Introductory statement with Q&A

Jean-Claude Trichet, President of the ECB,Lucas Papademos, Vice President of the ECB, andChristian Noyer, Governor of the Banque de France,Paris, 5 October 2006

Jump to the transcript of the questions and answers

Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to the press conference here in Paris. I would particularly like to thank Governor Noyer for his kind hospitality and express our special gratitude to the staff of the Banque de France for the excellent organisation of the meeting of the Governing Council.

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.

At today’s meeting, we decided to increase the key ECB interest rates by 25 basis points. This decision reflects the upside risks to price stability over the medium term that we have identified through both our economic and monetary analyses. Today’s decision will contribute to ensuring that medium to longer-term inflation expectations in the euro area 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. Also after today’s increase, the key ECB interest rates remain at low levels, money and credit growth are strong, and liquidity in the euro area is ample by all plausible measures. Our monetary policy therefore continues to be accommodative. If our assumptions and baseline scenario are confirmed, it will remain warranted to further withdraw monetary accommodation. The Governing Council will therefore continue to monitor very closely all developments so as to ensure price stability over the medium and longer term.

Turning first to the economic analysis, the quarter-on-quarter growth rate of real GDP in the euro area for the second quarter of 2006 was confirmed at 0.9%. Moreover, since our previous meeting on 31 August, Eurostat has revised upwards the growth data for the two preceding quarters, thereby confirming that a significant acceleration in economic expansion has taken place over the past few quarters. On the basis of the revised data, economic activity has been growing at a quarterly rate of 0.7% on average over the last four quarters, the unemployment rate has been on a falling trend, employment growth has recovered and employment expectations overall have remained favourable. All in all, the economic recovery now appears somewhat stronger than on the basis of earlier data. It has become more broadly based and is mainly supported by domestic demand. The available information on activity in the third quarter – coming from various confidence surveys and indicator-based estimates – continues to support the assessment that economic activity will grow robustly while possibly moderating somewhat.

Looking ahead to the remainder of 2006 and 2007, the conditions remain in place for the euro area economy to grow at solid rates around potential, with some volatility in the quarterly growth rates likely to emerge around the turn of the year. Global economic activity has become more balanced across regions and is still robust, thereby providing ongoing support for euro area exports. Investment is expected to remain strong, benefiting from an extended period of very favourable financing conditions, balance sheet restructuring, accumulated and ongoing strong earnings, and gains in business efficiency. Consumption growth in the euro area should also strengthen further over time, in line with developments in real disposable income, as employment conditions continue to improve.

Risks to the outlook for economic growth are broadly balanced over the shorter term, although the recent fall in oil prices – if it were to prove lasting – has the potential to lead to somewhat stronger demand and output growth than embodied in our baseline scenario for activity in the coming quarters. Over the longer term, risks to growth lie on balance on the downside, and relate mainly to the possibility of a renewed increase in oil prices, fears of a rise in protectionist pressures, especially after the suspension of the Doha round of trade talks, and possible disorderly developments owing to global imbalances.

As regards price developments, according to Eurostat’s flash estimate, annual HICP inflation fell to 1.8% in September 2006, from 2.3% in August. Although no detailed breakdown is available as yet, this relatively sharp decline seems to be the combined result of favourable base effects, given in particular the strong rise in oil prices a year ago, and the recent significant fall in oil prices. While the outlook for energy prices is uncertain, on the basis of current energy prices and the higher quotations on futures markets, overall inflation rates are likely to increase again towards the end of the year and in early 2007. As a consequence, we expect a considerable degree of short-term volatility in the annual HICP inflation rate, while the overall inflation rate will remain elevated at levels above 2% on average in 2006 and is likely to remain so in 2007.

In addition, risks to the outlook for price developments remain clearly on the upside. They continue to include a stronger pass-through of past oil price rises into consumer prices than currently anticipated and additional increases in administered prices and indirect taxes beyond those announced thus far. Furthermore, renewed increases in oil prices cannot be excluded. More fundamentally, given the favourable momentum of real GDP growth observed over the past few quarters and the positive signs from labour markets, stronger than currently expected wage developments pose substantial upward risks to price stability. Against this background, it is crucial that the social partners continue to meet their responsibilities, in particular in the context of a more favourable environment for economic activity and employment.

