On the basis of its regular economic and monetary analyses, the Governing Council decided to leave the key ECB interest rates unchanged. The current rates remain appropriate, taking into account all the information and analyses that have become available since our last meeting on 6 August 2009. In this respect, at today 's meeting we also decided that the rate for the twelve-month longer-term refinancing operation to be allotted on 30 September 2009 will be the prevailing rate on the main refinancing operations. This decision, which continues to guarantee liquidity support to the banking system of the euro area for an extended period of time at very favourable conditions, should promote the extension of credit to the euro area economy and, therefore, further underpin its recovery. Price developments are expected to remain subdued over the policy-relevant horizon. Annual HICP inflation was slightly negative in August according to Eurostat 's flash estimate. This reflects mainly the base effects of the strong rise in commodity prices in 2008. The return of HICP inflation to moderate positive rates is expected within the coming months. At the same time, the latest information supports our view that there are increasing signs of stabilisation in economic activity in the euro area and elsewhere. This is consistent with the expectation that the significant contraction in economic activity has come to an end and is now followed by a period of stabilisation and very gradual recovery. Available indicators of inflation expectations over the medium to longer term remain firmly anchored in line with the Governing Council 's aim of keeping inflation rates below, but close to, 2% over the medium term. The outcome of the monetary analysis confirms the assessment of low inflationary pressure over the medium term, as money and credit expansion continues to decelerate. Against this background, we expect price stability to be maintained over the medium term, thereby continuing to support the purchasing power of euro area households.
Let me now explain our assessment in further detail, starting with the economic analysis. Following the strong negative growth rates observed around the turn of the year, according to Eurostat 's first estimate, economic activity in the euro area declined only slightly in the second quarter of 2009, contracting by 0.1% compared with the previous quarter. Survey indicators for the third quarter of 2009 support the view that the euro area economy is stabilising further. In the near term, the euro area should continue to benefit from a recovery in exports, the significant macroeconomic stimulus under way and the measures taken so far to restore the functioning of the financial system. In addition, the inventory cycle is expected to contribute positively. However, uncertainty remains high and the persistent volatility in incoming data warrants a cautious interpretation of available information. Overall, the recovery is expected to be rather uneven, given the temporary nature of some of the supporting factors and the ongoing balance sheet correction in the financial and non-financial sectors of the economy, both inside and outside the euro area.
This assessment is broadly in line with the September 2009 ECB staff macroeconomic projections for the euro area. According to these projections, average annual real GDP growth will range between -4.4% and -3.8% in 2009 and between -0.5% and +0.9% in 2010. Compared with the June 2009 Eurosystem staff macroeconomic projections, this implies an upward revision of the ranges for both 2009 and 2010, reflecting mainly the recent, more positive developments and information. Forecasts by international organisations are broadly in line with the September 2009 ECB staff projections.
In the view of the Governing Council, the risks to this outlook remain broadly balanced. On the upside, there may be stronger than anticipated effects stemming from the extensive macroeconomic stimulus being provided and from other policy measures taken. Confidence may also improve more quickly, labour market deterioration may be less marked than currently expected and foreign demand may prove to be stronger than projected. On the downside, concerns remain relating to a stronger or more protracted negative feedback loop between the real economy and the still strained financial markets, renewed increases in oil and other commodity prices, the intensification of protectionist pressures and a disorderly correction of global imbalances. At the same time, the uncertainty surrounding this outlook remains higher than usual.
With regard to price developments, annual HICP inflation was, according to Eurostat 's flash estimate, -0.2% in August, compared with -0.7% in July. This development is in line with previous expectations and reflects largely base effects resulting from the movements in global commodity prices a year ago. Owing to these base effects, annual inflation rates are projected to turn positive again within the coming months. Looking further ahead, inflation is expected to remain in positive territory, with overall price and cost developments staying subdued in the wake of ongoing sluggish demand in the euro area and elsewhere. In this context, it is important to re-emphasise that the indicators of inflation expectations over the medium to longer term remain firmly anchored in line with the Governing Council 's aim of keeping inflation rates below, but close to, 2% over the medium term.
