On the basis of our regular economic and monetary analyses, we have concluded that the monetary policy stance remains appropriate, given the current outlook for inflation rates over the medium term. The prevailing exceptionally low level of both nominal and real interest rates across the entire maturity spectrum provides considerable support to economic activity in the euro area. At present our judgement is that, although upside risks to price stability exist, we continue to see no significant evidence of a build-up in underlying inflationary pressures in the euro area. However, not least in view of the risk of second-round effects from ongoing oil price increases, the Governing Council continues to monitor the development of inflation expectations very closely. At present, particular vigilance with regard to upside risks to price stability is warranted.
Allow me to explain our assessment in greater detail, turning first to the economic analysis. According to Eurostat 's flash estimate, real GDP grew at a quarter-on-quarter rate of 0.3% in the second quarter of 2005, compared with 0.4% in the first quarter according to the latest data releaseEconomic activity thus continued to grow moderately in the euro area. The most recent survey indicators have, on balance, been supportive to the view that economic growth could improve in the second half of 2005, while higher oil prices continue to weigh on demand and confidence.
On the external side, ongoing growth in global demand and improvements in euro area price competitiveness should support euro area exports. On the domestic side, investment should benefit from very favourable financing conditions, the robust growth of corporate earnings and ongoing improvements in corporate efficiency. Consumption growth should gradually rise, broadly in line with expected developments in disposable income.
This assessment is broadly consistent with the new ECB staff projections, which will be published today. Euro area real GDP is projected by staff to grow at rates of between 1.0% and 1.6% in 2005 and between 1.3% and 2.3% in 2006. Recent forecasts from international and private sector organisations give a similar picture. In comparison with the June Eurosystem staff projections, the ranges projected for real GDP growth in 2005 and 2006 have been revised downwards slightly, reflecting both the downward revision of growth data for the first quarter of this year and the effects of higher oil prices.
On balance, risks to the economic growth projections continue to lie on the downside, and relate to higher oil prices, low consumer confidence and concerns about global imbalances.
Turning to price developments, annual HICP inflation was 2.1% in August according to Eurostat 's flash estimate, compared with 2.2% in July. Over the next few months, annual HICP inflation rates are expected to fluctuate around current levels, mainly due to recent developments in oil prices. Looking further ahead, ECB staff project average annual HICP inflation to lie between 2.1% and 2.3% in 2005 and between 1.4% and 2.4% in 2006. The latest projections constitute considerable upward revisions to the Eurosystem staff inflation projections published in June, reflecting the fact that oil prices have once again increased by more than was suggested earlier by forward rates. At the same time, wage increases have remained contained over recent quarters ; the projections are based on the assumption that this trend will prevail for the time being given the current labour market situation. Overall, we continue to see no significant evidence of underlying domestic inflationary pressures building up in the euro area.
Risks to this new baseline inflation scenario are on the upside and relate to potential further rises in oil prices, administered prices and indirect taxes. More fundamentally, the main risks to the inflation outlook stem from potential second-round effects in wage and price-setting behaviour triggered by ongoing oil price rises. In this respect, it is key that the social partners continue to meet their responsibilities. Against this background, we will continue to monitor wage developments and inflation expectations very closely. Ongoing vigilance is required in order to ensure that longer-term inflation expectations remain well-anchored in the euro area.
Turning to the monetary analysis, the latest data confirm the strong monetary and credit growth which has been observed since mid-2004. The monetary dynamics are driven by the prevailing low level of interest rates, as reflected in the robust growth of the more liquid components of M3. Low interest rates are also fuelling credit expansion, with the strengthening of the demand for loans broadly based across the private sector. The growth of mortgage borrowing remains very strong. In this context, price dynamics in the housing markets need to be monitored closely. The liquidity situation in the euro area remains ample by all plausible measures, indicating risks to price stability over medium to longer horizons.
To sum up: recent oil price developments have pushed up the inflation projections for the year ahead, while medium-term domestic inflationary pressures still remain contained in the euro area. However, the balance of risks to the baseline inflation scenario is tilted to the upside. Cross-checking the economic analysis with the monetary analysis confirms the need for particular vigilance in order to keep medium-term inflation expectations firmly anchored at levels consistent with price stability. By achieving this, monetary policy is making a significant contribution towards a recovery in economic growth.
