While short-term inflationary pressures persist, they have recently diminished somewhat, mainly due to the decline in oil prices from the peaks seen in October. At the same time, there is currently no significant evidence that underlying domestic inflationary pressures are building up in the euro area. Accordingly, we have left the key ECB interest rates unchanged at their historically low levels. However, upside risks to price stability over the medium term remain, and 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. Eurostat yesterday released a new estimate for real GDP growth in the third quarter. At 0.3% quarter on quarter, it confirmed the previous estimate. While information on the fourth quarter is still incomplete, the latest macroeconomic data and survey evidence, although mixed, appear to suggest ongoing moderate growth.
Looking ahead, the conditions remain in place for economic growth to proceed. On the external side, global growth is expected to remain robust. The strength of global demand should help to sustain euro area exports. On the domestic side, investment should be supported by the very favourable financing conditions in the euro area, improved corporate earnings and greater business efficiency as firms continue to restructure. Moreover, private consumption is likely to evolve in line with the development of real disposable income. Consumption would also be supported if uncertainties surrounding the extent and pace of fiscal consolidation and structural reform in the euro area were reduced.
Downside risks to the economic outlook stemming from oil price developments have diminished somewhat over recent weeks. As regards exchange rates, we confirm our position, expressed when the euro rose sharply, that such moves are unwelcome and undesirable for economic growth.
Turning to prices, annual HICP inflation was 2.3% in December according to Eurostat 's flash estimate, up from 2.2% in November. Annual HICP inflation rates of above 2% are likely to persist over the coming months, notwithstanding the recent oil price decline. Looking further ahead, however, the available information indicates that, barring further adverse shocks, HICP inflation will fall below 2% in the course of 2005. Moreover, the latest indicators do not suggest that underlying domestic inflationary pressures are building up in the euro area. Wage increases remain contained, against the background of ongoing moderate economic growth and weak labour markets.
In the context of what is a broadly favourable outlook for price developments over the medium term, upside risks to price stability need to be taken into account. Given past oil price rises, there is a continued need to avoid second-round effects in wage and price-setting throughout the economy. Responsibility on the part of social partners remains very important. Moreover, developments in indirect taxes and administered prices require close monitoring.
Turning to the monetary analysis, the latest data confirm our previous assessment. Monetary and credit growth strengthened in the second half of 2004, largely as a consequence of the prevailing low level of interest rates. Given the strength of monetary dynamics over the past few years, there remains significantly more liquidity in the euro area than is required to finance non-inflationary growth. Overall, the monetary analysis points to upside risks to price stability over the medium to longer term. At the same time, the combination of high excess liquidity and strong credit growth could in some countries become a source of unsustainable price increases in property markets.
To sum up, the economic analysis suggests that underlying domestic inflationary pressures are contained but upside risks to price stability over the medium term need to be monitored closely. In this context, it is crucial that there is no spillover from current short-term developments in consumer price inflation to long-term inflation expectations. 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.
With regard to both fiscal policies and structural reforms, the governments and institutions of the European Union will have to confront many important challenges in the course of 2005.
Foremost among these challenges is the need to strengthen public finances by correcting excessive deficits swiftly and returning to a path of vigorous fiscal consolidation. Moreover, throughout the European Union there is a need to address the considerable challenges that population ageing poses to existing pension and social security systems.
There is also a need to now bring the ongoing discussions surrounding the European fiscal framework to a convincing conclusion which builds trust and confidence. The existing fiscal framework enshrined in the Treaty and the Stability and Growth Pact is a cornerstone of Economic and Monetary Union and thus of central importance for anchoring expectations of fiscal discipline. The Governing Council is convinced that improvements in the implementation of the Pact are possible. At the same time, it reiterates its position that it would be counterproductive to change the Regulations, dilute the 3% deficit limit or weaken the excessive deficit procedure.
Turning to structural policies, the forthcoming mid-term review of the Lisbon agenda provides an opportunity to give renewed impetus to structural reform in the euro area, as called for by the recently published Kok Report. We strongly support a reform agenda which focuses on raising employment growth, fostering investment and stimulating 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: Was there any discussion at the meeting today about raising interest rates? And if so, what arguments were presented for doing so? And how close did you actually come to doing it?
