On the basis of our regular economic and monetary analyses, we have decided to keep the key ECB interest rates unchanged following the increase of 25 basis points on 1 December 2005. The information which has become available since then supports the assessment that an adjustment of our very accommodative monetary policy stance was warranted. It remains essential to keep medium to long-term inflation expectations in the euro area solidly anchored at levels consistent with price stability. Such anchoring of inflation expectations is a prerequisite for monetary policy to make an ongoing contribution towards supporting economic growth and job creation in the euro area. Maintaining price stability over the medium term is our guiding principle, and we will consistently apply it when examining new information, making our judgements and taking decisions. With interest rates across the whole maturity spectrum remaining historically low in both nominal and real terms, and with our monetary policy stance remaining accommodative, we will continue to monitor very closely all developments with respect to risks to price stability over the medium term.
Allow me to explain our assessment in greater detail, turning first to the economic analysis. According to the information available, real GDP growth did indeed improve in the second half of 2005, as we expected. According to Eurostat 's first estimate, real GDP grew at a quarter-on-quarter rate of 0.6% in the third quarter of 2005, compared with 0.4% in the second quarter. The breakdown of GDP data for the third quarter of 2005 confirmed a stronger contribution from domestic demand. Moreover, recent economic indicators and survey data support the view that the expansion of economic activity broadly maintained its momentum in the fourth quarter of 2005 and will continue to do so in the first months of 2006, notwithstanding the impact of high oil prices.
Looking further ahead, the conditions remain in place for sustained growth of economic activity, in line with our staff projections and other available forecasts. On the external side, the continued strength of global demand should support euro area exports. On the domestic side, investment should further benefit from continued very favourable financing conditions, robust corporate earnings and gains in corporate efficiency. Consumption growth should gradually rise, broadly in line with expected developments in disposable income.
Risks to this outlook for economic growth continue to lie on the downside and relate to high and volatile oil prices, concerns about global imbalances and the level of consumer confidence in the euro area, although the latter is improving.
Turning to price developments, annual HICP inflation was 2.2% in December, according to Eurostat 's flash estimate, compared with 2.3% in November and 2.5% in October. This decline was the result of some relaxation of earlier tensions in oil and petrol markets. Nevertheless, annual HICP inflation rates are expected to remain at elevated levels over the short term, mainly on account of the most recent increases in oil prices and some adverse base effects. Beyond the short term, indirect effects of past oil price rises on other components of the price index may gradually materialise, and already announced changes to administered prices and indirect taxes can be expected to have an upward impact. Meanwhile, wage increases have remained moderate over recent quarters. All in all, the information available remains consistent with the scenario for price developments as reflected in the December staff projections.
Risks to this scenario remain on the upside and include further rises in oil prices, additional increases in administered prices and indirect taxes, as well as -- more fundamentally -- potential second-round effects in wage and price-setting behaviour. It is therefore crucial that the social partners continue to meet their responsibilities also in the context of a more favourable economic environment.
Turning to the monetary analysis, the annual growth rate of M3 moderated somewhat in November, but remained very robust, mainly owing to the stimulative impact of the prevailing low level of interest rates. The strong growth of M3 continues to be driven by significant contributions from its most liquid components. The growth of loans to the private sector -- and, in particular, mortgage borrowing -- has strengthened further over recent months, from already rapid rates of growth. Against this background, price dynamics in the housing markets need to be monitored closely. Liquidity in the euro area remains ample by all plausible measures. Strong monetary and credit growth in a context of already ample liquidity in the euro area points to upside risks to price stability over medium to longer horizons.
To sum up, the economic analysis suggests that some upward impact on HICP inflation will result from the indirect effects of recent oil price rises and already announced changes to administered prices and indirect taxes. It also indicates that risks to price stability over the medium term remain on the upside. This assessment is confirmed by cross-checking the economic analysis with the monetary analysis. It is essential that such risks do not affect medium-term inflation expectations, which need to remain firmly anchored at levels consistent with price stability. Monetary policy can thereby effectively contribute to sustainable economic growth and job creation. Accordingly, we will continue to monitor very closely all developments with respect to risks to price stability over the medium term.
