All in all, the short-term outlook for inflation remains worrisome, but our assessment of price developments over the medium term is unchanged. At the current juncture oil price developments are having a sizeable impact on consumer prices in the euro area, while there is no significant evidence that stronger underlying domestic inflationary pressures are building up. Accordingly, we have left the key ECB interest rates unchanged at their historically low levels. At the same time, we recognise the existence of upside risks to price stability over the medium term. Continued vigilance is of the essence with regard to those risks.
I shall now explain our assessment in more detail, turning first to the economic analysis. After the positive developments in the first half of 2004, economic growth has moderated in the second half. In the third quarter of the year, real GDP growth is estimated to have been only 0.3% quarter on quarter, after 0.7% and 0.5% in the previous two quarters. According to Eurostat, the contribution of net exports turned negative, reflecting in particular high import growth, and private consumption was subdued, probably dampened by higher oil prices. At the same time, investment growth increased and inventories were built up. The available survey information for October and November points to ongoing growth in the fourth quarter, albeit at a more moderate pace than in the first half of this year.
The conditions remain in place for economic growth to proceed. On the external side, while global growth is showing some signs of moderation, it nonetheless is expected to remain robust. Euro area exports should continue to benefit from global demand conditions. On the domestic side, investment should be supported further by the very favourable financing conditions in the euro area, improved earnings and greater corporate efficiency gained through business restructuring. Finally, scope exists for private consumption to strengthen, particularly if uncertainties surrounding the extent and pace of fiscal consolidation and structural reforms are reduced.
Accordingly, we expect a gradual recovery in euro area activity over the next two years, with somewhat more moderate growth rates due to the impact of oil prices. This is also reflected in the Eurosystem staff projections. Euro area real GDP growth is projected to be between 1.6% and 2.0% on average in 2004, between 1.4% and 2.4% in 2005 and between 1.7% and 2.7% in 2006. Available forecasts from international and private sector organisations convey a broadly similar picture.
Downside risks to these projections stem in particular from potentially unfavourable developments in the oil market. In order to limit such risks, second-round effects in wage and price-setting must be avoided and fiscal authorities should refrain from taking measures which would prolong or distort the necessary adjustment process. Moreover, the degree of competition in the euro area energy sector is an important factor in allowing higher oil prices to be absorbed without significant distortions. Further progress in increasing competition in this sector would be highly beneficial.
Turning to consumer prices, annual HICP inflation was 2.2% in November, according to Eurostat 's flash estimate, down from 2.4% in October. Over the coming months, inflation rates of above 2% are likely to persist, and some temporary further increase from current levels can not be excluded. Looking further ahead, however, the information available so far indicates that HICP inflation would fall below 2% in the course of 2005 if no further adverse shocks occurred and it does not suggest that stronger underlying inflationary pressures are building up in the euro area. Wage increases have remained contained over recent quarters and, in the context of ongoing moderate growth and weak labour markets, this trend should continue in the future. Producer prices are rising, but this remains concentrated on energy and intermediate goods, which should limit the pass-through.
These views are also embodied in the Eurosystem staff projections. Average annual HICP inflation is projected to lie between 2.1% and 2.3% in 2004. As the impact of recent oil price increases and the effects of previous indirect tax and administered price rises gradually dissipate, annual HICP inflation is projected to be between 1.5% and 2.5% in 2005 and 1.0% and 2.2% in 2006. These projections are broadly consistent with forecasts recently released by international and private sector organisations.
Several upside risks need to be taken into account. Concerns relate in particular to future oil price developments and, more generally, to the potential risk of second-round effects in wage and price-setting throughout the economy. Further developments in indirect taxes and administered prices also need to be monitored closely.
Further insight into the outlook for price developments, at medium to longer-term horizons, is provided by the monetary analysis. The latest monetary data confirm that the downward trend in annual M3 growth observed from the middle of 2003 has not continued in recent months and has even reversed.
Over the course of 2004, monetary dynamics have been driven by two opposing forces. On the one hand, the historically very low level of interest rates in the euro area has stimulated M3 dynamics, in particular demand for the most liquid components of M3 contained in the narrow aggregate M1. On the other hand, portfolio allocation behaviour has tended to normalise over the past year following the exceptionally strong preference for liquidity observed during the period of heightened economic and financial uncertainty between 2001 and mid-2003. However, investors ' preference for liquid assets seems to have remained greater than would typically be expected at the current stage of the economic cycle, possibly due to the fact that the economic and financial uncertainties in recent years have been relatively strong and protracted.
