On the basis of our regular economic and monetary analyses, at today 's meeting we decided to leave the key ECB interest rates unchanged. The information that has become available since our last meeting has confirmed that a further withdrawal of monetary accommodation was warranted to contain upside risks to price stability. Indeed, acting in a timely manner to contain such risks remains essential to ensure that inflation expectations in the euro area are kept 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 sustainable economic growth and job creation in the euro area. With key ECB interest rates at still low levels in both nominal and real terms, money and credit growth dynamic, and liquidity ample by all plausible measures, our monetary policy continues to be accommodative. Therefore, if our assumptions and baseline scenario are confirmed, a progressive withdrawal of monetary accommodation remains warranted. Against this background, we will exercise strong vigilance so as to ensure that risks to price stability over the medium term do not materialise.
Turning first to the economic analysis, the latest data and survey releases remain positive and, in general, have improved further. On balance, this confirms our assessment that economic growth has both regained momentum and become more broadly based and sustained in the first half of 2006. Looking further ahead, the conditions remain in place for continued economic growth at rates around potential, despite possible volatility in the quarterly figures. Global economic activity remains strong, providing support for euro area exports. Investment is expected to pick up, benefiting from an extended period of very favourable financing conditions, balance sheet restructuring and accumulated and ongoing gains in earnings and business efficiency. Consumption growth in the euro area should also strengthen gradually over time, in line with developments in real disposable income, as employment conditions improve further. This broadly favourable outlook for economic activity is also reflected in the June Eurosystem staff macroeconomic projections and forecasts by international organisations and private sector institutions.
The risks to the outlook for economic growth appear to be balanced over the shorter term, while in the longer term downside risks prevail, relating mainly to potential further oil price rises, a disorderly unwinding of global imbalances and potential pressures for increased protectionism.
With respect to price developments, according to Eurostat 's flash estimate, annual HICP inflation was 2.5% in June 2006, the same rate as in May and compared with 2.4% in April. During the second half of 2006, and on average in 2007, inflation rates are likely to remain above 2%, the precise levels depending on future energy price developments. This assessment is supported by the Eurosystem staff projections and available public and private sector forecasts. While the moderate evolution of labour costs in the euro area is expected to continue in 2007 -- also reflecting ongoing global competitive pressures, particularly in the manufacturing sector -- indirect effects of past oil price increases and already announced changes in indirect taxes are expected to exert a significant upward effect on inflation in the course of next year. Against this background, and also in the context of a more favourable environment for economic activity and employment, it is crucial that the social partners continue to meet their responsibilities.
Risks to the outlook for price developments remain on the upside and include further increases in oil prices, a stronger pass-through of oil price rises into consumer prices than currently expected, additional increases in administered prices and indirect taxes and, more fundamentally, stronger than expected wage and price developments due to second-round effects of past oil price increases.
Regarding prospects for inflation over medium to longer horizons, our assessment that upside risks to price stability prevail is confirmed by the monetary analysis. Money and credit growth have strengthened further over recent quarters, with the latest annual growth rate of M3 increasing to 8.9% in May -- the highest annual growth of M3 since the start of Stage Three of EMU. The stimulative impact of the low level of interest rates in the euro area remains an important driving factor behind the high trend rate of monetary expansion. On an annual basis, loans to the private sector as a whole have continued to increase at double-digit rates over recent months, with borrowing both by households and by non-financial corporations rising rapidly. Ongoing strong lending activity to households continues to be explained, in particular, by borrowing for house purchases, which has stood at an annual rate of above 12% in recent months. The dynamic growth of money and credit, in an environment of already ample liquidity, points to increased upside risks to price stability at medium to longer horizons. Monetary developments, therefore, require enhanced monitoring, particularly in the light of strong dynamics in housing markets.
To sum up, annual inflation rates are projected to remain elevated in 2006 and 2007, with risks to this outlook continuing to be on the upside. Given the dynamism of monetary growth in an environment of already ample liquidity, a cross-check of the outcome of the economic analysis with that of the monetary analysis supports the assessment that upside risks to price stability prevail over the medium term. It is essential that inflation expectations remain firmly anchored at levels consistent with price stability. Accordingly, the Governing Council will exercise strong vigilance so as to ensure that risks to price stability do not materialise, thereby making an ongoing contribution to sustainable economic growth and job creation.
