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 February 2010.
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Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our
press conference today. We will now report on the outcome of today's meeting of the
Governing Council.
Based on its regular economic and monetary analyses, the Governing Council decided to
leave the key ECB interest rates unchanged. The current rates remain appropriate. Taking
into account all the information and analyses that have become available since our meeting
on 14 January 2010, price developments are expected to remain subdued over the
policyrelevant horizon. The latest information has also confirmed that euro area economic activity
continued to expand around the turn of the year. Looking ahead, the Governing Council
expects the euro area economy to grow at a moderate pace in 2010. The recovery process is
likely to be uneven and the outlook remains subject to uncertainty. The outcome of the
monetary analysis confirms the assessment of low inflationary pressure over the medium
term. All in all, we expect price stability to be maintained over the medium term, thereby
supporting the purchasing power of euro area households. Medium to longer-term inflation
expectations remain firmly anchored in line with the Governing Council's aim of keeping
inflation rates below, but close to, 2% over the medium term.
Let me now explain our assessment in greater detail, starting with the economic analysis.
The latest information confirms that economic activity in the euro area continued to expand
around the turn of the year. The euro area has been benefiting from a turn in the inventory
cycle and a recovery in exports, as well as from the significant macroeconomic stimulus
under way and the measures adopted to restore the functioning of the financial system.
However, these stimuli will unwind over time, while activity is likely to be adversely affected
by the ongoing process of balance sheet adjustment in the financial and non-financial
sectors, both inside and outside the euro area. In addition, low capacity utilisation rates are
likely to dampen investment, and unemployment in the euro area is expected to increase
somewhat further, thereby lowering consumption growth. For these reasons, the euro area
economy is expected to grow only at a moderate pace in 2010 and the recovery process
could be uneven.
The Governing Council continues to view the risks to this outlook as broadly balanced. On
the upside, confidence may improve more than expected, and both the global economy and
foreign trade may recover more strongly than projected. Furthermore, there may be stronger
than anticipated effects stemming from the extensive macroeconomic stimulus being
provided and from other policy measures taken. On the downside, concerns remain relating
to a stronger or more protracted than expected negative feedback loop between the real
economy and the financial sector, renewed increases in oil and other commodity prices, the
intensification of protectionist pressures and the possibility of a disorderly correction of global
imbalances.
With regard to price developments, euro area annual HICP inflation increased further in
January 2010 to stand at 1.0%, according to Eurostat's flash estimate, after 0.9% in
December 2009. Inflation is expected to be around 1% in the near term and to remain
moderate over the policy-relevant horizon. In line with a slow recovery in demand in the euro
area and elsewhere, overall price, cost and wage developments are expected to stay
subdued. In this context, it is important to emphasise that inflation expectations over the
medium to longer term remain firmly anchored in line with the Governing Council's aim of
keeping inflation rates below, but close to, 2% over the medium term.
Risks to this outlook remain broadly balanced. They relate, in particular, to the further
development of economic activity and the evolution of commodity prices. Furthermore,
increases in indirect taxation and administered prices may be stronger than currently
expected, owing to the need for fiscal consolidation in the coming years.
Turning to the monetary analysis, the annual growth rate of M3 remained negative in
December 2009, standing at -0.2%. In the same period, annual growth in loans to the private
sector was zero. These data continue to support our assessment of a moderate underlying
pace of monetary expansion and low inflationary pressures over the medium term. Actual
monetary developments are likely to be weaker than the underlying pace of monetary
expansion, owing to the downward impact of the rather steep yield curve. Looking ahead, M3
and credit growth is likely to remain weak for some time to come.
The prevailing interest rate constellation continues to have a strong influence on both the
level and composition of annual M3 growth. On the one hand, the low rates of remuneration
on short-term bank deposits foster the allocation of funds away from M3 and into longer-term
deposits and securities. On the other hand, the narrow spreads between the interest rates
paid on different short-term deposits imply a low opportunity cost of holding funds in the most
liquid components included in M1, which continued to grow at a robust annual rate of more
than 12% in December.