Fiscal policies will make their best contribution to stability, growth and confidence if prevailing imbalances are tackled as part of determined and well-designed reform programmes. A rigorous implementation of the revised Stability and Growth Pact would reinforce the credibility of reform plans and boost expectations of a sound fiscal and growth situation. Against this background, it is regrettable that the pace of fiscal consolidation remains too slow. In some countries, targets for correcting excessive deficits are at risk. Moreover, due to a very generous application of the new rules of the Pact, countries which have recently breached the 3% deficit limit are being granted relatively long periods to correct the situation. The Governing Council therefore urges Member States to step up consolidation efforts where needed and to implement the revised rules in a manner that supports these efforts and deters future slippages.
As regards structural reforms, the European Commission has recently presented the" Community Lisbon Programme '' and a list of measures at the EU level to relaunch the Lisbon strategy. The programme focuses on enhancing knowledge and innovation in order to strengthen growth, on making Europe a more attractive place to invest and work, and on creating more and better jobs. It includes, for example, measures to further open EU markets and to simplify the regulatory framework within which business operates. The Community Lisbon Programme will be complemented by the introduction of national action plans for growth and jobs, which the Member States will present this autumn. Progress at both the Community and the Member State level is crucial to addressing the economic challenges facing the EU.
Question: President Trichet, you said in July at the press conference that you are not pre-announcing a rate cut and that you are not pre-announcing a rate increase. But now with this significant, considerable upward revision in your inflation forecast, you are probably in a better position today to give us your best guess on which direction the next rate move will be.
Trichet: I would say the same. At this press conference I am not pre-announcing a rate increase and I am certainly not pre-announcing a rate cut. We were unanimous in considering that the present level of interest rates remains appropriate. And we were also unanimous in considering that particular vigilance is of the essence at the present juncture. Because, undoubtedly, the risks have been augmented, not only by the price of oil but also by the increase in the price of oil commodities. And we have to remain particularly vigilant as regards possible second-round effects. That is exactly the way we see things today.
Question: Mr Trichet, would you still say, though, that the ECB 's policy stance is neutral? Or are interest rate cuts now definitely off the table since you have upgraded your inflation outlook and increased" vigilance '' to" particular vigilance '' in your statement?
Trichet: Again, I am not pre-announcing a rate increase. I am not pre-announcing a rate cut. The words that we have utilised are very clear. We consider the present level of interest rates appropriate and we are very vigilant. I have to make a point here: I have never, on behalf of the Governing Council, guaranteed anything to you or to the markets. I have never said" you can be sure that we will do this and that or that we wo n't do this and that ''. We are permanently vigilant. Everybody knows that we do not make promises. We are bound by our monetary policy, by our definition of price stability, by our two-pillar approach. And, again, we do whatever we judge appropriate to take account of the situation. We do not promise anything in advance.
Question: Mr Trichet, do you consider the impact of high oil prices on inflation a one-off effect or is this a permanent risk to price stability? Or, to put it in another way, would you tolerate higher inflation rates due to the oil price if they are just due to the higher oil price?
Trichet: It is not the first time that we have observed an oil shock. We have experienced a series of such shocks. And you can see what we have done in the past. So, we are not reacting mechanistically, we are looking at the second-round effects. We are expressing vigilance and particular vigilance on this occasion. And we do whatever we judge to be right to maintain our medium-term orientation and to maintain inflation in line with our definition of price stability, with particular attention placed on inflationary expectations. This is the reason why, even in the present circumstances, with undoubtedly a big difference between the previous projections and the present projections, and taking into account all the risks that I have mentioned, it is nevertheless our opinion that there is today no case for increasing rates. But, again, we remain vigilant. We do not promise anything in advance. And everything depends very much on what we call the second-round effects.
Question: You made an upward revision in your inflation rate forecast and a downward revision in your growth rate. Is monetary policy in a dilemma? And how is the risk of asset price inflation? What is your analysis in the bond market now?
Trichet: On the first point, every institution, every central bank and, in some respects, every economic agent has to take account of the impact of an oil shock or commodity shock or other such kind of shock. It has the effect of depressing real growth and pushing up inflation. It is not the first time that we have had such a shock since the creation of the ECB and of the euro. You know pretty well how we reason, and here you have a real case -- we have this shock, we have the impact on expectations and projections. And you can see clearly that the staff of the ECB, have revised our growth projections slightly down for this year and down also for next year. We have also revised upwards our inflation projections. And taking everything into account we have concluded that there is no case for changing rates today and that we have to demonstrate particular vigilance.
