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,
Venice, 8 October 2009.
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Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our
press conference here in Venice. I would like to thank Governor Draghi for his kind hospitality
and to express our special gratitude to his staff for the excellent organisation of the meeting
of the Governing Council. We will now report on the outcome of today's meeting of the
Governing Council, which was also attended by Commissioner Almunia.
On the basis of its regular economic and monetary analyses, the Governing Council decided
to leave the key ECB interest rates unchanged. The current rates remain appropriate. The
incoming information and analyses since our last meeting in early September have confirmed
our previous assessment. While annual HICP inflation was still slightly negative in
September, according to Eurostat's flash estimate, it is expected to turn positive again in the
coming months and to remain at moderately positive rates over the policy-relevant horizon.
At the same time, the latest information further supports our view that the euro area economy
is stabilising and is expected to recover at a gradual pace. However, uncertainty remains
high. As regards medium to longer-term inflation expectations, they remain firmly anchored in
line with the Governing Council's aim of keeping inflation rates below, but close to, 2% over
the medium term. The outcome of the monetary analysis confirms the assessment of low
inflationary pressure over the medium term, as money and credit expansion continues to
moderate. Against this background, we expect price stability to be maintained over the
medium term, thereby supporting the purchasing power of euro area households.
Let me now explain our assessment in further detail, starting with the economic analysis.
Available survey indicators continue to signal an ongoing stabilisation of economic activity. In
particular, the euro area should benefit from a recovery in exports, the significant
macroeconomic stimulus under way and the measures taken to restore the functioning of the
financial system. In addition, following the substantial negative contributions in the first half of
2009, the inventory cycle is expected to contribute positively to real GDP growth in the
second half of the year. However, uncertainty remains high and the volatility in incoming data
warrants a cautious interpretation of the available information. Overall, the recovery is
expected to remain rather uneven. It will be supported in the short term by a number of
temporary factors but is likely to be affected over the medium term by the process of ongoing
balance sheet correction in the financial and the non-financial sector of the economy, both
inside and outside the euro area.
In the view of the Governing Council, the risks to this outlook remain broadly balanced. On
the upside, there may be stronger than anticipated effects stemming from the extensive
macroeconomic stimulus being provided and from other policy measures taken. Confidence
may also improve more quickly, the labour market deterioration may be less marked than
previously expected and foreign demand may prove to be stronger than projected. On the
downside, concerns remain relating to a stronger or more protracted 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, annual HICP inflation stood at -0.3% in September,
according to Eurostat's flash estimate, compared with -0.2% in August. The current negative
inflation rates are in line with previous expectations and reflect largely base effects resulting
from the movements in global commodity prices a year ago. Also owing to base effects,
annual inflation rates are projected to turn positive again in the coming months. Thereafter,
over the policy-relevant horizon, inflation is expected to remain in positive territory, with
overall price and cost developments staying subdued reflecting ongoing sluggish demand in
the euro area and elsewhere. In this context, it is important to re-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 outlook for
economic activity and to 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 latest data confirm that developments in broad money
and credit growth remain subdued. In August, the annual growth of M3 and loans to the
private sector declined further to historically low rates of 2.5% and 0.1% respectively. This
parallel deceleration in money and credit growth confirms our previous assessment of a
moderate underlying pace of monetary expansion and low inflationary pressures over the
medium term.
The ongoing deceleration in annual M3 growth has continued to be accompanied by a
strengthening in annual M1 growth, which in August rose further to 13.6%. The strength of
M1 reflects the fact that narrower spreads between the rates on different short-term deposits
have fostered shifts in the allocation of funds from, in particular, short-term time deposits to
overnight deposits. At the same time, the steep slope of the yield curve may have supported
shifts from M3 to longer-term deposits and securities outside M3.