The monetary analysis continues to point to upside risks to price stability at medium to longer horizons. Annual M3 growth rose again to 8.2% in August and, more generally, the rate of monetary and credit expansion remains rapid, reflecting the still low level of interest rates in the euro area. In particular, loans to the private sector continue to grow at double-digit rates on an annual basis, remaining broadly based across the household and corporate sectors. Taking the appropriate medium-term perspective, these developments remain consistent with the persistent upward trend in the underlying rate of monetary expansion, identified by the ECB’s monetary analysis since mid-2004. Moreover, 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 still ample liquidity, as a result of the persistently high rate of monetary expansion over the past few years, point to upside risks to price stability over the medium to longer term. Monetary developments therefore require careful monitoring, particularly against the background of improved economic conditions and strong property market developments in many parts of the euro area.

To sum up, annual inflation rates are projected to remain elevated in 2006 and 2007, with risks to this outlook remaining clearly on the upside. Given the ongoing dynamism of 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 term. It is essential that inflation expectations remain firmly anchored at levels consistent with price stability. If our assumptions and baseline scenario are confirmed, it will remain warranted to further withdraw monetary accommodation. The Governing Council will therefore continue to monitor very closely all developments so as to ensure price stability over the medium and longer term.

As regards fiscal policy, euro area countries are now in the process of finalising their 2007 budgets and preparing their next stability programme updates. In the current favourable economic environment, it is essential that adequate headway be made towards sound public finances, implying that budget targets for 2007 should generally be more ambitious than in previous programmes. Countries in excessive deficit need to remain fully committed to bringing their deficits to below 3% within the agreed deadline via adequate and credible structural consolidation. Other countries need to make clear progress towards their medium-term objectives in line with the requirements of the Stability and Growth Pact. In all cases, any revenue windfalls from faster than expected growth should be used to speed up deficit reduction or to increase surpluses. Pro-cyclical policies should be avoided and expenditure restraint is of particular importance, also given the high spending ratios and taxes as compared with many other industrialised countries. Experience has shown that expenditure reform is key to successful consolidation, and consolidation is essential for reducing overall public debt and for making public finances less vulnerable to the impact of ageing populations.

Fiscal consolidation is likely to be most successful when coupled with comprehensive structural reforms. These are urgently needed to help to cushion the unfavourable economic effects of the projected demographic change in the euro area. The decline in the working age population will place further pressure on pension and health care systems, and may have wide-ranging economic consequences. In order to support the potential economic growth of the euro area, to foster macroeconomic flexibility and dynamism, and to safeguard the future standard of living of our citizens, labour and product market reforms are urgently needed. This will increase labour market participation and employment and strengthen innovation and the other forces driving productivity and economic growth. The ECB will play its part by continuing to maintain price stability over the medium term.

We are now at your disposal for questions.

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Question: Mr President, some economists were expecting today already a 50 basis point rise in the interest rates. Were there members in the Council supporting moving faster? And, as you mentioned, the policy is still accommodative.

Trichet: In our deliberations we always, as you know, consider all arguments, and the assets and liabilities associated with all decisions – and, just as we considered not moving to be an inappropriate decision, we also considered moving by fifty basis points to be an inappropriate decision. We were overwhelmingly in favour of this increase of 25 basis points.

Question: Just a follow up on my Finnish colleague’s question: does that mean that the decision to increase was unanimous? You said that there was an overwhelming sentiment, just to clarify on that. And, secondly, markets are expecting 25 further basis points of tightening by the end of the year. I wondered, whether these expectations are - in your view - reasonable?

Trichet: First of all and to be even more explicit, I would mention that we were unanimous in taking that decision and in analysing the appropriate decision to take in these circumstances. I mentioned that further withdrawal of monetary accommodation was warranted if we have confirmation of our baseline scenario. As regards the future moves I would say nothing else. You mentioned that the market has in mind a move before the end of the year. I would not say anything that would correct this sentiment.