As regards fiscal policy, most euro area countries have submitted their updated stability programmes, which include their medium-term budget plans. The upcoming assessment of these programmes by the ECOFIN Council and their subsequent implementation provide an opportunity to forcefully underpin the commitment to sound fiscal policies and the rigorous implementation of the Stability and Growth Pact. This would have an important positive effect on confidence. This effect is likely to be considerable if emphasis is given to well-defined and credible consolidation measures, restraint in expenditure commitments, and the incorporation of fiscal measures into a comprehensive and growth-friendly reform agenda.
With respect to structural reforms, the Governing Council welcomes the ECOFIN Council 's Conclusions of 6 December 2005 on the Lisbon National Reform Programmes and the intended response to the challenges of globalisation. In fact, the process of international economic and financial integration, characterised by strong growth in trade and capital flows, has been one of the driving factors behind the rise in Europe 's prosperity over the past decades. The ongoing transformation of the world economy, reflecting technological advances and the entrance of new economies into the world market, again offers great opportunities in terms of higher living standards. In order to translate these chances into achievements, Europe would greatly benefit from more flexible labour and product markets so as to speed up the necessary changeover from contracting to expanding activities and to minimise adjustment costs. It would also profit considerably from a more stimulative business environment which fosters the ability to innovate, invest and create new firms. Moreover, a fully operational EU internal market, including for services, offers great opportunities. The initiatives taken to relaunch the Lisbon strategy are a welcome step in the right direction.
Question: President Trichet, if I have interpreted your statement today correctly, it seems you 're much more confident about the outlook for growth in the euro area this month. I was wondering if anyone on the Governing Council advocated raising the interest rates today and, on the other hand, if anyone argued that raising interest rates would in fact hurt growth in the coming months?
Trichet: First, we were unanimous in taking today 's decision. We all held that all the information at our disposal called for the decision that was taken, that you, of course, knew of before this press conference. Second, all the information at our disposal since our decision of the beginning of December confirmed our working assumption that we were progressively reaching a rate of growth in the euro area that was close to potential, at potential or around potential. We, of course, remain pragmatic -- we depend on facts and figures that we examine very carefully, as always. All the information we have received since December has confirmed our working assumptions.
Question: I would like to try to ask that question again: at today 's meeting, did you just discuss making another change in interest rates today? And, secondly, how confident are you that you will get euro area inflation below 2% this year?
Trichet: As regards our discussion: as always, each one of us is weighing the risks to price stability. That is what we are called upon to do -- both individually and collectively -- in the Governing Council, i.e. the competent entity for taking decisions. The wisdom of a" college '' relies on a deep exchange of views and discussion, as well as on the fact that each member can change his/her own understanding as a result of the remarks made by -- in our case -- 17 other colleagues. That is how the wisdom of a" college '' comes about. The wisdom of a" college '' is not achieved by your coming to it with a certain view and then leaving with the same view, simply after having voted. That is not the case. You exchange views, and you reflect upon them and deepen your understanding of the situation. This is, of course, particularly important for us in the context of a single currency area. That having been said, we were unanimous in thinking that the present decision to leave the rates unchanged was the right decision.
Trichet: With regard to your second question, I said clearly on behalf of the Governing Council in my introductory remarks that inflation is at the level of 2.2% -- a level that is, of course, over and above our definition of price stability. In the short term, we do not exclude some move upwards and for the medium term, we confirm that we have absolutely no reason to change the Eurosystem staff projections that were published on the occasion of the last press conference in December. So, I will stick to that.
Question: Just two questions. First, since the ECB looks at medium and long-term developments, was there any discussion today about the possibility of slowing US growth and global growth in the latter half of the year? And is there any merit to suggestions that the ECB should frontload interest rate increases in the first part of the year to give it more room for manoeuvre later on this year? The second question has to do, again, with interest rates. I think it will not surprise you to hear that the market is expecting a further increase in early March. I noticed your words, your language today that risks to price stability will be '' monitored very closely ''. That is quite different from your language in October, two months before the December increase, when you used the words '' strong vigilance '', if I recall correctly. Could you elaborate on that please?