In terms of fiscal policy, the overall pace of consolidation is disappointing against the background of the favourable outlook for growth. Consolidation targets continue to be at risk, notably in a number of countries with an excessive deficit. The Governing Council therefore reiterates its position that it is crucial to avoid the mistakes of the past. It also wishes to express its broad agreement with the main fiscal challenges as generally identified by the European Commission. These concern, in particular, the need for a rigorous implementation of the revised Stability and Growth Pact with a view to speeding up fiscal consolidation and improving the outlook for fiscal sustainability. This needs to be underpinned by medium term-oriented structural reform strategies and appropriate national fiscal institutions and procedures. Finally, reliable compilation and timely reporting of government finance statistics remain essential for the European fiscal framework. Meeting these challenges will support confidence in the soundness of public finances and in economic prospects in Europe.
As regards structural reforms, enhancing the growth potential of the euro area, increasing job opportunities and strengthening the euro area 's ability to cope with the challenges of globalisation are among the most demanding economic policy issues of our time. In order to translate the opportunities brought about by globalisation -- in terms of higher living standards -- into achievements, the euro area would greatly benefit from more flexible labour and product markets. It would also gain from a more favourable business environment and a fully fledged internal market -- including in the services sector -- that foster innovation, investment and the creation of new firms. Indeed, implementing the necessary reforms in a decisive manner would both help to reap the benefits that globalisation and the single market offer our citizens and raise the production capacity of our economy.
Question: I have three questions. First, if we were to write today that you have signalled that you will raise your benchmark rates next month on 3 August, would we be incorrect? Second, what role will the economic data that you receive in the course of July up until 3 August play in your decision next month? And finally, did you discuss today how you would manage the communication issues surrounding any decisions made in these sleepy and hot summer months of Europe?
Trichet: The first question is very direct ! I will let you make your own assessment. You will certainly have noted that I mentioned" strong vigilance '' and I will let you draw your own conclusions from that. I would also add that we decided today that we would meet physically on 3 August. The possible announcement that we meet by teleconference is usually made the Friday before the meeting, but next time we will in fact meet physically. In this meeting we will examine all new information available during the present month. You know that all our decisions are conditional on facts and on figures and I have said this sufficiently frequently for you to be fully aware of this. Again we will look at all the information available and make our decision accordingly. I have always said that we are never pre-committed unconditionally. We take the decision that we judge appropriate on the basis of our analysis and all the information we have.
Question: Given the strength of the economic recovery that you have also identified, are you not emphasising the upside risks to price stability which you signalled with the expression" strong vigilance ''? Are you not concerned that this might dampen the potential for economic growth in Europe and the gain in competitiveness that is required for it to remain sustainable, if this expectation of constant interest rate hikes is maintained for a long time, as it is this year?
Trichet: It is the contrary. We feel that by doing what we do and by being very attentive to maintaining the strong anchoring of inflationary expectations, we are helping economic growth to be sustainable. We are making a major contribution to the achievement of sustainable economic growth. And I think it is the right way of looking at what we have been doing in the past and at what we may do in the future, based on our own analysis and judgement of the facts and figures. I would therefore repeat that it is exactly the contrary of what your question was implicitly suggesting.
Question: Mr Trichet, I want to ask you to give a message to the overwhelming majority of Greek citizens that have either consumer or housing loans. What is your message to them? What should they expect within the next one or two years regarding interest rates and whether the ECB might consider revising the 2% level of inflation upwards, changing it and putting the target, let 's say, at 3%. And the second question, I was wondering, what is your current relationship with Mr Jean-Claude Juncker? I observed that Mr Almunia was the only one present today.
Trichet: I have no particular message for any particular investor in Greece. As you know, we are looking at the full body of the euro area, namely 313 million people, a little bit higher, but it 's the same order of magnitude as the United States. It 's an immense, vast continental economy and it is at that level that we have an analysis of the increase in outstanding loans for financing housing. I mentioned the figure of 12% in the introductory statement. So it is clear that it is one of the elements that we looked at carefully. On the idea of changing the definition of price stability, it is totally absurd and we will certainly not do it. It will be the best way of destabilising the European economy by changing dramatically and disanchoring inflationary expectations. So you can count on our very inflexible attitude as regards the definition of price stability for the benefit of European growth and confidence in Europe, particularly confidence of households, which at their level, everywhere in Europe are sending us a very clear message: maintain price stability. And we will be fulfilling our mandate in this respect.
Trichet: On your second question, I have nothing to add to what I have already said. I have the highest esteem for Mr Juncker, who is a very, very good president of the Eurogroup.