Question: Just following up on the issue of market interest rate expectations – I think that there is quite a lot of market confidence that you will raise interest rates in December. There is much more uncertainty for 2007 in terms of what the European Central Bank will do then. And so, at the moment, people are seeing about a 50% to 70% chance that you will raise interest rates in the first quarter of next year. And I was wondering whether you thought that this was reasonable, or if you could expand more on what you see as the prospects for growth and inflation in the early part of next year.

Trichet: I will not comment on that. We will see what we have to do. As you know, we always do what is necessary to deliver price stability in the medium run and to be credible in the delivery of price stability, which is absolutely necessary to anchor solidly inflationary expectations. Our permanent posture is to do whatever it is necessary to do.

Question: Two questions, first, you have spoken of liquidity and of upside risks that are posing. Deutsche Bank and various other economists note that the ECB is actually though the greatest producer of liquidity at the moment in the world economy. Is that a concern for you, given your two-pillar strategy? And a second question: do you have any concern about the continued position of euro/yen?

Trichet: First of all, let me remind all of us: when we told observers, investors, savers, economists, market participants that we believed that we had to move rates upwards – you certainly remember that –we did that some time before we increased rates in December. You may recall that we were in an environment in which a large number of analysts including international institutions and a significant proportion of the market literature were signalling that, according to their economic analysis, we were not fully justified to increase rates. I have a vivid memory of that. Perhaps those of you who were in Frankfurt also have a memory of that. And those who are in Paris today may also have a memory of that, and of all the declarations and analyses of the time. We decided to increase rates for the first time after a long period in December with the benefit of the hindsight the decision appears to have been fully justified. And I have seen progressively that the full body of global economic analysis whether public or private has come to agree on our position. When we decided it was not only our economic analysis that played an important role. The monetary analysis played a very important role, too. We were determined to raise the rates because the information we were getting from the monetary analysis was signalling that there were risks in the medium to longer term. As you know, we look very carefully at all indicators. You will remember that I had signalled at the last two press conferences that we were observing a certain tendency of M3 to go down. Now I have to take a look at the figures: in August, we are back to 8.2%. The sequence for M3 in the most recent period of time, you may recall, was 8.8% in May, 8.5% in June, 7.8% in July and now 8.2% in August. If I take the three-month moving average, it has come down from 8.6% to 8.3%, and we are now at 8.2%. So we have there information that we have to look at very carefully to understand exactly what are the dynamics behind M3. To give you some figures, loans to the private sector are growing – according to the August figures – at a rate of 11.3%. Loans to the non-financial corporate sector are growing at a rate of 12%. And the rate for lending for house purchase is 11.1%, while consumer credit is rising at a rate of 9.2%. So, we have a set of counterparts to M3 that remain very dynamic and, in particular it is loans to the non-financial corporate sector that are quite dynamic. All this again calls for very close monitoring, as I have already said.

On the euro/yen, I will stick to what I had said in Singapore.

Question: You said in a recent interview in response to a question regarding the economic outlook for 2007 that we should not discount the level of uncertainty that exists in the world today. Can we take away from that that you believe that the risks to growth have risen, are rising, for 2007? You refer also to your previous phraseology regarding your acting according to your baseline scenario, that the further withdrawal of monetary accommodation will remain warranted. Can you give us a sense of what it would take to alter your baseline scenario at this point? Seeing how you have to think ahead as good central bankers, I wondered if you could tell us what your working hypothesis is regarding the effects on price stability and on growth of the value added tax increase that is coming in a large European country on 1 January?