Trichet: First, as regards our sentiment on growth in a longer term perspective. I said that we saw no reason to consider that we should modify the Eurosystem staff projections which were published in December. With regard to inflation, I would say that the same applies as for growth. We have seen absolutely no reason to change in any respect at the present moment the Eurosystem staff projections as regards inflation which have been published in December.
Trichet: Second, I mentioned on behalf of the Governing Council that risks to growth existed and that they were on the downside. And I quoted in particular the imbalances and the oil prices. I also referred to consumer confidence in the euro area, which is improving, but remains low. On the two first points there is clearly a risk which we take note of. As I said, we are pragmatic and we fully respect the facts and figures. I would not embark on any kind of" gossip '' in answering the part of your question which relates to how we should act in view of possible risks stemming from a slowing down of the global or US economy. With regard to the perceptions of observers and market participants, I would say that European and global investors and savers have pretty well captured the message we communicated at the last press conference in December. From that standpoint, I confirm that, from our own perspective, the message has been well-received and interpreted, including as regards what is presently in the market for possible future decisions. As regards future decisions, as you pointed out, I mentioned twice that we would monitor the situation" very closely ''.
Question: Mr Trichet, this morning the statistical office of Germany published the first data for growth last year. And according to the data which we have until now, the German economy stagnated in the fourth quarter of last year. This is quite different to what economists expected. How serious are you in your appreciation that growth in the euro area is going to get stronger in the fourth quarter of last year?
Trichet: We look at growth from a perspective that goes above and beyond quarter-on-quarter figures. As you know, quarter-on-quarter figures are very often corrected. We have to fully respect the methodologies applied by economists and statisticians. So I do not want to comment on one particular prior indication that the fourth quarter in one particular country might have been different from what was expected. We are reflecting on the euro area as a whole. Taking into account both so-called soft figures -- surveys, polls -- and hard figures, I would say that the bulk of information received since our last meeting confirms our working assumptions. I also mentioned that we were totally pragmatic and respect facts and figures. We will see, when all the figures are computed, what are the results for various economies and for the single, integrated economy of the euro area as a whole.
Question: Two hopefully fairly short questions. One on language: is" continue to monitor closely '' the same thing as being vigilant? -LSB- I know you like to change the language. -RSB- And my second question is: you said that the markets have got your message from the last press conference. You have declined to tell us whether you actually talked about an increase in interest rates in this meeting. But I know you put a lot of value on predictability. Was there any discussion today about possibly pre-announcing rises in months to come?
Trichet: On the sentiment of the Governing Council, I will only repeat what I have already said: we will continue to monitor very closely all developments with respect to risks to price stability over the medium term and take the decisions that will be necessary. This is very clear. We have a needle in our compass and that needle in our compass points to delivering price stability, being credible in the delivery of price stability and, by way of consequence, solidly anchoring inflationary expectations. All this relies upon our own credibility. Our credibility depends on everyone knowing that we do not hesitate to act when necessary, and we have demonstrated that recently. That is well understood by observers, as I said, and certainly by market participants. We will monitor very closely all developments with respect to risks to price stability over the medium term. I already said that the solid anchoring of inflationary expectations is in a way the arithmetical illustration of our credibility because it is something which relies entirely upon our credibility. It is something which is also permitting the continued very favourable medium and long-term market rates environment.
Question: On Sunday, I think, we heard a statement by Mr Wellink, who is also a member of the Governing Council. He said something like:" We should expect some more rate hikes within the next months ''. When he entered today, did he change his opinion very rapidly?
Trichet: First of all, I will not comment on Nout. You will ask Nout directly what he thinks. I said that today our decision was taken unanimously. I add that perhaps each of us has his or her own way to mention the fact that we will monitor all developments very closely. There is no doubt in the mind of any market participant, observer, investor and saver that we will act and do what is necessary when it is necessary. Whatever good advice we receive from here and there, we have our own responsibilities and we will always be up to these responsibilities. They are decisive for Europe and for the prosperity of Europe: we will continue to do what is necessary.
