European Central Bank: Press conference - introductory statement
Introductory statement by Mr Jean-Claude Trichet, President of the European Central Bank, Frankfurt
am Main, 11 January 2007.
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Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our first press
conference in 2007. Let me therefore wish you all a very Happy New Year. I would also like to take
this opportunity to welcome Slovenia as the thirteenth country to adopt the euro as its currency.
Accordingly, Mr Gaspari, the Governor of Banka Slovenije, became a member of the Governing
Council on 1 January 2007.
Let me now report on the outcome of our meeting, which was also attended by the President of the
Eurogroup, Prime Minister Juncker, and Commissioner Almunia.
On the basis of our regular economic and monetary analyses, we decided at today's meeting to leave
the unchanged. The information that has become available since our last
key ECB interest rates
meeting has further underpinned the reasoning behind our decision to increase interest rates in
December. It has also confirmed that very close monitoring of all developments is of the essence so
that risks to price stability over the medium term do not materialise. This will permit medium to
longerterm inflation expectations in the euro area to 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. Our monetary policy
continues to be accommodative, with the key ECB interest rates remaining at low levels, money and
credit growth very strong, 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, quarter-on-quarter real GDP growth in the euro area was
0.5% in the third quarter of 2006, after very strong growth in the first half of last year. Domestic
demand remained the main driver of economic growth, thus confirming the anticipated broadening of
the recovery and pointing to the increasingly self-sustaining nature of economic expansion in the euro
area. Drawing on the latest information, the evidence from various confidence surveys and
indicatorbased estimates supports the assessment that robust economic growth has continued and that the
situation in labour markets has improved further. While some volatility in the quarter-on-quarter growth
rates around the turn of the year may be observed - associated with the impact of changes in indirect
taxes in a large euro area country - the information available continues to be in line with our baseline
scenario.
Looking ahead, the medium-term outlook for economic activity continues to be favourable and the
conditions remain for the euro area economy to grow solidly, at rates around potential. As for the
external environment, global economic growth has become more balanced across regions, with some
deceleration in the US and resilient growth elsewhere. Overall, global growth should remain robust
and therefore continue to provide support for euro area exports. Domestic demand in the euro area is
expected to maintain its momentum. Investment should remain dynamic, benefiting from an extended
period of very favourable financing conditions, balance sheet restructuring, accumulated and ongoing
strong earnings, and gains in business efficiency. Consumption should also strengthen further over
time, in line with developments in real disposable income, as employment conditions continue to
improve.
In the Governing Council's view, the risks surrounding this broadly favourable outlook for economic
growth over the coming years lie mainly on the downside. The main risks relate to fears of a rise in
protectionist pressures, the possibility of a renewed increase 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
1.9% in December 2006, unchanged from the previous month. On account of their volatility over
recent months, and owing to base effects, energy prices will continue to play an important role in
determining the profile of annual rates of HICP inflation in early 2007, together with the impact of
higher indirect taxes. Looking further ahead, annual inflation rates are projected to hover around 2%
over this year and next.
In the Governing Council's view, the outlook for price developments remains subject to upside risks,
stemming in particular from a stronger than anticipated pass-through of previous oil price increases,
increases in administered prices and indirect taxes beyond those announced thus far, and the
possibility of renewed oil price increases. More fundamentally, given the favourable momentum of real
GDP growth over the past few quarters and positive labour market developments, wage dynamics
could be stronger than currently expected. It is therefore crucial that social partners continue to meet
their responsibilities. In this context, wage agreements should take into account productivity
developments, while recognising the still high level of unemployment and price competitiveness
positions. As stated on previous occasions, it is also important that wage settlements move away from
automatic, backward-looking indexation mechanisms.