Trichet: As regards your first question I must say that, of course, the global economy exerts an influence on what our own economy will do. We are a very important part of the global economy. The best summing-up I can give from the Singapore meeting and the confrontation of various analyses is that we were experiencing an extraordinary period of very robust global growth, around 5% for the fourth consecutive year probably in 07, so a very impressive episode of growth in’04, ’05, ’06, and probably ‘07. And at the same time, the uncertainties were also seen on the increase and so we have to take account of those two elements: Solid growth on the one hand, uncertainties rising on the other hand. We will see what happens. I hope very much that these downward risks will not materialise. There are very good reasons to think that they will not materialise. But we have to take them into account anyway. As I said, over the shorter-term, we have economic growth here in Europe, in the euro area, which, in terms of risks, is broadly balanced, and even perhaps a bit on the upside if I take the immediate influence of the lower price of oil to foster growth. In the longer term, we continue to think that risks to growth remain on the downside, for all the reasons I have already said, and I could add some other reasons, but the main reasons we see are first the uncertainty about the price of oil and second the very important risk, that we could have confirmation of, that protectionist pressures are themselves materialising: it is something which is very adverse to growth at a global level and at the European level. Third we have also the permanent threats that are associated with the global risks connected with the disorderly unwinding of global imbalances and the market risks which are embedded at a global level. So we have to take all that into consideration.

As regards your second question I will not enter into our baseline scenario. If the baseline scenario was not confirmed, whether it would be upward or downward, we would draw the appropriate consequences. We have a compass and we have a needle in our compass: it is price stability, the delivery of price stability in the medium-term and the credibility of the delivery of price stability. It is because we are credible in the delivery of price stability that our inflationary expectations are anchored in line with our definition of price stability. This solid anchoring is essential, as I have said, for sustainable growth and job creation in the medium and long-term. As regards the profile of HICP due to the VAT increase in one big economy in the euro area, clearly there we have, I would say, a mainstream analysis which is suggesting that we will have a hump in HICP, starting in January 2007 it is extraordinarily likely, arithmetically speaking, and there is also a probability of having more consumption in the last quarter of this year, and less consumption in the first quarter of next year. That's also clearly suggested by the situation. As you know, there are several schools of thought around the mainstream analysis, and we will see exactly what happens. My sentiment - and I am communicating the overall sentiment of the Governing Council - is that after a relatively short period of volatility we will go back to more normal behaviour. We should not pay too much attention to the short-term volatility that would be induced by this phenomenon. In any case we think in the Governing Council that we must extract information from all sources we have as far as data, facts, figures are concerned, and extract from that an assessment on the trend. You remember we had a very poor quarter in the last quarter last year. It was, until the recent revision upward, only 0.3%, it was disappointing obviously but we said it doesn’t put into question our understanding of what is the trend growth. And the results of the first and second quarters of this year confirmed that our assessment of the situation was fully justified.

Question: (translation) How do you analyse the enormous resistance of long-term rates? And are you afraid that in the long run, this might be a handicap as regards the efficiency of your monetary policy?

Trichet: (translation) This is an excellent question which was commented on by our former colleague Alan Greenspan, who spoke of a “conundrum”; that remains. You will remember that we still have long-term interest rates which are exceptionally low, both in Europe and in the United States. That is a shared global level. When you try to understand what that means, you will see that we extract all possible information from the financial markets. And extracting all that information you will see that, especially in the recent past, the trend has been for a decrease in real interest rates. You can see that very clearly if you look at indexed bonds. I think that that shows a very clear phenomenon world-wide. And then we have what I might call modest but favourable developments in terms of the anchoring of inflation expectations. I would say on both sides of the Atlantic, but certainly here in Europe, we are seeing the confirmation of this anchoring of inflation expectations and, as I always say, that is something which is extremely important for us. So it is a combination of these two factors – real interest rates, which are objectively low, and inflation expectations, which are anchored at the appropriate level – which gives us the results that we see. Now, the reasons for this are very complex. There are traditional analyses on the interaction between investment and savings at world level, which until the very recent past made us think for good reasons that Asian savings, which, as you know, are very high, traditionally, go hand in hand with a certain restrain in investing in industrialised countries. That might be part of the explanation for the whole development. But you have also seen that enormous amounts of savings have been amassed, and are still being amassed by the oil-exporting countries, maybe not exactly quite as fast today as they were, but the increase is still very considerable, and obviously that is an additional element, when you try to compare savings and investment at world level. There may be other phenomena, on which we are also looking at, including market phenomena, which could also explain what we are seeing at the moment. But what is clear is that we have the feeling that this won’t necessarily last - at least not forever - and that this period that we are in at the moment is really a period of real long-term interest rates at very low levels. With the benefit of hindsight, you will see that this has been an exceptional period. But, in addition to everything that I have said, that is to say low real long-term interest rates in Europe and in the United States on the best signatures, you have an assessment of risk which, even after the corrections of May and June, remains at a low level. So, you have a high level of the risk appetite in all of the financial markets, and that risk appetite probably won’t last forever either. These are a few comments I wanted to make on this question. What we are responsible for is obviously– not only, but mainly – inflation expectations in the medium and long term. We pay very close attention to those expectations and, as I have said, it seems to us that these inflation expectations, on the basis of the indicators that we have at the moment, seem to be correctly anchored In my view it is because nobody doubts our determination, given the fact that we have proven that we intend to be inflexible in fulfilling our mandate.