Question: Just one question about your admonishment here to social partners, who should" continue to meet their responsibilities, also in the context of a more favourable economic environment ''. You have used this phraseology before in describing your advised action in a less favourable economic environment, which as an indirect admonishment regarding wage negotiations is interesting. You have said:" meet responsibilities in a less favourable environment ''," meet responsibilities in a more favourable environment ''. When is the right time for wage increases in the light of stagnating disposable income over the last four years in the euro area and how is that consistent with the hope, and I think it is a widely shared hope of all of us, that domestic demand recovers strongly in the euro area?
Trichet: It is always time to be as sound and reasonable as possible in terms of protecting real wages. We are defending price stability, and by defending price stability we are defending the purchasing power of consumers, of all households, of employees and workers. This is very important to understand. We will see again what the present state of the economy is, whether our working assumption is confirmed. Until now, everything that we have seen has confirmed our working assumption on the progressively more favourable conjuncture.
Question: There are concerns about the risk of global imbalances. The US current account deficit is at a record high. Will this year pose a risk for you and for the world economy because the gap in the interest rates is narrowing this year? Is this a risk and are you prepared? What is your view on this point?
Trichet: I will not comment on US monetary policy. I have said what I had to say on our own monetary policy and we will see what the interest rate differentials are. As regards the imbalances, we consider that they are a risk to global growth and, of course, to economic growth in Europe too. It is a view which is not particularly original. It is shared by all" Gs '' as I know. I myself recently expressed the same sentiment on behalf of the G10 at the global economy meeting in Basel: that it was one of the risks that we had to take into account when analysing and listing the risks to global growth and to growth in each particular component of the global economy.
Question: There are some economists who say that inflation in the medium term is coming down somewhat quicker than you expected. Is it possible that this is due to inflationary pressure diminishing at a global level and to the rise in the euro? I did not hear anything about the euro from you today.
Trichet: No, I really think that most of what you can hear or read here and there comes from arithmetical projections of the spot prices of oil. So, if you look at the price of oil, which is obviously very volatile, and then make projections using these different levels of the price of oil over a short to medium-term horizon, of course you find different levels of inflation. As I said, we do not consider, at this stage, that we have to change, in any respect, the present medium-term Eurosystem staff projections that we published a month ago. We stick to these staff projections as being the reference that we would consider appropriate. But because there have been downward moves in the price of oil recently followed by upward moves, we expect the profile to be volatile. We are presently at a level which some are saying is a bit lower than what they had in mind and then it will probably go upward only for the arithmetical reason that it will incorporate the most recent upward move. We are looking at the medium - term. We are not changing the Eurosystem staff medium-term reference projections.
Question: And the euro? Did it have some influence on your discussion today?
Trichet: I will not comment on the exchange rates.
Question: Mr Trichet, given that inflation has been higher than you would like for the past several years and that companies have been very profitable -- this is a question returning to wages -- are you more concerned this year about workers being, I guess," irresponsible '', to use your words, with their wage demands. Are you more concerned about that this year than you were a year ago? And the second question concerns the new countries that are joining the euro next year. In 2002 the ECB laid out a revised voting plan for when new countries join the euro, and it would give more weight to bigger countries in the euro area. Are you still confident that this voting system is going to be the most efficient way to do the voting when the new countries join?
Trichet: On the first point I was not speaking on behalf of the Governing Council about particular social partner, but about all social partners and also about all price-setting mechanisms, not only wages and salaries. This is a permanent message that we have for social partners, on the one hand, and for all price-setting mechanisms on the other. As regards the economic situation, we will see whether the working assumption continues to be confirmed. Again, as I said, we are very pragmatic and respect facts and figures. It is clear that if the economy develops and continues to be at a level of growth which is significant, then it augments the risks to price stability that I have mentioned. Those risks have fortunately not materialised ; but they exist, and that is the reason why we gave this message.
Trichet: As regards the future voting procedure, it is our law, it has been decided. We were very proud because, as you know, it was a unanimous decision of the Governing Council of the ECB which made it possible to get out of a situation which was obviously very difficult. It has been accepted by all decision-makers and it has been decided by the European Union as a whole, so we will apply the new rule. From all I have seen so far, observers, market participants and academics consider that we have a very good way of dealing with this obviously complex situation. I am extremely confident that when times come it will be applied well and will function very well.