Trichet: We had a very thorough discussion and the President of the European Union, Jean-Claude Juncker, and the President of the European Commission, Mr Barroso, were witness to our exchange of views. I remind you that every fortnight we invite the President of the ECOFIN, the Eurogroup and the representative of the Commission to participate, as the Treaty calls for. And I would stress that there is, in this respect, a very close relationship between the ECB and the pertinent institutions of Europe. And the conclusion was, all things taken into account and balancing all arguments considered pertinent, and after a very thorough economic analysis and monetary analysis, that we consider that the rates today are exactly the kind of rates which are fitting with our mandate, and also that we have to continue to be vigilant. Because vigilance is of the essence if we want our mandate to be fulfilled. And I do not want to repeat what I have said from time to time, but one has to understand that, by expressing our vigilance, we are permitting inflationary expectations to be anchored on a two-year, five-year, ten-year, twenty-year, thirty-year basis. I could see that for myself only a few days ago: one of the member countries of the Eurosystem issued securities on a thirty-two-year basis -- more than thirty years -- at an extraordinarily low level of interest rates. And that is possible only if markets, if investors, if savers, believe in the capacity of the ECB to deliver a very low level of inflation over thirty-two years. If they did not believe in this capacity, they would elevate the level of their inflationary expectations and we would immediately have medium - and long-term market interest rates that would be higher, or much higher, or much, much higher. And if you want to know what it could be like, you only have to look at what existed before the euro was set up. So, again, it is very important that we continue to be vigilant. And we are vigilant.
Question: Listening to what you have said today, one could draw the conclusion that you are a little bit more confident than in the previous month about inflation and about growth. Is this true?
Trichet: I know, of course, that what is very important for you is to note a subtle difference. I would say that, as regards inflation, we have, as everybody has, observed a certain attenuation of the impact of the price of oil. And that, of course, has an impact on immediate and short-term inflationary observations. In that sense, yes, the environment has changed a little bit. But what counts, really, is the medium-term perspective. And I would say that in the medium term we have exactly the same kind of analysis as we had before. So, the present changes, or the immediate future changes a little bit, but it is not really very pertinent. Because we are permanently reasoning in the medium term. And when I say medium term, I also mean the long term and even the very long term. As regards growth: of course, we have observed that some indications, particularly those coming from the Commission, were a little bit more favourable. We will see. We consider that we still have mixed signals. Some are going in the direction of more robust growth. Others are going in the other direction. And I would say, to sum up, that we are very much in the same universe of moderate ongoing growth. That is really the best summing-up I can deliver.
Question: I have two questions. The first one being: you spoke about your credibility in financial markets just a minute ago. Inflation expectations, as read by French inflation-linked bonds, have gone up since you were nominated to become President of the European Central Bank and are now above 2%. Are you concerned that your credibility may be eroding somewhat? And the second question is: just four days ago you welcomed statements by US Treasury Secretary John Snow regarding US moves to reduce budget deficits and the current account deficit. Since then Snow has reiterated that exchange rates are best decided by the market. And I was wondering whether you had received any signal from the US government that there will be some sort of active steps taken to reduce the current account or budget deficit?
Trichet: Since the very beginning, we have followed, with extremely close attention, inflation expectations, which anchor our entire monetary policy. Not only are they a permanent measure of our success and challenges, but they are also incorporated in market interest rates. If inflation expectations on a ten-year basis are going up, it augments, all else being equal, market rates. If they are well maintained, in good order, in line with our definition of price stability, then we have lower market interest rates. From time to time, we are judged to be too" obsessed '' by inflation expectations. And there is a sentiment from time to time that this attention is producing higher interest rates. It is exactly the contrary. If we are credible in this permanent search for appropriately low inflation expectations, we deliver low market interest rates. And then we are creating the very favourable financial environment which is part of our own contribution to growth and job creation in Europe on a sustainable basis. So I insist very much on that. That being said, of course they fluctuate, and our successive analyses are very much based on what we are observing on the side of inflation expectations. And you are right on one thing: if we extract the break-even inflation rate from indexed bonds, we see that there has been a tendency for them to rise a little. The most recent evolution has been a little in the other direction. So, after having attained a certain peak they are now going downwards. And we believe that the strong expression of vigilance has played a role in calming down something that was rising slightly. Now, this is technically quite complex, because you can interpret this break-even as incorporating inflation expectations and risk premia on future inflation. So we measure real inflation expectations not only by the break-even inflation rate extracted from index-linked bonds but also using surveys and consensus estimates of future inflation. The present level, i.e. the last information we had, is 1.9-2%. Again, this calls for vigilance. But it is also the representation of our own long-term credibility. So, again, we will maintain credibility and do what is necessary to maintain credibility.
Trichet: As regards Secretary Snow, I said a few days ago that I had seen the declaration he made. What was important was that he had said he wanted to do things to sustain the strength of the dollar. Among them was to go to Congress and work on the deficit. And that was really something which I praised because I believe that it was something important. I have nothing to add to what I have already said. I believe that when things are said that are, in my opinion, important and excellent, why not mention them?