The very low level of interest rates is also fuelling private sector demand for credit. In particular, the demand for loans for house purchase has continued to be robust, supported also by strong house price dynamics in several euro area countries. Growth in loans to non-financial corporations has picked up further in recent months.
As a result of the persistently high growth in M3 over the past few years, there remains substantially more liquidity in the euro area than is needed to finance non-inflationary economic growth. This could pose risks to price stability over the medium term.
To sum up, the economic analysis suggests that underlying domestic inflationary pressures are contained, but a number of medium-term upside risks to price stability need to be monitored closely. Cross-checking with the monetary analysis supports the case for continued vigilance with regard to the materialisation of risks to price stability over the medium term. It is of the essence to avoid any spillover from short-term consumer price developments to long-term inflation expectations.
As regards fiscal policies, forthcoming budgets and stability programmes should send strong and confidence-building signals, namely that sound public finances and growth-friendly structural adjustments in public finances are being pursued. Concerning the European institutional framework, the Stability and Growth Pact and the excessive deficit procedure are the key fiscal cornerstones of EMU. These must remain firm. The Pact and the excessive deficit procedure should be fully respected in their current form, while their implementation could be improved, in particular as regards the preventive arm of the Pact.
Finally, let me support the calls expressed in the report of the High Level Group chaired by Wim Kok to renew the impetus in the Lisbon process and to sharpen its focus. In this context, we restate our strong support for all efforts on the part of governments, parliaments and social partners implementing the reform agenda and focusing on those reforms that will support employment growth, foster investment and stimulate innovation and productivity. Progress in this direction will not only enhance the underlying growth potential of the euro area economy over the medium term but will also help to bolster consumer and business confidence over a shorter horizon.
Question: I do not know if I understood everything well but I do not think I have heard you mentioning the euro, which is considered the major problem for economic growth together with oil by the economists. So, I would like to ask you: are you worried by the present level of the euro? And, second, regarding one report in an international newspaper today, are you going to intervene together with Bank of Japan to buy dollars to contain the euro?
Trichet: Well, first of all, I would confirm what you know, namely that we consider recent moves as unwelcome. And, as regards intervention, you know also that I never comment on such matters. I will only add that we are taking into our analysis, of course, all elements that are part of our analysis and, of course, we have taken into account all that we know on the domestic development in the euro area, on the evolution of labour costs, on the impact of the price of oil, on the impact of exchange rate, and so forth. We have, as you know, a totally comprehensive vision. And, again, we are clearly saying: recent moves are unwelcome. I would only add that" verbal discipline '' in the present time is really of the essence.
Question: Could you be a little bit more specific when you talk about recent moves being unwelcome? Do you mean the size of the moves or do you mean the absolute level of the euro?
Trichet: It speaks for itself.
Question: And in that context, could you explain: when you use the word" brutal '', do you use it in the French sense of a" surprise move '' or do you mean it in the English sense of a" hostile move ''?
Trichet: As you know, the English language comes partly from the Anglo-Normand and you could say that it is the Anglo-Normand style.
Question: Is the downward risk for economic development for you more important than the upward risk of the exchange rate?
Trichet: I expected that question. As you know, we have a needle in our compass. The needle of the compass is price stability. And we take all pertinent information into account, including the evolution of domestic demand, the evolution of the economy and all other elements, as part of our own judgement of the risks to price stability, both through the economic analysis and through the monetary analysis. The conclusions that we draw determine our monetary policy. So, we take absolutely everything into account.
Question: To come back to the question of the absence of exchange rates in your statement, we are being told that the statement is a description of what was discussed in the Governing Council. Does the fact that it is not mentioned mean that it was not discussed at all and that you regard it as unimportant for developments in the euro zone? Or does it mean that there is no consensus, so you can not report on it?
Trichet: No, there is a full consensus on what I have just said. And I am speaking here on behalf of the Governing Council and not in my personal capacity. I am reporting as the spokesperson of the Governing Council. The Governing Council is unanimous in saying that recent moves are unwelcome. And we fully take into account all parameters in our own analysis -- both the economic analysis and the monetary analysis. All this is fully taken into account. And if you want details on the deliberations of the Governing Council, I would sum it up in the following fashion: we did not consider at all the option of decreasing rates ; we assessed the situation ; and we concluded that maintaining the present rates was the correct decision, taking everything into account, and that continued vigilance was of the essence. Because our credibility is essential to anchoring inflation expectations. And because solidly anchoring inflation expectations in line with our definition of price stability is key in the present episode, where we have various shocks, including the oil shock which is an important feature in the present environment.
