we estimate and produce our currency requirements at the Security Plant
Complex is undergoing review to make it more efficient and responsive to the needs of the
economy.
Indeed, change is happening around us. Now, more than ever, we need to be open to
change, to be flexible to be dynamic to achieve the goals we have set under our Medium
Term Development Program.
Nevertheless, even as we welcome change, we should, at all times, remain faithful to the five
core values of our institution, which are: patriotism, integrity, excellence, dynamism and
solidarity.
These core values should serve as our enduring and lasting guides as we deal with the
opportunities and challenges ahead of us.
Ladies and gentlemen of the Bangko Sentral ng Pilipinas. By tradition, this is the time of year
when we commit to do better through what we call New Year's resolution.
As our joint New Year's resolution therefore, let us commit to be guided by our core values,
at all times, wherever we may be.
Muli sa ngalan po ng ating Monetary Board at nang aking pamilya kasama na ang aking
maybahay na si Elma at tatlong anak, ako po ay nagpapasalamat sa inyong lahat at
humihiling na sana ay maging masaya, malusog, masagana, at matagumpay ang 2008 para
sa ating lahat, at sa ating mga kababayan!
Mabuhay ang Bangko Sentral! Mabuhay ang Pilipinas!