Question: (translation) Talking about the risk appetite of the financial markets, there is an event which has been mentioned a lot in the press and which has concerned the financial community, namely the fact that Amaranth, a speculative fund, has practically foundered. What do you think about that? Have you looked at that at central bank level and do you think that supervision and regulation of this type of fund and financial body is sufficient at European level?

Trichet: (translation) We looked very carefully at what was happening. I have to say that like everything we have seen on the markets – I’ve talked about the events of May and June – this event itself has been absorbed by the market very fast and quite easily. So there is a high level of resilience in world capital markets. But that does not mean, obviously, that there are no risks, and that those risks are not of great importance. I am convinced – and we are all convinced – that there are important risks and that is why we have to be vigilant as regards market risks. We cannot sit back and let these risks go by without reacting. In our last Financial Stability Review, we had stressed - Lucas Papademos will certainly remember that because he was the one who presented the report - the risks associated with hedge funds and we even had a specific box in that report in order to explain to all the observers how we see the risks posed by hedge funds. Now, it is quite obvious that we can and must improve the situation in this area, even if it is a very subtle question, and even if, as I have already said, we need world-wide solutions in this area. For this problem there is no partial solution for just one continent, because it is a problem that does arise at world level.

Question: A couple of questions if I may. Firstly, maybe I misheard you, but in response to an earlier question, I think that you said that the market sentiment is for further moves before the end of the year and you do nothing to correct this, did you mean to say that market sentiment is for a further move before the end of the year, and you wouldn’t want to correct that. As regards my second question on inflation outlook - yours is a medium-term strategy - what do you expect to happen to inflation in 2008, what’s your thinking on this at this stage? I know that there is no formal prognosis but you must obviously have talked about this in the Governing Council. And the third question, you said again that monetary policy in the euro zone remains accommodative, how are you judging whether or not policy is accommodative and are we near the point where it might no longer be accommodative?

Trichet: When we will judge that monetary policy is not accommodative, we will tell you. This is as simple as that and answers your third question very easily.

As regards your first question, I responded to an earlier question which was addressing the expectations until the end of December and I have said, that I have nothing to say which would be aiming at moving these expectations. And I stick to what I said already. As regards beyond the end of the year, I have absolutely nothing to say. You all know that we will do what is necessary to deliver price stability and anchor solidly inflationary expectations. That will be as always based upon facts, figures and overall events on which we will make our judgement in the light of our monetary strategy as we always do. It is part of our own strategy, as you know, never to pre-commit in advance, in the medium term. We do what is necessary and the market can draw its own conclusions from the information which will be available in the oil price area, in the global economy area, in all other areas we take into account to preserve price stability. We have to work out a synthesis and it is what the market and the economists are doing for their own part. As regards inflation in 2008 we will publish our staff projections in December, and they will include 2008. At this stage, all that I can say is that, according to all information I have, in 2007 it would be probably as an average over and above 2%, but there is of course a great influence from various parameters, including the price of oil as regards headline inflation next year. Then our own strategy is such, that over a period of 18 to 24 months, we will be below 2% in line with our definition of price stability. But we will see exactly what is embedded in our next staff projections.

