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, 5 march 2009. * * * ladies and gentlemen, the vice - president and i are very pleased to welcome you to today ’ s press conference. we will now report on the outcome of today ’ s meeting of the governing council, which was also attended by the president of the eurogroup, prime minister juncker, and commissioner almunia. on the basis of its regular economic and monetary analyses, the governing council decided today to reduce the key ecb interest rates by a further 50 basis points. this decision brings the total reduction in the interest rate on the main refinancing operations of the eurosystem since 8 october 2008 to 275 basis points. overall, inflation rates have decreased significantly and are now expected to remain well below 2 % over 2009 and 2010. this outlook for inflation is due to the fall in commodity prices and diminishing domestic price and cost pressures, reflecting the severe downturn in economic activity. indeed, recent economic data releases and survey information add further evidence to our assessment that both global and euro area demand are likely to be very weak in 2009. over the course of 2010, the economy is expected to gradually recover. at the same time, available indicators of inflation expectations over the medium to longer term remain firmly anchored in line with the governing council ’ s aim of keeping inflation at rates of below, but close to, 2 % over the medium term. a cross - check with the outcome of the monetary analysis confirms that inflationary pressure has been diminishing. after today ’ s decision we expect price stability to be maintained over the medium term, supporting the purchasing power of euro area households. the governing council will continue to ensure a firm anchoring of medium - term inflation expectations, which supports sustainable growth and employment and contributes to financial stability. accordingly, we will monitor very closely all developments over the period ahead. let me now explain our assessment in greater detail, starting with the economic analysis. reflecting the impact of the financial market turmoil, the world economy has weakened substantially in recent months, affecting increasingly also emerging market economies. in a climate of heightened uncertainty, a severe fall in world trade volumes has been accompanied by a pronounced decline in domestic demand in the euro area. as a consequence, euro area real gdp contracted markedly in the fourth quarter

the exchange rate and, therefore, to the risks coming from abroad. in any case, inflation expectations two years out have remained near 3 %. on the output side, the improved external financial conditions could affect growth more than previously estimated. meanwhile, business and consumer expectations are still in pessimistic territory, which could hold back the recovery of consumption and investment, triggering a sharper deterioration of the labor market. having assessed these risks, we estimate that the risk balance is unbiased for both inflation and activity. in a nutshell, inflation has declined as expected, and our forecasts point at a faster convergence to 3 % than we thought in june. our output and demand outlook is fairly unchanged. there are still risks in our external scenario, even if its recent evolution surprised us for the better. allow me some final reflections. final reflections i will end with some thoughts on the capacity of monetary and fiscal policy to address the economic cycle. i think we must because, after years of slow growth and within a context of increasing social demands, pressures on both have become stronger and the way we decide to confront them will be crucial in the future of our economy and our country. i see three main challenges : first, it is obvious that neither monetary nor fiscal policy can flatten out the business cycle, much less affect the economy ’ s trend growth. but they certainly can smooth the cycle and help the economy make sound adjustments when suffering a domestic or external shock. anyway, the capacity to smooth the cycle is proportional to the medium - term sustainability of these policies. why? it is very simple : economic decisions — think of investment, for example — depend not only on such policies ’ immediate effects, but also on how the various economic agents expect them to continue to affect the economy in the future. thus, even if we believe that the effects of some policy action can be very powerful, if the agents consider that implementing that policy will be inconsistent with the macroeconomic equilibria, its effects will be diminished and may even be counterproductive. in the case of fiscal policy, this problem has been properly addressed in our country by way of a fiscal rule that establishes that fiscal spending must be consistent with the economy ’ s capacity to generate earnings in the medium term. this rule has been carefully monitored, and has even 5 / 14 bis central bankers'speeches been replicated in other countries. ending it could not only result in many problems in the future, but also lessen the macro