The zero annual growth rate of bank loans to the private sector reflects a further increase in
the growth in loans to households, while the annual growth in loans to non-financial
corporations moved further into negative territory. Such divergence remains in line with
business cycle regularities. The ongoing contraction in the outstanding amounts of loans to
non-financial corporations continues to be accounted for entirely by a strong net redemption
of loans with a short maturity. For the sector as a whole, the overall contraction may be due
partly to substitution with market-based financing.
Given the typical lags between turning points in economic activity and those in the demand
for bank loans, growth in loans can be expected to remain weak over the months to come. In
the meantime, the real cost of external financing for non-financial enterprises has declined
further, while the net tightening of credit standards applied by banks has continued to
diminish, as indicated by the Bank Lending Survey for the last quarter of 2009. At the same
time, banks have continued to reduce the size of their overall balance sheets over the past
few months. In this respect, the challenge remains for banks to adjust the size and structure
of their balance sheets while ensuring the availability of credit to the non-financial sector. To
address this challenge, banks should use the improved funding conditions to strengthen their
capital bases further and, where necessary, take full advantage of government support
measures for recapitalisation. This is important to facilitate access to finance, especially for
those enterprises that do not have recourse to market-based financing.
To sum up, the current key ECB interest rates remain appropriate. Taking into account all the
information and analyses that have become available since our meeting on 14 January 2010,
price developments are expected to remain subdued over the policy-relevant horizon. The
latest information has also confirmed that euro area economic activity continued to expand
around the turn of the year. Looking ahead, the Governing Council expects the euro area
economy to grow at a moderate pace in 2010. The recovery process is likely to be uneven
and the outlook remains subject to uncertainty. A cross-check of the outcome of the
economic analysis with that of the monetary analysis confirms the assessment of low
inflationary pressure over the medium term. All in all, we expect price stability to be
maintained over the medium term, thereby supporting the purchasing power of euro area
households. Medium to longer-term inflation expectations remain firmly anchored in line with
the Governing Council's aim of keeping inflation rates below, but close to, 2% over the
medium term.
We will continue our enhanced credit support to the banking system, while taking into
account the ongoing improvement in financial market conditions and avoiding distortions
associated with maintaining non-standard measures for too long. The Governing Council will,
in early March, take decisions on the continued implementation of the gradual phasing-out of
the extraordinary liquidity measures that are not needed to the same extent as in the past. In
order to counter effectively any threat to price stability over the medium to longer term, the
liquidity provided will be absorbed when necessary. Accordingly, we will continue to monitor
very closely all developments over the period ahead.
As regards fiscal policies, many euro area countries are faced with large, sharply rising
fiscal imbalances, leading to less favourable medium and long-term interest rates and lower
levels of private investment. Moreover, high levels of public deficit and debt place an
additional burden on monetary policy and undermine the Stability and Growth Pact as a key
pillar of Economic and Monetary Union. Against this background, it is of paramount
importance that the stability programme of each euro area country clearly defines the fiscal
exit and consolidation strategies for the period ahead. Countries will be required to meet their
commitments under the excessive deficit procedures. Consolidation of public finances should
start in 2011 at the latest and will have to exceed substantially the annual adjustment of 0.5%
of GDP set as a minimum requirement by the Stability and Growth Pact. A strong focus on
expenditure reforms is needed.
The key challenge in order to reinforce sustainable growth and job creation is to accelerate
structural reforms, as the financial crisis has negatively affected the productive capacity of
our economies. In the case of product markets, policies that enhance competition and
innovation are urgently needed to speed up restructuring and investment and to create new
business opportunities. In labour markets, moderate wage-setting, effective incentives to
work and sufficient labour market flexibility are required in order to avoid significantly higher
structural unemployment over the coming years. Finally, an appropriate restructuring of the
banking sector should play an important role. Sound balance sheets, effective risk
management and transparent, robust business models are key to strengthening banks'
resilience to shocks, thereby laying the foundations for sustainable growth and financial
stability.
We are now at your disposal for questions.