The overall flow of bank loans to the non-financial private sector remained subdued in
August. In the case of households, the latest data suggest that the decline in loan growth has
been levelling off at low rates of expansion. In the case of non-financial corporations,
following a few months of negative flows, the flow of loans was again slightly positive in
August. Looking through the volatility in monthly data, loan growth continues to be very
subdued. This is in line with the lag that normally prevails between trends in economic
activity and developments in loans to enterprises. In this respect, given the subdued levels of
production and trade, as well as the ongoing uncertainty with regard to the business outlook,
further weak developments in loans to non-financial corporations in the coming months
appear likely. At the same time, the ongoing improvement in financing conditions should
support the demand for credit in the period ahead. Against the background of highly
demanding challenges, banks should take appropriate measures to strengthen further their
capital bases and, where necessary, take full advantage of government measures to support
the financial sector, particularly as regards recapitalisation.
To sum up, the current rates remain appropriate. The incoming information and analyses
since our last meeting in early September have confirmed our previous assessment. While
annual HICP inflation was still slightly negative in September, according to Eurostat's flash
estimate, it is expected to turn positive again in the coming months and to remain at
moderately positive rates over the policy-relevant horizon. At the same time, the latest
information further supports our view that the euro area economy is stabilising and is
expected to recover at a gradual pace. However, uncertainty remains high. As regards
medium to longer-term inflation expectations, they remain firmly anchored in line with the
Governing Council's aim of keeping inflation rates below, but close to, 2% over the medium
term. Cross-checking the outcome of the economic analysis with that of the monetary
analysis confirms the assessment of low inflationary pressure over the medium term, as
money and credit expansion continues to moderate. Against this background, we expect
price stability to be maintained over the medium term, thereby supporting the purchasing
power of euro area households.
As the transmission of monetary policy works with lags, we expect that our policy action will
progressively feed through to the economy in full. Hence, with all the measures taken,
including our latest 12-month longer-term refinancing operation of 30 September, monetary
policy is providing strong ongoing support to the economy. Once the macroeconomic
environment improves, the Governing Council will make sure that the measures taken are
unwound in a timely fashion and that the liquidity provided is absorbed in order to counter
effectively any threat to price stability over the medium to longer term. By so doing, the
Governing Council will continue to ensure a firm anchoring of medium-term inflation
expectations. Such anchoring is indispensable to supporting sustainable growth and
employment and contributing to financial stability. Accordingly, we will continue to monitor
very closely all developments over the period ahead.
As regards fiscal policies, the need for ambitious and realistic fiscal exit and consolidation
strategies is becoming increasingly pressing. It is vital that governments put in place
concrete structural measures and convincingly communicate that they are committed to
ensuring the sustainability of public finances. Governments should design their consolidation
plans in line with the provisions of the Stability and Growth Pact, ensuring that consolidation
starts as soon as possible and at the latest when the recovery takes hold. These plans
should also be accompanied by a strengthening of national budgetary frameworks.
Consolidation efforts should be stepped up in 2011 and will need to exceed significantly the
benchmark of 0.5% of GDP per annum set in the Stability and Growth Pact. In countries with
high deficit and/or debt ratios, the annual structural adjustment should reach at least 1% of
GDP. In view of the rapidly increasing public expenditure ratios, as well as projected further
expenditure pressures owing to higher interest burdens and ageing-related costs, countries'
structural measures should focus on the expenditure side.
Turning to structural reforms, in all countries more efforts are crucial to support sustainable
growth and employment as it is likely that the financial crisis has affected the productive
capacity of our economies. In particular, appropriate wage-setting, sufficient labour market
flexibility and effective incentives to work are required. At the same time, policies that
enhance competition and innovation are urgently needed to speed up restructuring and
investment and to create the business opportunities and productivity gains needed to ensure
a sustained recovery. An appropriate restructuring and consolidation of the banking sector
should also play an important role. Sound balance sheets, sound risk management, and
transparent as well as robust business models are key to strengthening the financial
soundness of banks and their resilience to shocks, thereby laying the foundations for
sustainable economic growth and financial stability.
We are now at your disposal for questions.