Question: You’ve mentioned the fact that, GDP-wise or growth-wise, there will be a certain amount of volatility around the end of the year, partly due to VAT in Germany, partly due to other factors. That decreases presumably the amount of visibility you have. Would it be fair to say that around that time of the year the ECB would like to sit back and think a little bit more, and wait a little bit more before proceeding with any further withdrawal of monetary stimulus? Secondly, I would like to have your analysis of some things that have happened or become more apparent since the Singapore meetings and the analysis that was taken at the time of the state of the global economy, namely the fact that there is more evidence now that the US housing market is going down and more discussion about whether or not Europe and Asia are in a position to grow irrespective of whether the American economy goes into a downturn, the decoupling debate. What is your analysis of Europe’s capacity to withstand lower US growth? And thirdly on the housing market in Europe: do you believe that, like a lot of economic research suggests, the situation in Europe is just the American situation with about a one-year lag but in fact it is an accident waiting to happen about a year down the road?

Trichet: First of all, since Singapore I would say that the analysis of Singapore was very much confirmed. Remember I said growth uncertainties were on the upside. So in a way what has happened since then was confirming this judgement. The main element has been the price of oil, as you know it is a twofold phenomenon: it diminishes immediate headline inflation, arithmetically, and it fosters growth, because the overall drain on the global economy is less acute. That, in our perspective - which is to maintain price stability in the medium-run in order to fulfil our mandate and, by way of consequence, to contribute to sustainable growth and job creation –is complex. You have a phenomenon of headline inflation which is lower, which in a way is better from the perspective of the spill-over for the next years as regards inflation. But on the other hand, you have an activity which might be more buoyant and that of course entails risks for inflation. So I would say that we have to look at it from all possible angles to be sure that our final judgement is well founded That is exactly the reverse of when the prices are going up. Then we have also a mix of phenomena, headline inflation higher, a drain on growth because of the price of oil that is higher and then we have to draw the appropriate consequences for medium-term inflation. Never forget that we are thinking about the medium term. As regards housing in the US and the US economy as a whole, you know that an order of magnitude which would perhaps be considered by economists as a good order of magnitude would be that the trade coupling, plus the “echo”, the reverberation of the US economy on the rest of the world, which impacts also indirectly on the euro area would perhaps be summed up by the fact that if the US economy slows down by 1%, more or less, we have ourselves an impact on our growth, taking everything into account, of minus 0.2%. It’s an order of magnitude, I say that with great caution, which means that there is an impact, but that impact is not necessarily too large, depending on what happens in the United States. I know that there are a number of schools of thought that believe that the US will continue to be going steadily, others are thinking that we are at the beginning of something which could be more ample. As a matter of fact, we don’t know. Our baseline scenario remains that the slowdown in the US will be moderate and in line with a soft correction which is in line with present observations. So we will see what happens, but it is absolutely true that we are influenced by a number of other very important developments. I need also to mention and I do that from time to time, in terms of trade the UK is more important for us than the US, and that of course appears a little bit paradoxical taking the size of the two economies concerned but it is what the figures are telling us.

An element I would mention “en passant” and that has now been documented is that we see that our market share in the oil-exporting countries is quite significant. There of course we have an element of additional contribution to growth in the euro area and in Europe in general. As regards the real estate sector, I would only say that we have been looking very closely at this now for a long period of time. I’ve responded very often to such questions, you know to what extent we are in a complex situation in this respect because we have Germany which is still not dynamic, even if things are changing gradually, other economies are very dynamic. We will see how it moves. I would not compare Europe with the US, but I already quoted the figure of 11.1% as regards growth of lending for house purchases. That it is something which is obviously very dynamic at the level of the euro area as a whole also taking into account that Germany is much less dynamic.