Question: Do you think that it is a coincidence that the four teams being semi-finalists in the World Cup are all members of the euro zone? And also connected to that: what 's your tip for Sunday? And will you be there? Will you be in Berlin?
Trichet: I will look very carefully at what will happen on Sunday. It will be a magnificent match. I have no doubt about that. I will not be present physically but I will look at it very carefully. I was present in Frankfurt on the occasion of the match between Brazil and France. And it was a beautiful match. But as always, que le meilleur gagne ! -LRB- May the best team win ! -RRB-
Trichet: Let me say that I will not draw any conclusion from the fact that the four best teams in the world all belong to the euro area. But if anybody across the Atlantic or across the Channel wants to stress that, well, after all it would be their own decision, but I will not make an argument out of that.
Question: Do you expect current headline inflation to rise and does n't that imply higher interest rates? What is your bias on that? The second question is on market volatility. Is it something that you consider when taking your decision?
Trichet: On the first question, it seems to me that I have already responded. We will take all decisions without any pre-commitment. All decisions that we will judge appropriate in order to maintain price stability and to ensure that we continue to have a solid anchoring of inflationary expectations. We have to cope with a succession of shocks ; I mentioned the oil shock previously and our monetary policy is entirely designed to avoid the second-round effects that would destabilise this delivery of price stability in the medium term. This is very important and we consider that risks are on the upside.
Trichet: On financial market volatility we have looked at this phenomenon. We look at it in an ongoing fashion. I would say that it is clear that it needs very close monitoring. It is also clear that we had already diagnosed a degree of underpricing of risks in the financial markets in general, observed in particular as regards spreads, as regards risks premia. One can interpret what has happened as some kind of repricing of risks: that would go in the direction that we had more or less suggested because we were not that happy with the previous very low level of assessment of risks. At this stage, I would say that some correction has been observed. We have to remain careful and to monitor future developments closely.
Question: Monsieur Trichet, I have two questions, one about today 's discussion: if you are vigilant on inflation, as we know you are, and we should be braced for a rate hike next month, maybe, what prevented you from doing so today? Was there indeed a unanimous decision against a rate hike today? And secondly, we have had plenty of comments -- admittedly from your colleagues in the ECB, not from yourself -- as to the pace of interest rate hikes, telling us that we should not always expect only 25 basis points: the pace could pick up and that the intervals could be getting shorter. What do you say to that?
Trichet: Again we never pre-commit ex ante -- neither on the pace, nor on the quantum. The markets have observed us in the past and they have drawn their conclusions. But we proved in Madrid that we could increase rates also outside of Frankfurt. We are not trapped in any kind of pre-committed pace or rhythm. That being said, we act when we judge it to be appropriate to act. Today, taking into account all of the elements, we judged that it was not appropriate to act. We will see what happens next time we meet.
Question: Was the decision unanimous today?
Trichet: Yes, very much.
Question: Just to follow up. Was the decision to meet physically on 3 August also unanimous? And getting back to my colleague 's question on competitiveness: many economists say that divergence will widen within the euro zone, both on the basis of consumption and competitiveness. Does this pose a risk to price stability? And finally, on consumption, to what extent do you think consumption is being artificially bolstered right now by the World Cup and by the German purchasing ahead of the VAT increase next year? Do you feel that consumption will pick up enough to be sufficient to drive growth in the face of a global slowdown in demand?
Trichet: As regards your first question, there was an overwhelming sentiment that it was appropriate to meet physically for our meeting at the beginning of August.
Trichet: As regards divergences, I prefer the expression" diversities '' because, in our analysis, the diversity that we observe in the vast continental European economy is of the order of magnitude of the diversity that we observe in the vast continental US economy, as regards growth, inflation and a number of other key parameters. So, what marks the European economy is much more the persistence of differences than diversity itself. In that respect, we have already said several times that this had to be looked at very carefully and that, in some cases, the persistence of diversity was a good thing, permitting corrections and adjustments that are or were necessary or even overdue, whereas in other cases, it would call for corrections. If, for instance, a country and an economy have unit labour costs that are going faster than the average in the euro area, with a competitive position that is already not flattering, and with external accounts that are displaying negative signals, such as important trade deficit and current account deficit, then we would certainly call for appropriate progressive correction -- so that those unit labour costs move not over and above the average, but lower than the average -- in order to progressively restore appropriate relative cost-competitiveness. That being said, I think that it is normal that one observes a large deal of diversity when dealing with more than 313 million people today, and more tomorrow.