Trichet: We do not promise anything in advance. You and the market knows that. In our opinion, and because you all know that and the market knows that, the market believes we are credible and capable of delivering price stability. That is why we have a solid anchoring of inflation expectations over the medium and long run
Trichet: On asset price inflation I would say that the Governing Council is monitoring closely what happens. The real estate segment of the asset market is complex. We have a number of economies in the European Union and in the euro area where real estate is extraordinarily dynamic, while in some others the market is flat or going in the other direction. We know that we have to look at this very closely. We also trust that our monetary policy concept is such, with its two pillars, that we are more able to take account of this aspect of the situation. Again, you know our today 's conclusion.
Question: As you know, a member of the Governing Council in Italy is in the midst of a controversy on the banking market and it is my understanding that the Governing Council discussed the issue yesterday evening. I wanted to have your feeling about the latest developments in Italy and regarding Mr Fazio.
Trichet: First, we have received the report which was submitted by the Banca d'Italia to an inter-ministerial committee in Italy and we will reflect on that. The Governor of the Banca d'Italia has expressed his readiness to supply more information if necessary.
Trichet: Second, on the question of the banking sector and on the implementation of the Single Market, the position of the Governing Council is crystal clear. We are fully committed to the principle of the integration of the financial markets in the European Union and in the euro area. We are committed to it because it is required by European law and also because, in our opinion, it is good for the economy of the euro area, for the European Union and for the best possible functioning of the level playing field in this sector. And this applies not only to the banking sector, but to the financial services sector as a whole. The Governing Council is totally committed to the equal treatment of banks, whatever their nationality, in Europe, in the euro area and in the European Union. That is my second point.
Trichet: My third point is that the Governing Council is also of the opinion that it is necessary to actively reinforce cooperation and coordination between banking supervisors. Banking supervisors in Europe are different in nature. In some countries the banking supervisors are the central banks themselves. Others are connected to the central bank, while still others are independent of Government and the central bank. From that standpoint the system is decentralised. That being said, whatever the national arrangement, we are strongly in favour of the closest possible cooperation and coordination between banking supervisors.
Trichet: And my last point is that we will continue to monitor this situation closely, taking into account the fact that the Banca d'Italia has its responsibility according to European and Italian law, that there are other institutions that have responsibilities and are implementing their responsibilities in Italy, and also that there are responsibilities on the part of the European Commission as regards the implementation of European law. We will follow all of this carefully.
Question: Two questions, if I may, just to follow up on the last subject. Are you personally satisfied that the ECB 's Code of Conduct for members of the Governing Council has been adhered to in every respect in this matter of Italian banking? And my second question, going back to the monetary policy: you said earlier this year that interest rates at the current low levels could not last forever. Would you perhaps say the same thing today or would you not believe that it is even more likely that rates will have to go up, given what we see in the money supply figures?
Trichet: I will take your second question first. I really have already responded. I am not pre-announcing anything. And you know that we can move whenever we judge that it is appropriate. It is as simple as that: no insurance policy given by us on any unconditional orientation. You know what the facts and the figures are. You know what our policy is. You know what our monetary policy concept is. You deduce yourself what we will or could do. Again, it is very important to understand that we are confident that our vigilance permits us to anchor medium and long-term inflationary expectations in an efficient fashion.
Trichet: On the first point, I mentioned that we were following up this dossier very carefully and that, as I said, the Banca d'Italia and its Governor had expressed its readiness to better inform the Governing Council, if necessary.
Question: Mr Trichet, concerning the troubles of Mr Fazio and the code of conduct of the Governing Council of the ECB. You talked a lot about the responsibilities two answers ago. Is it the responsibility of the ECB to take care that the Code of Conduct of the ECB is being satisfied?
Trichet: I already responded to a question which was similar. Again, the Code of Conduct is a voluntary code which has been signed by each member of the Governing Council. It is not a law. It is not a European or national regulation. It is a voluntary adherence to that particular set of principles. It has been signed by all the members of the Governing Council. And I have said that we will continue to see the evolution of this dossier, which is also being followed by a great number of institutions that have their own direct authority. I can not say anything else than that.