Question: From your earlier comments in the Q&A session, can I take it that you are saying that there is no evidence available to the Governing Council today that would suggest the baseline scenario will not unfold as anticipated over the next six months? Amid reports that output will be cut, do you have a message for OPEC and do you believe that such a move would call into question the reliability of OPEC members as suppliers? And finally, to build on my colleague's question on long-term interest rates, I would just like to know if there is concern among Governing Council members that rate moves are not affecting what appears to be a voracious appetite for consumer credit effectively enough and that policy will not be able to do what it needs to do soon enough?

Trichet: In answer to your first question, I repeat that our baseline scenario is that the trend growth is around potential – as I said in my Introductory Statement. I have absolutely no information to give you that contradicts the baseline scenario, so I fully confirm it.

As regards OPEC and the price of oil in general, it is true that there is a big difference from the global economic standpoint and consequently for all parts of the world – whatever their size – and certainly for the euro area. The difference is between a demand-driven increase in the price of oil: you have a very dynamic global economy, which triggers demand, which in turn drives up the price of oil; here you have a phenomenon that is well-known, well-founded because it is really dictated by supply and demand. It is a different case when you have something which is more artificial, which is a control of supply based upon an administrative decision. This was the case with the first and second oil shocks and these administrative decisions are of course of a totally different nature. So we shall see what happens. I am not satisfied in that domain or others by ex ante administrative decisions. As regards the impact of our interest rate decisions, if you look very carefully at the components of M3 you will see that there is an impact which is important. There is a substitution of those pure deposits that are not remunerated at market rates with those components of M3 that are remunerated at market rates, and this phenomenon is quite big so we see the impact of our interest rate increases. That being said as regards the counterparts on the credit side I mentioned figures that are quite dynamic. Part of it is in the area of households, where consumer credit is clearly very dynamic but less dynamic than the lending for house purchases. I mentioned the figure of 11.1% for house purchases and 9.2% for consumer credit. I also have to mention the great corporate dynamism, which seems to be due to two major phenomena: investment – and one of the good pieces of news that we have at the level of the euro area is that growth over the last period, particularly in Q2 of this year but also beforehand, seems to have been driven by gross capital formation. This contributed over the past twelve months to a rate of growth which – all things taken into account– is of the order of magnitude of 2.6%. We have a contribution of 0.9% coming from gross capital formation, which is quite substantial; it represents even a contribution of 0.4% in Q2, and that is very important to know. And then we also have the merger and acquisitions phenomenon, which is very important and explains also this dynamism at the level of 12% for loans to the non-financial corporate sector.

Question: A couple of quick questions. The first has to do with the situation in Central Europe at the moment. There have been political difficulties in a number of countries there and Mr Liebscher of the Austrian Central Bank was quoted the other day as saying that he was disappointed with the progress that had been made towards macroeconomic reform in a number of Central European countries; and I was wondering whether you shared that disappointment at all and when you expected these countries to join the euro? The second question returns to the issue of the euro and the yen, and I know that you did not wish to comment about that earlier but I was wondering if the market reaction to your comments has been as you expected or as you hoped or whether you thought that there might have been slightly more of a response to what you said?

Trichet: As regards the overall group of ten countries which have joined us I would say that, all things taken into account, the transformation of these countries – driven in particular by foreign direct investment coming from the rest of the world and from the fifteen and from the euro area as part of the fifteen – has been really quite impressive. Of course, there is a great difference between countries but the overall result is impressive. We have observed developments that were going in the right direction; developments that were going in the wrong direction; it is a very complex phenomenon. I do not want to cite any particular country, but I will say one thing in the case of one country which I have already mentioned as creating a problem. I refer to Poland and the problems that the central bank had in Poland vis-à-vis the executive branch. As you know, we consider that this was not in line with the rules in the European Union, and I must confess that I was myself very heartened to see that the feeling that something abnormal had been done was shared by a major institution: the constitutional court in Poland; so I would mention that as something that we have noted. For the rest I would say that what is happening in the ten is remarkable, all things taken into account. It represents a transformation, which of course from time to time encounters real difficulties; and as you know we are doing all that we can to pave the way for the best possible outcome. Our colleagues (including from Romania and Bulgaria as observers) are represented in all our committees in the ESCB, and we consider it our duty to facilitate things in the best possible fashion. – That being said, to enter in the euro area the criteria must be rigorously met. So everybody knows what conclusion we drew when we looked at the cases of two countries which wanted to join the euro area. One clearly met the criteria, in our opinion; the other did not. We said so candidly and clearly, and we shall of course be welcoming Slovenia to the euro area on 1 January next year.