Trichet: As regards consumption, we will see exactly what happens. Our analysis is that there are elements for consumption to continue picking up. We will see. I will not comment again because I did that already in the past on the impact of VAT and the speeding-up of consumption before the impact of VAT and then the slowing-down. It is clear that there will be some kind of boom-bust profile, which would be normal and is anticipated by all institutions and observers.
Question: Mr Trichet, could you just clarify for us whether we could also expect a press conference following your meeting on 3 August? And secondly, I wondered if you could perhaps give us a little bit more information about your discussions today in terms of accelerating the pace of interest rate increases, which was clearly an issue for you if you do indeed act on 3 August. Was there any discussion about moving rates by 50 basis points? What was the feeling of the Council on that issue?
Trichet: On the 50 basis points, no, there is no sentiment that we should do something different from the previous decisions we took, although we of course remain fully free as I have always said. We will see what we do on 3 August, and I do not want to say anything except that we will look very carefully at all the elements, we will meet physically and there will be a press conference.
Question: Two questions: firstly, before the press conference today, at least, markets were expecting at least two more interest rate increases by the end of the year, taking the benchmark rate to about 3.25%. I guess after your comments today the expectations were something a little bit higher. Would you describe that as reasonable? Secondly, can you just explain why it is you feel the need to have a physical meeting now on 3 August, when you would be scheduled to meet physically anyway just 28 days later on 31 August? In the scheme of things, as a central bank, it does not seem to be a huge amount of difference. Could it be, perhaps, that inflation expectations are not in fact as anchored as you might hope? The European Commission 's latest survey showed price expectations higher than any time since the launch of the euro coins and notes in 2002.
Trichet: Our sentiment is that it would certainly be useful in the circumstances to meet physically, which permits us to have interaction which is more profound than in a teleconference. However, we have a lot of teleconferences in the course of the year, something of which you are perhaps not fully aware, and decisions are always possible via teleconference. For instance, we have approved a number of convergence reports, which had been very carefully and professionally prepared, by teleconference and reached a number of decisions. I will not comment on any acceleration of the pace of our progressive withdrawal of monetary accommodation if our baseline scenario is confirmed. You know the way in which we are looking at the future: any interpretation in terms of ex ante decision to change in any respect the rhythm of our withdrawal of monetary accommodation would not be correct. Again we do not take ex ante positions. We take the facts and figures as they are and our monetary and economic analysis as they are when we meet.
Question: Do suggestions at the moment of a high probability of a rate hike at the next meeting on 3 August correspond to the sentiment on the Council?
Trichet: Again, we will decide when we meet.
Question: Just another question on acceleration. If you hiked rates in early August, would you call that an acceleration of the pace of interest rate increases, because before you have done that every three months, then it would be only every two months. And second question: could you give us a definition of the word" progressively ''? Does progressively mean increasing the pace of whatever actions you are doing, or does it just mean continuing at the same speed? There are two possibilities.
Trichet: We are outside our concept of not committing ex ante. So," progressively '' meaning to the extent that we see our baseline scenario developing according to our own projections and scenario, then we will progressively withdraw monetary accommodation in order to permanently keep inflationary risks under control. This is necessary for us to deliver price stability in the medium run, for inflationary expectations to be firmly anchored and for growth and job creation to be sustainable. As you know, job creation has been quite substantial in the recent period, and we are very happy about that. It has to be sustainable, and we have to take care that the recovery is sustainable.
Question: Very different points about Mr Fukui, Governor of the Bank of Japan: he is a good friend of yours and he is being criticised at the moment about his private investments. What are your comments on this, and have you ever heard any kind of explanation from him? In general, I would like to ask about how dangerous it would be, if a monetary decision were to be affected by the personal matters of a central banker?
Trichet: I would certainly confirm very solemnly to you that Governor Fukui is regarded as a great professional and held in very high esteem, not only by myself, but also by all his colleagues in the Community of central bankers. It is not only the case in the industrial world: it is also the case globally. I am therefore absolutely sure that monetary policy decisions, as they have been done in the past, will continue, in the future, to be taken according to the good and appropriate professional guidance from Governor Fukui without any other consideration.
Question: This question is about M3. Why did your interest rate policy not correct M3? We have the strongest growth rate in M3. Should you not correct your policy? First, because you are behind the curve, why did the credit and the money expand so strongly? Is there also a risk for the asset prices? We have a" merger-mania '' worldwide. There is excessive liquidity on the financial market, posing a risk to financial stability.