Turning to the monetary analysis, annual M3 growth rose to 9.3% in November. This represents its
highest annual rate of growth since the introduction of the euro and, indeed, its strongest aggregate
growth in the euro area group of countries since 1990. While the significance of monthly figures should
not be overstated, as they may also be influenced by temporary factors, the series of strong monetary
data over the past couple of months underscore the continued very dynamic underlying rate of broad
money expansion in the euro area. Rising short-term interest rates, in combination with low long-term
interest rates, have exerted only a limited influence over monetary developments in recent months.
This has mainly taken the form of shifts among the components of M3 rather than constraining the
overall expansion of M3 itself. In particular, over recent months the annual growth rate of M1 has
moderated somewhat, reflecting shifts from overnight deposits into other components of M3 that offer
more market-related returns.
All in all, the rate of monetary and credit expansion remains rapid, reflecting the low level of interest
rates and the strengthening of economic activity in the euro area. In particular, the annual growth rate
of loans to the private sector was 11.2% in November, unchanged from the previous month. While - in
the context of rising interest rates - the growth of household borrowing has shown signs of
stabilisation in recent months, albeit at very high rates, the growth of borrowing by non-financial
corporations continues to trend upwards. Thus, credit continues to expand rapidly and in a
broadbased fashion, thereby remaining the main driver of the current strong monetary growth when viewed
from the counterpart side of the MFI balance sheet.
Taking a medium to longer-term perspective, the latest developments are consistent with a
continuation of the persistent upward trend in the underlying rate of monetary expansion. Following
several years of robust monetary growth, the liquidity situation in the euro area is ample by all
plausible measures. Continued strong monetary and credit growth in an environment of ample liquidity
point to upside risks to price stability over the medium to longer term. Monetary developments
therefore continue to require very careful monitoring, particularly against the background of improved
economic conditions and continued strong property market developments in many parts of the euro
area.
To sum up, annual inflation rates are projected to hover around 2% this year and next, with risks to
this outlook remaining on the upside. Given the very strong 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. Hence, very close monitoring of all developments is of the essence in
order to ensure that risks to price stability over the medium term do not materialise. This will permit
medium to longer-term inflation expectations in the euro area to remain solidly anchored at levels
consistent with price stability. Therefore, looking ahead, acting in a firm and timely manner to ensure
price stability in the medium term is warranted.
As regards fiscal policy, almost all euro area countries have submitted their updated stability
programmes. While these programmes generally indicate that governments plan to proceed towards
sound budgetary positions, there are also indications that budget targets do not consistently imply
sufficient consolidation and that concrete and credible measures have not yet been specified in all
programmes. These indications are a cause of concern and entail risks for the future. Against the
background of current good times, it is essential that sound budgetary positions are reached in
countries with fiscal imbalances and that a pro-cyclical loosening is avoided in all member countries.
Moreover, countries need to improve the quality of their tax and expenditure policies as part of a
comprehensive medium-term strategy, so as to strengthen confidence in a growth and
employmentfriendly, and sustainable, fiscal policy environment.
With regard to structural reforms, over recent years euro area countries have become increasingly
aware of the necessity to adjust to the challenges of increased global competition, ageing populations
and accelerating technological change. In response, some have undertaken reform efforts to create
more job opportunities. Both as a reflection of these reforms and as a result of wage moderation in
some countries, the euro area has seen a remarkable dynamism in employment growth over the
recent period. Notably, around 12 million new jobs were created in the euro area in the eight-year
period since the start of Stage Three of EMU. This compares favourably with the little more than two
million new jobs created in the same group of countries in the eight years before 1999. However, the
Governing Council notes that significant structural impediments continue to exist and contribute to
explaining why unemployment rates are still unacceptably high and participation in the labour market
is still low by international standards. With other countries in the world also increasing the
competitiveness of their markets, it is essential for each euro area country to minimise the market
distortions induced by its particular regulations and for the euro area as a whole to remove remaining
barriers to market integration. This requires the implementation of comprehensive reforms necessary
to deepen market integration, soften labour market rigidities and improve wage flexibility in order to
continue fostering growth and new employment opportunities.
We are now at your disposal for questions.