Question: Mr Trichet, I have a question about the Chinese currency. How would you comment on recent developments after the flexibilisation of the Renminbi? You made a comment in July -- do you have anything to add?
Trichet: For a long period of time, namely a year and a half, I have myself signed communiqués on various occasions, particularly communiqués of the G7, where we clearly signalled that the international community thought that it would be appropriate and advisable for a number of currencies belonging to the" emerging world '', and in particular" emerging Asia '' -- and I do not want to mention only one currency, because it was a message which related to a number of currencies -- to move up and progressively take better account of the overall economic and monetary situation. I have always been discreet myself, because I consider that such matters are matters that you have to treat with some discretion -- like all exchange rate matters. We have seen that there have been changes in the case of that particular country, namely China. I said publicly that this change was going in the right direction. And I would underline that it is the responsibility of China, it is the responsibility of the Central Bank of China, it is the responsibility of the Chinese authorities to take decisions in this respect, and that, in any case, seen from an objective standpoint it seems to me that the facts, the figures, the overall international and Chinese environments, as well as those of other countries, suggest that it would be in the interests of all to continue the move in the same direction. But, again, it is the responsibility of the Chinese authorities and the responsibility of the other national authorities concerned.
Question: I hope you will allow another question on Mr Fazio. Do you think that Mr Fazio 's behaviour breached the Code of Conduct of the ECB?
Trichet: I have already responded to such questions. And we certainly have, at this stage, no such assessment by the Governing Council.
Question: Do you share the fears of an energy crisis after the hurricane, as some newspapers wrote today? And then, sorry if I come back to the question of Mr Fazio, I would like to ask if you considered opening a procedure against Mr Fazio in today 's Governing Council meeting or at the dinner yesterday evening, a procedure following Article 14.2 of your Statute? Some observers say that the national observation of national law is something but what is happening now in Rome is damaging the whole of the European market and hampering its integration. And it is also damaging the name of the Council because there is a sort of identification of one member with the whole. Do you agree with that? And, last question, yesterday evening or today, if you discussed this matter, is it true that there was a very strong disagreement among the members of the Council about the matter?
Trichet: First point. We are, in the Governing Council, saddened by the terrible events in the United States and that are proving again that risks can materialise in all domains in a terrible fashion. So I would like to express our profound sympathy, sadness and solidarity. Second, we will see what the economic consequences are ; it is much, much too early to draw any conclusions at this stage.
Trichet: On the question of the banking sector in Italy and in the rest of Europe, I restate that our principle is crystal clear: fair treatment, full and resolute implementation of the Single Market in financial services in general and in the banking sector in particular, for all legal and economic reasons. That is the position of the Governing Council. We have not opened any procedure at this stage. We asked whether more information was available, and we will monitor this situation. Again, the Governing Council has its own responsibility, which is important as you know, and there are a number of institutions which are involved in this particular case in Italy and in Europe -- I mentioned the Commission, which has its own responsibility
Question: The ECB last year gave the Italian government a statement with suggestions on a possible reform of the Banca d'Italia. Now the government has reached an agreement to make this reform, which follows mostly what you said last year. They said that they will decide to put a time limit on the mandate of the Governor, which does not exist and which you suggested. But they also want to change the capital, the property, the shares of the Banca d'Italia by transferring these shares from the private banks into public hands. I wanted to know your opinion about it.
Trichet: Well, this is premature, obviously, because we have not yet received the draft legislation. I have heard that the decision has been taken to change the law as regards the Banca d'Italia. So we are waiting for this draft legislation to be written. As you know, the procedure, as far as we are concerned, would be that the draft law would be given to the Governing Council of the ECB, and we would have to make an assessment of whether or not it is in line with the Treaty. We have done this before -- you mentioned that in the case of a previous draft law that we received. And so at the appropriate moment I will tell you the position of the Governing Council on the draft law -- which we do not yet have.
Question:... the question on Mr Fazio. Is it true that you were profoundly divided about the matter...?
Trichet: No, not at all. Not divided at all.
Question: There has been a forecast from an Austrian Bank that Bulgaria can join the euro zone in 2010 providing we are members of the EU in 2007. Do you think that this is feasible, and probably some special recommendations for our fiscal policy?
