However, I should first like to inform you about some decisions we have taken regarding the publication of staff macroeconomic projections.
As you are aware, twice a year Eurosystem staff, that is, staff of the ECB and the euro area national central banks, jointly produce a set of macroeconomic projections. These serve as one of the inputs into the deliberations of the Governing Council. Subsequently, the projections are published in the June and December issues of the Monthly Bulletin. As you also know, in the interim period, that is, for March and September, ECB staff produce what is basically an update of the Eurosystem staff projections. These projections also serve as input into the meetings of the Governing Council, but so far have not been published.
The positive experience and familiarity gained over the past few years with the publication of macroeconomic projections have given us the confidence to go a step further by also publishing the interim ECB staff projections. Therefore, in the spirit of transparency and accountability, the ECB staff projections will also be published from September 2004 onwards.
In all cases, that is, four times a year, the projections will be published in the appropriate form in the Monthly Bulletin. In addition, as a further step towards providing relevant information in a timely manner, we will from today onwards provide you with an advance copy of the Monthly Bulletin section covering the projections. This advance copy will be made available shortly after the end of this press conference, both in hard copy and on the ECB 's website. The same procedure will be applied in September and every three months thereafter.
The fact that we have decided to publish the interim ECB staff projections in future does not change their role as one of the inputs into our deliberations. The Governing Council continues to base its monetary policy decisions on a comprehensive economic analysis, which is cross-checked with the monetary analysis.
Let me now turn to today 's monetary policy discussion.
In summary, we noted that the economic recovery has strengthened over recent months. At the same time, we have also witnessed stronger inflationary pressures over the short term. Nevertheless, we are still of the view that the medium-term outlook remains in line with price stability. Accordingly, we left the key ECB interest rates unchanged. The low level of interest rates continues to support the economic recovery. We will remain vigilant with regard to all developments which could affect the risks to price stability over the medium term.
I shall now explain our assessment in more detail.
In the context of our economic analysis, the latest data releases confirm that the economic recovery in the euro area is under way. According to Eurostat, real GDP grew by 0.6% quarter on quarter in the first quarter of this year, and quarterly real GDP growth for the fourth quarter of last year was revised upwards from 0.3% to 0.4%. The more pronounced pace of real GDP growth mainly reflected both stronger private consumption and buoyant exports. Latest survey data still provide mixed signals with regard to the underlying strength of the recovery but remain fully consistent with ongoing growth in the current quarter.
Looking ahead, the conditions for a continuation of the recovery remain in place. Economic growth outside the euro area continues to be strong and should promote export growth. On the domestic side, investment should benefit from the positive global environment as well as from the favourable financing conditions. Improvements in corporate efficiency and higher profits are also supporting business investment. Moreover, private consumption should gradually recover from the stagnation witnessed during most of 2003, broadly in line with growth in real disposable income which, with the usual lag, should be further underpinned by an increase in employment growth later on.
Accordingly, we expect an ongoing recovery in euro area economic growth over the coming quarters, leading to a broader and stronger upswing in the course of next year. This is also reflected in the Eurosystem staff projections, which envisage euro area real GDP growth of between 1.4% and 2.0% on average in 2004, rising to between 1.7% and 2.7% in 2005. Available forecasts from international and private organisations convey a broadly similar picture.
With regard to this scenario, there are risks and uncertainties in both directions. On the one hand, the current rather robust pace of economic growth outside the euro area, the recent development in private consumption as well as some survey data imply a potential for stronger growth dynamics, particularly in the short term. On the other hand, high oil prices could pose a downside risk. Over a longer horizon, concerns also remain about the persistence of global imbalances.
Concerning prices, recent oil price developments have created considerable upward pressure on consumer prices. According to Eurostat 's flash estimate, annual HICP inflation was 2.5% in May, partly due to base effects, after standing at 2.0% in April. Markets expect oil prices to decline gradually from recent peaks. If they were to remain at their recent high levels, it is to be expected that inflation rates would continue to be higher than previously anticipated and stay above 2% for longer than just a few months ahead. When assessing price trends over the medium term, however, the outlook remains favourable. In particular, overall import price developments should remain moderate and inflationary pressure from wages and unit labour costs should be contained. Both factors should help to bring annual rates of consumer price inflation back to below 2% in 2005.