As regards your question on the euro and the yen I already said that I stick to what I said in Singapore.

Question: Two short questions: first, you didn’t mention the second-round effects on wages and salaries linked to oil price developments. Is this because you are no longer afraid of them? Second there is an ongoing debate on the fact that we are at the end of a period of deflation that has lasted for several years that might have been brought about on the one hand by the problems in economic activity which were more important than in the past and on the other hand by the arrival of new workers on the world labour markets; for some of us this period has come to an end while for others it hasn't. The Banque de France published a study on this matter recently; private banks have done the same. Were you talking about this in the Council and what is your opinion on this?

Trichet: On your first question, maybe you weren't listening to the translation or maybe you were listening to English directly. I don't know but, quite on the contrary, we emphasised this point very strongly. We said more fundamentally that, given the very favourable dynamism of real growth of the GDP which we have seen over the last few quarters and given the strong growth in the jobs market in Europe at the moment, wage and salary increases that would be higher than what expected at the moment - would pose serious risks to price stability. Therefore we said that it is absolutely essential for social partners to live up to their responsibilities. We did consider this as important and we emphasised this point. Turning to your second question, the only thing I can say is that if we look at prices and price indicators and we distil from these the prices of imported products and especially the prices of imported manufactured goods, there we see that - for quite some time now - you no longer see the same phenomenon of very strong disinflation with prices that were regularly and considerably going down previously. What we now see, quite independently of the economies and the continents concerned, whether the United States or Europe, is that this disinflation has slowed down or, that those particular prices of imported goods have increased and are above the zero line. Looking at this indicator, we get the sense that there will be at least a slowing down of this world-wide movement of disinflation that was linked in particular to globalisation.

Question: Just a short question to clarify your position on oil prices. When the price of oil was rising, you repeatedly said that it makes more sense to look at headline inflation and not to focus on core inflation, because headline inflation affects core inflation in the long run. I was just wondering what your position is now that the price of oil is declining. Does it still held, because you were just mentioning two effects, i.e. higher activity pushing up inflation, lower energy prices pushing down inflation. What is the net effect in your view now of a decline in oil prices? Does it increase the risks for price stability or reduce them?

Trichet: Don’t forget that in any case we are reasoning ourselves medium term and what counts is the headline inflation in the medium term. From time to time headline inflation goes up or down, down or up, but what counts is the medium term. And from that standpoint I think it’s a bit too early to conclude in which direction the overall addition of the two risks – one downward risk and one upside risk – would go. I would say, at this stage, that this should not change drastically our understanding of what headline inflation will be in two years' time. That being said there is also short term volatility, which is again something we have pre-announced. There will be short-term volatility. To give you an example, in the euro area we are presently below 2 at the moment. We might very well be below 2 in one month’s time. I don’t exclude that possibility at all; we may even be lower, perhaps. We will see. Again I don’t make any projection. But I would not exclude either the fact that we may go upward again because, as I said, you have a number of phenomena that are due to the profile of the oil prices twelve months ago. At the end of the year inflation could very well be substantially over and above 2%, even without changing the present price of oil. So we can go up or down. I remember that I once explained in the past that we had a hump in inflation, but that this would go down over a short period of time, say three or four months. Then I tell you the contrary, I tell you that we have inflation which is low, perhaps even lower, but then it will go up again and that for arithmetical reasons that everybody can check. So be aware that short-term evolutions should not be considered important in the conduct of our policy when we have to cope with shocks because what counts is that our policy is driven in an eighteen-months’ to two-years’ perspective to deliver price stability in line with our definition.