Trichet: It is far too premature to embark on such an assessment. I would not even embark on such an assessment for those who are presently members of the European Union, or even for those who are not only members of the European Union but also members of the exchange rate mechanism II. So all I can say is that, as you know, we already consider Bulgaria and Romania as friends, as observers in our committees and meetings, including those of the General Council, so as to prepare in the best fashion possible for their belonging to the European Union, and tomorrow, and the day after tomorrow perhaps, if criteria are met and if everything is in good order, to the euro area. But it is far too premature and we will see when the time comes.
Question: So maybe to go back to oil prices: are you more concerned about the impact it has on growth than on inflation? We 've also seen some rather negative data recently out of Germany and also France and other countries -- is that reason to be worried about the further development in the euro zone?
Trichet: I will not comment on the first question because it was discussed already. The mechanistic impact is going in the reverse direction. You know exactly what our present projections are, and you also know what the difference is with the previous projections. So all this is clear, at least in the arithmetic of our staff projections, and I said already what our conclusions were.
Trichet: On the other question, I already said what our present judgement is. The downward revision of growth for this year mainly comes from the downward revision of what was observed in the first quarter. The profile that we see is still one in which we should -- in our present judgement, on the basis of all the information we have -- see a certain pick-up materialise in the second semester. But there are risks, and of course the oil price increases are one of the obvious risks to growth. So we will see, we remain very, very pragmatic. We will see exactly what happens. Our judgement is that the profile is such that we should have, in the second half of the year, in the third and fourth quarters, an element of picking-up. We have exactly the same judgement as we had before, but since then, downward risks to growth have appeared, and these are undoubtedly associated with oil prices in particular, but not only oil prices, as I just said, also commodity prices in general. So again, we will see. I have said very often that we are not optimistic or pessimistic, that we are realistic, taking into account facts and figures on a permanent basis.
Question: Thanks, if I could just follow up on a point that was raised before. I think one of the colleagues asked if the ECB and the Banca d'Italia 's reputation had been damaged at all by the allegations about Fazio, and did you think that it has and, if so, to what extent? Also, has the ECB now been informed by the Chinese authorities as to the role that the euro plays in the basket that the Yuan is now pegged against and, if not, do you think there needs to be more clarity on this issue?
Trichet: When the Chinese authorities decide to make public anything, they will do so, and you will have the information and everybody will have the information. On the first point, I have to tell you that the Governing Council of the ECB is pursuing its own responsibility as clearly as possible. I made our principle clear again, and for the rest of it, it is certainly not appropriate for me to make a judgement on anybody. As I said, we are monitoring the situation closely and we will continue to be informed on a permanent basis.
Question: Mr Fazio again. Some days ago, somebody -- I think it was a Governor -- said" Mr Fazio is one of us ''. Today can you say again that Mr Fazio is one of us?
Trichet: I have never heard anybody say that, but I would certainly say that Mr Fazio is one of us.
Question: First, you say that you are not giving any guarantee or making any promises to anyone. Does that mean that anything can happen, even next month, regarding the rates? Second, maybe this is a marginal question, but I noticed that you came back to the word" appropriate ''. You were using the words" in line '' earlier. Is there any reason for this? Thank you.
Trichet: First," appropriate '' is not a new word. We have used it before. Second, I am not pre-announcing anything, and since the ECB was set up, we have never promised anything or an unconditional bias. So I can certainly confirm that we can move if it is judged necessary. Nobody knows what might happen in the near future. Some of you have mentioned events that were totally unforeseeable. So I can only tell you that we will do whatever is needed. In our view, it is necessary to protect our definition of price stability and to be credible as regards our definition of price stability. As you know, being credible depends on our own action to preserve inflation in line with our definition of price stability. In doing so we are consolidating the anchoring of inflationary expectations and therefore helping delivering on growth and job creation in Europe in the present circumstances, and the present circumstances are not at all easy from that standpoint. It is clear enough. But we have the best nominal yield curve ever observed in Europe in the last 100 years. We I do not hear it very often, but check -- it is reality. When we are asked to be forthcoming as regards growth and job creation, we know we do this by being faithful to our mandate and by being credible, which is the case. We are delivering the best yield curve ever available in any country in Europe over the last 100 years. So that is something, and one has to take it into account.