These views are in line with the Eurosystem staff projections, which put average annual HICP inflation at between 1.9% and 2.3% in 2004 and between 1.1% and 2.3% in 2005. They are also broadly consistent with recently released forecasts by international and private organisations. These forecasts and projections are subject to a number of risks and uncertainties. Concerns relate in particular to oil price developments. Moreover, there is insufficient knowledge today about future changes in indirect taxes and administered prices ; information on these items typically becomes available only towards the end of the year. Against this background, the potential risk for second-round effects via wages needs to be monitored closely. Finally, there has been an increase in measures of long-term inflation expectations derived from financial market indicators. While these indicators should be interpreted with caution, the recent upward trend calls for particular vigilance.
Moving on to the monetary analysis, we have seen increasing evidence of a normalisation of the portfolio behaviour of private investors. As a consequence, annual M3 growth has fallen quite significantly over recent quarters. Still, the low level of interest rates continues to fuel monetary growth and the amount of excess liquidity remains high in the euro area. In an economic upswing, the persistence of excess liquidity could lead to inflationary pressures over the medium term.
To sum up, the economic analysis indicates that the main scenario for the outlook for price developments over the medium term remains in line with price stability. However, short-term pressures on inflation have increased recently and some upside risks need to be taken into account. Cross-checking with the monetary analysis also supports the case for vigilance with regard to the materialisation of risks to price stability.
Given the signs that the economic recovery will continue, it is particularly important that fiscal policies and structural reforms play their part in improving the economic fundamentals of the euro area. It is regretful that recent fiscal developments have not been helpful in this respect. A growing number of countries are reporting significant imbalances and fiscal consolidation efforts fall disappointingly short of commitments. In order to strengthen confidence in a sustainable upswing, it is now essential that clarity about the future course of consolidation of fiscal policies is re-established in all countries concerned. This requires credible measures with an emphasis on structural expenditure reform so that imbalances are redressed, tax/benefit systems become more growth-friendly and social security systems are put on a sound financial footing. These measures, together with a revived momentum towards effectively implementing structural reforms in labour and product markets, would provide very valuable support to the current economic upswing.
Question: I was wondering whether the forecasting was becoming rather more difficult now because of this issue with the oil price, in particular, that the oil price is somewhat irrational. But also because, of course, it depends on this issue of stability in the Gulf, and that is very difficult to know from one week to the next, one month to the next, and I wonder how all these things are playing into the forecasting?
Trichet: The projections exercise is always a difficult exercise. And for all decision-makers and for all responsible institutions -- and central banks are, of course, fully part of this constituency -- decision-making is decision-making in an environment of uncertainty. This is the reason why we insist ourselves, as you can see, on using -- I would say --" ranges '' in our present staff projections, as I have mentioned ; and again, I would stress the fact that these are Eurosystem staff projections, not Governing Council projections. I mean, they are one of the inputs that we take into account. So, again, it is absolutely clear that we have to take into account the uncertainty we are in. And while I will perhaps respond directly to a question on oil, which is part of the issue today, I am responding here to the general environment of uncertainty. There is an uncertainty in the oil area but also in a number of other areas.
Question: Mr Trichet. In past weeks you have stressed that the ECB is keeping all its options open and has no bias. Is this still the message you want to get across?
Trichet: I will certainly confirm that following the analysis that we conducted today we, in the Governing Council, consider that we have all our options open, that we have no bias and that we are vigilant.
Question: I have three questions. First: transparency. Now that you are going to publish four times a year people will say" So what about the minutes of the conference? '' When are you going to publish the minutes? Are you going to catch up with other big central banks in the world? This is the first question. And then, I did not understand if you mentioned the oil price which is the basis for your projections? And for which exchange rate? I have not heard you speak about the euro so far.
Trichet: First of all, as regards the transparency of the central banks, I have to mention again what I have already said quite a lot of times: first, that we are -- to my knowledge -- the first central bank in the world that has introduced a real-time display of the diagnosis of the Governing Council, of the monetary policy body. We were the first ones. We started the thing. We started the concept. We are still the only ones, to my knowledge, who publish a thorough diagnosis of the Governing Council in real time. And you will have this diagnosis -- I have just read it and it will be published. Others publish short communiqués, not four or five pages of diagnosis. We probably remain the only ones among comparable central banks to have a press conference in order to be as clear as possible and as transparent as possible. For a number of reasons we consider that it is not opportune, as you know, to display the individual position of members of the Governing Council. I will not go on stressing the fact that we are very, very transparent.
Trichet: As regards the display and real-time publication of the projections I have been mentioning, I have already said what it was about ; I will not say anything else about the minutes. And as far as the projections are concerned, I do not want them to play a dominant part in this press conference because they are, as you know, only one of the inputs. They are not the input. So, I would prefer perhaps for you to have the full explanation of the projections, with all the assumptions that have been made, immediately after this press conference. If we discussed that here, then this would be moving away from the normal explanation of the monetary policy decision that we took today.