Question: Mr President, discussing and preparing the next G7 meeting in London, did you find a common answer -- you, the President of the ECB, and President Juncker -- if the United States asks for more excessive deficit spending and a more relaxed monetary policy to produce more growth in the euro zone? Did you discuss this question or prepare your common answer today?
Trichet: Each of us has our own mandate and responsibility, and I have to tell you that all the G7 meetings I have participated in, including when I was not President of the ECB but rather observing what was being discussed, have proved to be very efficient in terms of interaction between the various participants, including the President of the European Union and the President of the ECB -- my predecessor as well as myself. So, I would certainly consider that, a priori, there is nothing to be said on this interaction. As regards what the United States might or might not ask, we will see when we participate in the meeting, but again, I do not want to anticipate in any respect what we will do, or what the British Presidency will do, I will only say that the present global consensus -- and it has been expressed several times before now -- is that we all have homework to do. There is a consensus in the international community that structural reforms are of the essence in the euro area, and in Europe as a whole, because it is the appropriate way to elevate the growth potential, and our contribution to global growth would be to elevate the growth potential. There is also a consensus that the same can be said as regards Japan, and that the savings issue in the United States is a very important question for them -- exactly the equivalent of structural reforms as far as we are concerned. I can also tell you that this consensus is shared to a very large extent, as far as I understand, by colleagues in the G10 and in the Global Economy Meeting when we meet in Basel.
Question: Two short questions, one to Professor Papademos because you answered a similar question last year, so maybe you will also this year. There was an article published in a famous German newspaper about a big loss recorded by the ECB last year of around $ 1 billion to $ 1.2 billion. Is this correct? This is the first question.
Papademos: I should first say that the strengthening of the euro against the dollar has adversely affected the financial result of the ECB in the year 2004. And the reason is very simple: the bulk of our foreign exchange reserves are in dollars and when the euro appreciates relative to the dollar, the value in euro of the assets denominated in dollars declines, and we therefore have unrealised losses. As you know, we follow a prudent accounting approach so that unrealised losses are recorded and reported as realised losses. So, it is correct that in the year 2004 the ECB will record a loss. However, we would like to communicate the magnitude when we have the final figures and when the time comes for approving the financial results of the ECB.
Question: Will that be on 17 March?
Papademos: That is when the financial results will be approved by the Governing Council and they will be reported.
Question: You said the bulk of your currency reserves are dollars? How much is that?
Papademos: The composition of our foreign reserves we do not disclose.
Trichet: The financial results will be disclosed when the time comes and when we have the full decision on the accounts.
Question: The second question: did you also talk about cutting interest rates today? Did you take it into account?
Trichet: I said that we considered the present level as being exactly the kind of level which was in line with our analysis.
Question: I have two questions, if I may. Mr Juncker, in an article at the beginning of the week, said that the current arrangement of a dialogue between the Eurogroup and the ECB was not sufficient, and he called for it to be strengthened. He also called for the Eurogroup to become an international forum for representing the eurozone internationally. Can you give your reaction to those comments? And secondly, maybe one for Mr Papademos, can you give us an update on the discussion on the new headquarters of the ECB? Was that discussed today?
Trichet: On the first point I would say, that we are very eager ourselves to have the best possible exchange of views between the Eurogroup and the ECB. I already said on the occasion of this press conference that we were inviting ourselves, every fortnight, the President of the Eurogroup and the Commission to participate in our own deliberations, which, of course, is a very good way to understand how we are reasoning ourselves. The Vice-President and I have the privilege of being invited every month by the Eurogroup to reciprocate and to have a full knowledge and understanding of the way the Eurogroup is reasoning. We all have our responsibility, but it is important that we understand each other as well as possible with mutual respect and mutual respect for independence, which goes without saying. I have to say that we are in full agreement, and I am personally in full agreement, with Jean-Claude Juncker on all that, and today was precisely an illustration of this accord. Our will has never been to have a Eurogroup which is as weak as possible -- it is exactly the contrary. We consider that by sharing the same currency we are sharing a common destiny. There are a number of points which are of extreme importance: fiscal policies, structural reforms of all natures, which are in the hands of the Ministers of Finance and not in our own realm. All this is very important for an appropriate functioning of Monetary Union, and I remind you that the kind of union we have in the constituency of the 12 we call Economic and Monetary Union: EMU. On the second point you made: I mentioned that at 3.15 p.m. we will issue a press communiqué which will say that we took a decision this morning as regards the architectural choice for the future headquarters of the ECB. So at the end of this press conference it will be made public and then in the middle of next week we will have a special press briefing, the Vice-President and I, to explain in detail how we will proceed from now on and all the details which you would like to obtain about the future course of action.