Question: Mr Trichet, I have two questions. First, could you reassure us that central banks can use intervention as an instrument if it 's necessary? And my second question is: in the discussion about the impact of exchange rates, do you think the impact of demand for euro zone exports, which is quite good, has been forgotten?
Trichet: On the first point, it goes without saying intervention is a weapon that exists, and it has existed, historically, in all major partner countries. And I confirm to you that I never comment on such matters. I understand the second question as a call for a judgement on the global demand addressed to the euro area? Is that right?
Question: You have, for example, a history of high demand and you have a good export performance at the same time -- there 's a correlation. This aspect is often underestimated in the discussion about the impact.
Trichet: Again, we have to take into account the full body of the 306 million citizens of the euro area and we have to take into account the full body of the 12 economies concerned. They are not in exactly the same situation as regards a number of parameters. And for very good reasons: we can explain of course what comes from the reunification in Germany, what would come from the specialisation of the various economies, what would come from decisions taken in the past and so forth. We have a global vision, and, as I said, we consider that global growth will remain robust. We can expect global demand -- which is the external demand addressed to the euro area -- to continue to be part of an environment which is favourable, even though we have observed some moderation. We have had, as you know, a global economy which was picking up very, very impressively. So, we see now some moderation but a continuation of global growth at a robust pace, which is of course a favourable environment in this respect.
Question: President Trichet, on the euro you said that verbal discipline was of the essence, and I wondered why you were saying that. Is it directed towards finance ministers, or the Japanese? And the other question I have is: you say that the euro 's moves are unwelcome. But why are they unwelcome? What 's the problem?
Trichet: As regards the first remark, it is a general remark which is not addressed to any particular audience or constituency. I made it in front of you and after the first question of this press briefing. As regards what I said on exchange rates, I will stick to this sentence, which speaks for itself.
Question: Mr President, was there a broad consensus in the Council on the impact of the euro on growth and did you touch on the subject of raising or cutting interest rates at all?
Trichet: I have already responded to part of your question. I said that we did not examine cutting interest rates. We examined the other options, and our conclusion -- which was a very, very broad conclusion -- was that interest rates were correct at the moment and that continued vigilance was of the essence. Vigilance is the driving force behind credibility. Credibility is the driving force to ensure inflation expectations remain in line with our definition of price stability. And if inflation expectations remain in line with price stability, this paves the way for no second-round effects, for all economic agents to make the assumption that in the medium run we will be in line with price stability, and for a financial environment which is extremely favourable. Obviously, for the 306 million inhabitants of the euro area, it is the best financial environment we have had in nominal terms since the Second World War.
Question: You just mentioned inflation expectations. I guess they are right now about 2.2%. Is that in line with what you would like to see?
Trichet: It is precisely the reason why we have to remain vigilant and why I insist on vigilance being of the essence. Some indications we have are confirming that we are around the level of 1.9%, below 2%, close to 2%. You probably refer partly to what we extract from index bonds and the extraction from index bonds gives figures that are a little bit over and above 2%, and this is something that we have to examine very carefully. There are various ways to analyse this situation. Some are arguing that a part of it is due to risk premia on top of inflation expectations that would justify the fact that we remain a little bit below 2% for the sole inflation expectations. I do not express a definitive opinion on this. I would say all the information we have is calling for vigilance to be of the essence.
Question: You said in the answer to the first question you should take into account all factors including exchange rates and oil prices. Of course this year, earlier in the year, many of the concerns surrounded oil prices about mid-year and towards the end of the year we have now found ourselves grappling with the implications of the exchange rate. Do exchange rates represent an uncertainty in monetary policy-making of the same magnitude that oil prices represent?