Question: Mr President, early this spring you were worried about consumer confidence and consumption. Do you now see a light at the end of the tunnel?
Trichet: According to the data which have been published for the first quarter, domestic demand in the euro area has started to play a part in the growth that we are observing. And you might remember that this growth -- which has been observed for the first quarter -- has exceeded expectations. Still, we have mixed signals and we are analysing the various signals we have very carefully. On the confidence side, they are not all that positive. We remain very keen to capture all the new information that is coming. On other sides, for example the PMI, you might have observed that the recent indication on the industry side -- and the most recent indication today on the services side -- have been quite encouraging, signalling that a recovery is under way. So, we are in a situation where we consider our working assumption of recovery to have been confirmed. You might remember that some of you expressed doubts about this some months ago: I had to answer a lot of questions about whether we were right in making that working assumption of a gradual recovery. I would say that all the data we have so far have confirmed that it was an appropriate working assumption, particularly for the first quarter. But, that being said, the information received may continue to be mixed and we continue to be very, very keen on analysing the new data and information and on being vigilant.
Question: I have three questions: first, do you believe in the risk of a" stagflationary '' scenario for the euro area if oil prices remain at such high levels for some months? Second, do you believe that the ECB could soon be faced with a sort of dilemma between cutting interest rates in order to boost economic growth or increasing the level of the interest rates in order to ensure price stability over the medium term. And third, you did not say this time that the interest rates are appropriate, nor that they are in line with price stability. What are they then?
Trichet: On the third question, I have already said very clearly that we have all our options open, that we have no bias, and that we are vigilant. As regards your first question on oil, it is a very important issue at the current juncture.
Trichet: If the present levels persist, the price of oil would have both a dampening influence on growth and an immediate upward effect on inflation. Both effects are highly unwelcome in the present circumstances. This is why we and a number of other institutions and authorities urge oil producers to be responsible so that the present episode would be transitory. But it is certainly too early to assess whether we are witnessing a transitory episode -- as we would wish -- or whether we have to take into account a more persistent level of prices. Under the current circumstances, the responsibility of the ECB is to prevent second round effects which would make higher inflation a permanent feature, which would prevent us from ensuring price stability and which would hamper sustainable growth. And there I insist: we have to prevent the second round effects. This is why we have to be vigilant. And it is also why we call on social partners to be responsible.
Trichet: On your second question on the dilemma of any central bank, may I remind you once again: we are responsible for price stability. The magnetic needle of our compass is price stability. The decisions on the monetary policy stance are based upon a final judgement on the balance of risks to price stability. The fact that we are credible in maintaining price stability in the medium and long run is per se a decisive contribution to growth. This is because the inflation expectations in the medium and long run are priced in the market interest rates. The full body of the yield curve is made up of the pricing in of inflationary expectations. The success of the transition to the euro has been the success of providing all 306 million inhabitants of the euro area the kind of very low market interest rates that were previously the privilege of only part of the euro area, not of the whole euro area. So, by being as vigilant and credible as possible in delivering price stability in the medium and long run, we make a decisive contribution to growth and job creation.
Question: I have three questions. The first one: Mr Trichet, could you confirm that in July the central rates for Lithuania and Estonia are going to be fixed? That is what I learned from other sources. Second question: would you kindly explain the procedure of this fixing of the central rates, how it is done? Third question: when you do the cross-checking of your two different types of analysis, what kind of reference value do you use for monetary developments? You must have some quantitative yardstick. The background for that question is that there was an ECB watchers ' group, EMU Monitor, who yesterday said you just scrapped the 4.5% and you were not very reliable with what you are doing. So I would just give you the opportunity to correct that impression.
Trichet: That is very kind of you, madam. First of all, I will not comment at all on the first question. These are monetary issues that have a market influence and I will certainly not comment on issues of that nature. We are speaking of the possible functioning of ERM II and whether it was ERM I or ERM II we have never embarked on a policy of pre-announcing or pre-commenting possible future decisions.
Trichet: On the procedure, this idea is to apply the very same procedure that has already been set up. ERM II already exists, as you know: Denmark, the Danish krone is part of this mechanism and it is a collective mechanism, where the decision has to be taken by the members of the mechanism. There is no unilateral decision. There is no such thing as" I fixed my own position and the others will follow ''. This is true, of course, for the newcomers, those who will join ERM II, as well as for those who are inside ERM II. Namely us, the ECB, on the central banking side, the executive branches and the Eurogroup on the executive side, and Denmark, whom we should not forget, because Denmark is fully part of this mechanism. I will say that it is our collective and collegial responsibility to have ERM II function in the best possible way. ERM II has served the euro on the one hand and the Danish krone on the other hand very well for some time now.