Papademos: So, not only did we discuss it but we took a decision. You will find more details in the press release about our assessment concerning this design, and, as the President mentioned, in the middle of next week we will have a press conference dedicated to the presentation of the decision regarding the final design.
Question: Mr President, you said that in some property markets we may witness unsustainable price increases. Which are those property markets and what is your scenario for those? And a couple of days back I believe Mr Issing said part of the problem of the strong euro was Asia, especially China. What is the ECB doing to address that problem?
Trichet: On the second point, there has been a clear consensus amongst the international community at the last G7 meetings on the fact that there is a need for emerging Asia to move in the direction of a progressive and orderly appreciation of some currencies. That has already been communicated at the global level several times. I could mention at least three G7 communiqués on that.
Trichet: On the other questions, I will not make any economy-by-economy qualifications. We look at the whole euro area and it is at that level that we note certain phenomena. At this stage our monetary analysis suggests strongly that we have a high level of liquidity, higher than would be necessary for the appropriate financing of growth in Europe. We are reasoning in the medium term in this respect, not in the short term, and it is part of the risks that we have clearly identified. Of course, this liquidity has a counterpart. Part of the counterpart is precisely credit to the economy and, as part of that ; we see a dynamism of credit to real estate, which is undoubtedly substantial. This is not the case everywhere because, again, we have the addition of economies that are not, from that standpoint, in the same position. As you know well, what you observe in Germany in the real estate market is not what you might observe in other countries such as Spain or anywhere else in Europe. So that is a question that we have to follow carefully and without undue alarm, but it is part of the risks that we are identifying.
Question: Mr President, are you embarrassed by the deep commercial balance deficit of the United States as shown yesterday and is it a signal that something must be done on the currency rate policy instead of leaving the currencies gold?
Trichet: As far as the currencies are concerned, I have nothing to add. I will not comment on figures that are produced on a monthly basis. But we all agree that one of the risks at the global level in the economy is the constellation of imbalances. That 's absolutely clear.
Question: Two days ago, Mr Issing stated that the adjustment of the euro has been completed and even gone too far. What does that mean? Does that have implications for the currency policy of the ECB?
Trichet: You have everything you need as regards the exchange rates. Not only did I say what our qualifications were in terms of our own exchange rate as regards the US dollar, but you also have the explanations I gave on emerging Asia. So I stick to what I said.
Question: Mr President, another question regarding the euro. In your Introductory Statement on 2 December you did not mention the euro and the currency. In your statement today, you have mentioned it. Is there a reason for this change?
Trichet: No, not at all. I have to say that, as you know, I am the" porte-parole '' of the Governing Council. So, it was not in the Introductory Statement, as we had considered that it was better for me to tell you directly, on the occasion of the press conference, what the position of the Governing Council was. But what I say here is as the" porte-parole '' of the Governing Council. So do not draw conclusions from your observation between December and January.
Question: Mr Trichet, what is your position on the fact that the German government tried -- unsuccessfully -- to push the Bundesbank to sell gold? The Bundesbank is a great player in the euro, and other central banks now have to sell the gold that it could have sold. What do you think about this?
Trichet: I would prefer the Bundesbank to communicate directly and, to my knowledge, they have done that. As regards the Eurosystem and myself as President of the ECB, I would say that we have an accord which gives options for a number of signatories to sell gold. Of course, it has been made public, so you know that there is an accord. You know who the signatories are: a number of central banks of the Eurosystem, the ECB itself and also other central banks which are not part of the Eurosystem, including those of Switzerland and Sweden. Together, we signalled to the market that we would perhaps sell gold under a certain ceiling over a period of five years. We can, of course, within the framework of this accord, where we have internal arrangements, have one participant deciding not to use his option, in which case there is, of course, the possibility for the option to be utilised by others. But, to my knowledge, the Bundesbank has communicated on that. This will not change the overall option for sales of gold by the Bundesbank over the full period. So it is much more the possibility for arranging the timing. It is not for me but for Axel Weber to explain and I am, in any case, only quoting what he said to give you an overall understanding. The ECB itself is also participating in this overall agreement. I note that the market has, thanks to this accord a full understanding of the possible interaction between the central banks and the gold market, as far as the signatories are concerned. So this accord is important. As you know, it started more than five years ago and we continue to have a very transparent, visible and predictable way of dealing with these gold sales.