Trichet: I will not embark on a" hit parade '' of the uncertainties in which we are living, we ourselves in the Governing Council of the ECB and also at the level of all responsible entities, not only in Europe but all over the world. So, it is clear that the oil price is an uncertainty that we have to take into account. As you could see, as regards the projections of the staff of the Eurosystem, this has been taken into account at a certain level which is the working assumption. It is absolutely clear that it could go up or down. As you know, as member of the international community, we are calling for oil markets to function as well as possible and for this price to go down and we are strongly calling for that. I myself signed the G7 communiqué, which is calling for that and we trust that the present level does not reflect fully the normal price which would come out of the normal" encounter '' of supply and demand, but again: we have to be realistic, we have to be entirely attached to facts and figures, and we take the reality as it is. And it is true that we are living in an uncertain world. As everybody can see, we are also living in an uncertain world as regards a number of other parameters, of course exchange rates, of course the overall attitude of authorities that are responsible for structural reforms, that are responsible for fiscal policies. We are also very much depending on the global evolution. We have an idea of the global evolution, but there are risks at the global level that we have to take into account. I do not make a" hit parade '' of risks but we have to continue, as we have been until now, to be an" anchor of stability ''. It is our own responsibility. We have to be an anchor of stability that would not only be stable for today or tomorrow but also in the medium and long run. Do not forget that we have treasury issuance with a 30-year duration: they rely upon our very long-term credibility in delivering price stability. We have to be such an anchor in an environment which is obviously uncertain, and which is changing. You see that the working assumptions of the present Eurosystem staff projections are different from the working assumptions of the previous projections that we published three months ago, only because the environment changes. We must remain the anchor in an environment which is changing.
Question: You said before that you did n't take into account the possibility of a rate cut. Could you please tell us if you discussed, maybe in a marginal way, the possibility of a rate increase?
Trichet: I said that two other options had been examined. We concluded -- with a very, very large consensus -- that the present rates were correct. And that vigilance was of the essence.
Question: Given the latest macroeconomic indicators for the euro zone and the United States, do you feel that the EUR/USD exchange rate still reflects the fundamentals of these economies or do you feel there are other kinds of forces behind the latest movement of the market, on the exchange market?
Trichet: That was a very good try. I do not want to bore everybody by repeating for the third time a sentence that you know pretty well. But thank you very much nevertheless for your question.
Question: Mr Trichet, can you tell me if the ECB was aware of the problems of the Greek budget in 2000 and earlier? And what is your reaction now to the news that the European Commission is flagging formal action against Greece for breaching those deficit limits?
Trichet: First of all, I will say that we have a position at the level of the Governing Council on this question of facts and figures. We said very clearly -- and we were echoing the sentiments of the ECOFIN Council -- that we need independent institutions for the application of accounting rules and for the collection of facts and figures at the level of the various nations. We need a capacity at the centre -- namely the European Commission, Eurostat and the Commission -- to check facts and figures, I would say examining the dossiers, and also on the spot. We need a system that ensures that when a figure has been stamped, it can not be changed. If the referee has said this or that, it can not be changed. That is extremely important, but of course, it can only be done if the other two conditions are fully met and we expect the Commission to make very precise proposals in this domain. And I can tell you that the Governing Council certainly feels that this is very important. Lucas, would you like to add a word on this issue?
Papademos: The report of the Commission I think, speaks for itself, and the Commission has issued a communication. I would derive a number of general conclusions from this report, very much in line with what the President said. The first is that it is very important that the weaknesses and insufficiencies in the provision of budget deficit figures are addressed effectively. It is essential that we have complete and reliable data in order to be able to apply the excessive deficit procedure and to evaluate the convergence of Member States. For that reason, we must learn from past experience in order to ensure that the kind of problems that have been identified do not occur again. And to this end a number of measures can be taken. As the President noted, I think it is important, among other things, to enhance the professional capacity, the effectiveness and the independence of national statistical offices, and also to further strengthen the monitoring and inspection capacity of Eurostat.
Trichet: Thank you very much. So, the sooner, the better. What Lucas could not necessarily say but what I will say is that, when I look at the report of the Bank of Greece for the time in question, I see that the Bank of Greece had reported both the deficit figures based on" delivery '' -LRB- national accounting -RRB- -- we are entering into technicalities here -- and the figures based on" cash payments ''. And the figures based on cash payments were clearly very different. It was not the duty of the Bank of Greece to decide what the right accounting procedure was, but the figures -- as far as I understand it, after having read it -- were clearly there. I mention that en passant. That is not the problem, the problem is to have a system which will function impeccably. That is what we are calling for, and I am sure that the Commission will propose a good system and that the Council will approve it. The Council itself -- and we fully approve of this -- said that" we should not be dependent on electoral cycles or political influence ''. This is clear, it has been said by the ministers themselves, and we fully subscribe to it.
Question: I think there is some confusion about the meaning of the words" strong dollar '' that you have just mentioned?
Trichet: I did not mention that at all.
Question: You referred to the" strong dollar ''.
Trichet: No, please do not ask me to repeat for the fourth time the same sentence.
Question: Sorry, but what is the strong currency from your point of view?