Trichet: As regards the monetary analysis, first of all, you remember that when we clarified and communicated our monetary policy strategy, we explained at length why we believe it is important to have a monetary analysis, why the monetary analysis is based very much upon our utmost conviction that in the long run, inflation is a monetary phenomenon. And I have to say that there is a great deal of support for this view in all circles, including academic circles. At the same time, we explained that because it was important in the medium and long term, we judged that it was not appropriate to review the reference value every year. We considered that the 4.5% reference value should be seen in a medium and long-term perspective. We still have that reference in the medium and long-term perspective. It still exists, it has not been changed or modified in any respect. We believe that it is extremely important for any central bank, and I would say in particular for the ECB, to firmly anchor medium and long-term expectations. I do not want to repeat what I have already said, about the importance of maintaining the benefit of the present yield curve for the full body of the euro area. We consider that the fact that we have this cross-checking with the monetary analysis is one element among others which contributes to a better anchoring of medium and long-term expectations. I will have to read the analysis to which you refer, but again I see more and more understanding of what I just said in all observer circles, watchers in general and academic circles.
Question: My question goes a little bit beyond the topic of the day, but on Tuesday this week the IMF strongly criticised the Member States of the EU for the ambiguities in their economic statistics. Are these ambiguities also affecting the analysis the ECB is doing?
Trichet: My memory is that these remarks were very much concentrated on fiscal positions and I take it that the IMF would recommend that in all countries, not only in Europe, if I am not misled, but all over the world, there should be some kind of objective, independent authority to assess the situation, without necessarily making any recommendation, without taking any sides as regards fiscal policy. Rather, it would take an objective view of the current situation: what are the facts, what are the figures? I must say, on a personal basis, because we have no Governing Council position in this respect, that it seems to me very opportune to eliminate all kind of ambiguity as regards the facts in this domain as well as in all others. And if we could go in this direction I believe that we would all be better off: of course, first of all the countries concerned and certainly the Eurosystem and the European Union as a whole -- the remark was, if my memory is correct, about the European Union as a whole -- and I can tell you that it is also a recommendation which is made by this institution to all countries.
Question: Coming back to the issue of credibility, given the fact that the ECB appears to have revised upwards its inflation forecast for this year and given the fact that it struggled to keep inflation under 2% over the past three or four years, are you concerned about the credibility of the ECB amongst investors and consumers in terms of its ability to keep inflation close to but below 2%?
Trichet: As I said, it is our responsibility to deliver price stability, it is our responsibility to be credible as far as medium and long-term expectations are concerned. It is the duty of all central banks in the world to be successful in these two domains. You might remember what you were asking for in your questions here only a few months ago? I do not want to elaborate on that ! We said that our overall analysis of the situation was such that we judged it inopportune to go in the direction that had been suggested at the time, and I would say that most of what we said proved to be well-founded. I have said what I had to say on oil and I do not want to repeat myself. We believe that the combination of past decisions -- which we sometimes took against strong advice to the contrary -- and vigilance -- which is, as we say, of the essence now -- will permit us to deliver what it is our duty to deliver. And again we are judged by yourselves, by market participants and by all observers. We have very important responsibilities and we are subject to the scrutiny of all.
Question: The French Finance Minister yesterday expressed himself to be in favour of the creation of a European economic government to act as a counterweight to the monetary policy of the ECB, which he believes to be too monetary-oriented. What answer do you have for him?
Trichet: I never embark on dialogues with various governments. We have a responsibility for 306 million inhabitants and for taking into account their superior interests. I would only say that the Eurogroup is very important for us. The Eurogroup is the executive branch counterpart -- and certainly I would not speak of a" counterweight '' since I do n't think it is appropriate at all, but of a" counterpart '' to the European Central Bank and the Eurosystem. We have also the Commission, which plays a very important role in Europe as you know. We invite the President of the Eurogroup and the Commissioner every fortnight to participate in the Governing Council, not to vote of course, but to be there -- to be present. This is a very, very frequent occasion on which we can meet. I wo n't comment any more on that. The Eurogroup certainly has very important responsibilities and these responsibilities are decisive for the European Economic and Monetary Union -- EMU. It is not only a monetary union, it is an economic and monetary union, which is one of the reasons why we consider so important the fiscal side of the coin and on the Stability and Growth Pact.