Trichet: As you know, we look at it very carefully. I mentioned it very clearly myself in the introductory statement on behalf of the Governing Council. We have not done so now or recently, but have done it for a long period of time, and our strategy has two pillars ! I therefore entirely agree with you that it had to be looked at very carefully, not only at our level, but at the global level. In this respect, the last BIS report was very interesting to read carefully. You might remember that we increased rates against a lot of recommendations. I have been questioned a great deal about that: Why you are raising rates when the IMF is telling you not to raise rates? Why are you raising rates when the OECD is telling you not to raise rates? Why are you raising rates when doubts are being expressed in market literature? It was because we thought that the monetary analysis and the economic analysis, as well as the cross-checking of the economic analysis with the monetary analysis, was calling for an increase in rates. We are not behind the curve ; we are doing exactly what we judge to be appropriate. That being said, we will continue to monitor all information very closely and to be as pertinent as possible in our economic analysis and our cross-checking with the monetary analysis. And we are not behind the curve.
Question: Mr Trichet, you have stressed the freedom of the central bank to move whenever it feels it is necessary. I therefore wonder whether you can comment on the possibility of a rate rise on 3 August and whether we might see a second one on 31 August. Whether in any case then you could comment on the possible and probable narrowing of the interest rate differentials between the euro area and the United States. And finally, whether you could say a little bit more about the euro and whether you are concerned at all about its upward trajectory against the dollar.
Trichet: As regards the euro and the dollar, I will stick to the G7 Communiqué that was published at our last meeting in Washington. When I have a message to deliver, I deliver it. It is as simple as that.
Trichet: As to your other point, I will certainly not comment any further, as I have already said everything that I have to say about the future.
Question: I have been working really hard for the past two years and only yesterday I managed to convince my boss to give me a vacation for the whole of August. I was wondering -- I do not want an ex ante answer, I just want a sentiment -- should I be back by 2 August or should I be back on 30 August? Or should I not take any vacation at all?
Trichet: I credit you with a lot of cleverness and intelligence and I do not think you need any other information.
Question: Mr Trichet, I just want to get a sense of your overall communication here as far as the manner in which you engage in a conversation with the markets is concerned, because you have during the course of this year explicitly confirmed market expectations. You are shying away from that -- not doing that -- right now. Would it be safe to say that, going forward, financial markets are going to have to get used to a more data-driven ECB, one that perhaps has neither the freedom nor the intention to give the sorts of verbal signals that you have over the past nine months?
Trichet: I know of course that there are permanent comparisons with our friends across the Atlantic...
Question: I did not make any reference to your friends across the Atlantic...
Trichet: Then, we have not changed anything in our concept of communication. Those who have been here for a long period of time know that we have always had the same principle. We have not changed ; we have not changed recently ; we did not change a long time ago.
Question: If you had not changed your communication, you would be monitoring inflation very closely right now. In fact you are being vigilant...
Trichet: You can draw whatever conclusion you want to draw from the words I used today. I will let you draw any conclusion you want from that. But if you look at what we have said in the past, you will see that from time to time we have said that, and you and your colleagues are free, of course, to draw any conclusion from that. Our concept of communication is clear: as I have always said, we are not pre-committed ; we do not decide ex ante on sequencing ; we decide on the basis of our own concept of monetary policy, in the view of facts and figures. Now, it is up to you to draw the appropriate conclusion from the words that are in the introductory statement and those that I use in this session. Until now, it seems to me, these have been quite well understood.
Question: Is Poland doing enough to quickly join the euro area?
Trichet: Everything that goes in the direction of convergence, in the direction of fiscal soundness, is of course welcome. We will see, when the time comes, whether the convergence, the economic" rapprochement '' will operate effectively. We ourselves hope that Poland will go as far as possible in this direction. We believe that it is in the interests of Poland taking into account the Treaty and the fact that the euro area is open to Poland, as well as to all other friends, provided they meet the Maastricht criteria, provided they have converged sufficiently, and taking into account the fact that they have no opt-out clause, which we are happy about.
Question: Mr Trichet, I am still a bit puzzled in the sense that you told us, which I clearly understand, that the time is not right to move on rates now. You, however, expect something to fall into place between now and 3 August. What could that be?
Trichet: Well, we will have a number of new figures. Do you want me to give you all the new information that we normally have in the month of July?
Question: No, not all of it
Trichet: Not all of it? Well, amongst many, many, we will have the Commission confidence indicators for July, which will come on 31 July ; we will have a number of indicators of industrial production on 17 July ; we will have the PMI on 1 August ; we will have... So again, facts and figures, as always...