Trichet: I did not say" strong dollar ''. If you absolutely want me to say that word, then I would say that I appreciate what John Snow has said as regards this particular point. I also appreciate very much what he has said regarding the necessity and the will of the US government to correct a lack of savings which is materialising in particular through public dissavings. Everything that the US government and John Snow have said in this regard is important. I would say that to echo your question.
Question: I am very sorry to say that, but you keep repeating what Mr Snow said. And Mr Snow said that two days after the US had increased their limit to increase their debt by USD 800 billion. How does that go together? The markets at least do not believe it. And to me, it seems dangerous for you to keep repeating what Mr Snow has said while the US government does exactly the opposite. It is not the words that count ; it is the deeds -- and the markets can think too. So, what do you say to that?
Trichet: It was very important that the US government was committing itself to correct these fiscal imbalances. That is exactly what I said, and I think that you will fully subscribe to that. But I understand pretty well your own judgement and appreciation.
Trichet: I should also mention the fact that we have a consensus on the diagnosis on the assets and liabilities of our economies on both sides of the Atlantic. On both sides of the Atlantic, we have assets and liabilities and we -- by which I mean the G7, including the European Union and the ECB -- all agree on that. We agree that the main asset of the United States is the flexibility of the economy. And the fact that structural reforms have been implemented and are giving the economy a high level of growth potential and the capacity to be resilient to shocks is something which is remarkable. That is the asset. The liability is an important lack of savings, and there is a consensus on that. A correction of this lack of savings involves correcting public dissavings and this is what the US government has said. I myself have no reason to immediately question what they will do. In this sense, you are right: we will see what they will do. But I approve what they say. And I do not hesitate to say that -- on this side of the Atlantic -- we also have our homework to do. We all agree that here in Europe we do not have a lack of savings ; we have a slight surplus of savings, which is reflected in a slight surplus of the current account. It is an important asset. But we have a big liability, namely a lack of structural reforms. I do not want to bore you, but we agree also that this lack of structural reforms creates two problems, reverse problems in comparison with the United States: we have a lower level of growth potential and we are less resilient to shocks. These are big problems and we have to correct them. That is our homework. So, we both have homework to do and we both agree on that. But I also agree entirely with you: now we have to deliver on both sides of the Atlantic.
Question: Last month you said that you have good cooperation with the US authorities. Would you also say today the same sentence?
Trichet: I have just said that there is a joint consensus on the main assets and liabilities on both sides of the Atlantic. I expect that we will continue to have a confident relationship.
Question: In the past, in the first five years of the ECB press conference, a dominant factor was the reference value of M3. Is this reference value still alive? Of great importance in those press conferences was the explanation of that reference value. Is the potential growth rate now lower than before and the definition of price stability higher than before? What is the velocity of money? What about the components of the M3 reference value? Is this still alive and a factor in the discussions today?
Trichet: As you know, when we clarified our monetary policy concept, which was done in 2003, we said that the reference value of 4.5%, which of course exists, was a medium-term reference value, so we would not reassess the reference value every year. If there was a revision every year, this would not be in line with the idea that it was a medium-term reference value. So, it is in place, and we regularly calculate the monetary gap with reference to our reference value. Perhaps you have noted that in what I have said today in my introductory remarks there are four paragraphs that concern our understanding of what is happening on the monetary side. We attach great importance to our monetary analysis. We believe that it is one of the main tools that we have to anchor medium and long-term inflation expectations. We in the Governing Council of the ECB believe that in the long term inflation is a monetary phenomenon and we have the impression that this is also regarded by academics and by observers in general as something which is very important. We are proud of our monetary policy concept and we consider that it has to be examined very carefully. And, as I have said, we are looking at the monetary gap that we are experiencing and we are trying to gain a better understanding of a phenomenon which I mentioned earlier, namely the fact that the portfolio shifts observed previously have not reversed, in our opinion, in the way that they normally could do or should do at this point in the cycle. This is a matter for further reflection. It is an important matter.
Question: You said there was a very, very large consensus. Is it unequal to unanimity?
Trichet: We discuss such matters at length. Each of us weighs up all the pros and cons for the various possible decisions that we could take. This is true also for non-monetary policy decisions. I am interpreting the weight of the pros and the weight of the cons but I am not giving you a proportion. It is my belief that everything is taken into account. Each of us admits that there were pros and cons, and the result is -- as I said -- a large consensus. I know that some of you want to have a sense of the meeting and that is why I want to give you a sense of the meeting. I will sum it up again: interest rates are correct and vigilance is of the essence. And this is true for all the reasons I have mentioned, including those relating to monetary developments.