Question: Mr President, I have two questions concerning the EU Constitution. As far as I have learned -- as far as we know -- there will be a proposal for some kind of majority voting procedure concerning the nomination of ECB Executive Board members. In December last year you said that you might come up with a comment on this proposal. Has the ECB Governing Council come up with an idea about what it thinks about this proposal? Are you in favour or do you have no comment at all? And the second question is: except for the notion of price stability under the goals of the EU, it seems that the other proposals you made in your last letter to the EU are not going to be part of the constitution. Do you see this as a kind of diminution in or as some kind of giving-up of credibility of the ECB? Are you losing some kind of reputation through this?
Trichet: On this very important question, which is the Constitution, we all rely very much on the wisdom of the Irish Presidency, and I will not comment on the details of what the Irish Presidency is preparing. That is really its responsibility. I was, myself, in Dublin recently. I had the privilege of being invited by our colleague John Hurley and I took advantage of my stay to be received by Bertie Ahern, the Prime Minister, and Charlie McCreevy, the Minister of Finance. I am very grateful for this occasion of direct contact. We put in writing the sentiment of the Governing Council. I sent a letter to Mr Cowen, the Minister for Foreign Affairs. Again we rely on the wisdom of the Irish Presidency. Of course the mention of price stability is absolutely decisive to us. I do n't want to go back to what I have said on the necessity of anchoring inflation expectations, not only in the short term, but in the medium and long term. This is decisive.
Question: Two brief questions: first, you mentioned in your statement the potential risks to growth from high oil prices. Was that the only downside risk to growth that the Governing Council discussed today and is that helping to keep your stance neutral and flexible at this point? Second, as I understand it, OPEC was discussing an 8% production increase in oil output today. Do you expect significant relief on the inflation front if they go through with a production increase of that size?
Trichet: On the second question, we urged the oil producers to take account of the situation and be responsible so that the present episode that we have been witnessing for the last few days and weeks would be transitory. The decision that has been taken is a step in the right direction and I do not want to comment any more on that. As regards the uncertainties and risks for the growth and credibility of this working assumption of a gradual recovery, which is materialising, I do not want to say more than I have already said. Of course, the main issue in the eyes of a great number of observers is certainly the oil issue. But we have other elements in the euro area and, as I have said, some are going in the direction of more buoyant growth. I have to remind you that, in the first part of the year, most of you here were more pessimistic about what you thought was materialising. The first quarter has been better in this respect than most observers expected. So we have to be prudent and cautious. There are uncertainties and risks in both directions and that is why we have to be very vigilant and alert, and keen to get all new information and to introduce this new information into our own assessments. That is why we keep our options open. That is why we do not have a bias. Again I remind you that the magnetic needle of our compass is -- for all the reasons I have explained -- price stability.
Question: Have the staff projections that you have discussed today in the Governing Council been accompanied by a risk scenario analysis which would quantify the impact from sustained higher oil prices. And if you did have this risk scenario analysis, could you say something about it: how much it might affect inflation and growth? And looking to the future, might you consider such risk scenario analyses if they are available?
Trichet: I do not want to comment again on that issue because I think I am giving a status to these projections that would not necessarily be the real appropriate status that they have in our own monetary policy strategy. But we did have such analyses and you can imagine what the various consequences of various possible scenarios would be.
Question: One last question about oil, but as you say it is the main issue. A couple of times you used the line" urging oil producers to take necessary steps to ensure that the situation is transitory '' which implies, at least to my mind, that a -RRB- it is a situation that could be brought back down, and that b -RRB- the oil producers have a great deal to say about it. There are some economists who make the argument that, for reasons of increased consumption in places like China, we are facing a period of sustained high oil prices, and that this is a secular trend and not something that can be fixed by just raising a production quota. In your conversations today at the Governing Council did you consider the possibility that there is a secular change in oil prices?
Trichet: We do not claim to be oil specialists and we rely very much on analyses provided by a number of specialised entities. What I say in this domain is true for all others. We are in a world of a high uncertainty. In that uncertain environment what counts is that you take decisions that are wise and robust, namely that they are as optimal as possible, having worked through various possible representations of an extremely complex reality that can not be summed up with any level of pertinence by a single mathematical economic model. It is very important to restate that we are pragmatic. We will respond to the changing reality as this reality materialises. Our own goal is to maintain price stability. I personally do not exclude any scenario. We could have this scenario you are mentioning as well as others. We are not dogmatic and we do not pretend that we are extra-lucid. But what we can say is that we urge the oil producers and all partners to maintain the highest possible level of responsibility in the present circumstances. Everybody knows what the consequences of sustained high prices are. But our own responsibility is to ensure price stability, namely to avoid the secondary rounds. That is what is decisive. That is where we concentrate our own action as a central bank.