This outlook is consistent with the September 2009 ECB staff projections for euro area inflation. In these projections, annual HICP inflation is projected to range between 0.2% and 0.6% in 2009 and between 0.8% and 1.6% in 2010, revised slightly upwards from the June 2009 Eurosystem staff projections, reflecting mainly upward revisions to energy prices. Available forecasts from international organisations provide a broadly similar picture.
Risks to the outlook for price developments remain broadly balanced. They relate, in particular, to the outlook for economic activity and to higher than expected commodity prices. Furthermore, increases in indirect taxation and administered prices may be stronger than currently expected owing to the need for fiscal consolidation in the coming years.
Turning to the monetary analysis, the latest data confirm a continued deceleration in both broad money and credit growth. In July, the annual growth rates of M3 and loans to the private sector declined further to 3.0% and 0.6% respectively, reaching new lows since 1999. These developments support the assessment of a slower underlying pace of monetary expansion and low inflationary pressures over the medium term.
The short-term developments of M3 and its components have remained volatile. The recent changes in interest rates paid on the different instruments included in M3 have continued to underlie the strong shifts in the allocation of funds from, in particular, short-term time deposits to overnight deposits. The deceleration in annual M3 growth has thus continued to combine with a substantial further strengthening of annual M1 growth, which in July rose to 12.1%. In addition, the relatively steep yield curve and the re-emergence of risk appetite, reflected particularly in the increase in stock prices over the past few months, may have dampened M3 growth to some extent.
The overall flow of bank loans to the non-financial private sector remained subdued in July, with the differences across borrowing sectors becoming more marked. The flow of loans to households remained slightly positive, whereas in the case of non-financial corporations the flow of loans was negative again. The decline in loans to non-financial corporations continues to reflect mainly a strong net redemption of loans with a shorter maturity, while lending and borrowing at longer maturities remained positive. The fall in production and trade and the ongoing uncertainty in the business outlook are likely to have dampened firms ' demand for financing. Given the normal lag between a recovery in economic activity and a pick-up in loans to enterprises, further weak developments in loans to non-financial corporations in the coming months appear likely. At the same time, a gradual improvement in financing conditions, as lower market interest rates continue to be passed on in lower bank lending rates, should support the demand for credit in the period ahead. Against the background of highly demanding challenges, banks should take appropriate measures to strengthen further their capital bases and, where necessary, take full advantage of government measures to support the financial sector, particularly as regards recapitalisation.
To sum up, the information and analyses that have become available since our meeting on 6 August 2009 confirms the view of the Governing Council that the current key ECB interest rates remain appropriate. In this respect, at today 's meeting we also decided that the rate for the twelve-month longer-term refinancing operation to be allotted on 30 September 2009 will be the prevailing rate on the main refinancing operations. Price developments are expected to remain subdued over the policy-relevant horizon. Annual HICP inflation was slightly negative in August. This reflects mainly the base effects of the strong rise in commodity prices in 2008. The return of HICP inflation to moderate positive rates is expected within the coming months. At the same time, the latest information supports our view that there are increasing signs of stabilisation in economic activity in the euro area and elsewhere. This is consistent with the expectation that the significant contraction in economic activity has come to an end and is now followed by a period of stabilisation and very gradual recovery. Available indicators of inflation expectations over the medium to longer term remain firmly anchored in line with the Governing Council 's aim of keeping inflation rates below, but close to, 2% over the medium term. A cross-check of the outcome of the economic analysis with that of the monetary analysis confirms the assessment of low inflationary pressure over the medium term, as money and credit expansion continues to decelerate. Against this background, we expect price stability to be maintained over the medium term, thereby continuing to support the purchasing power of euro area households.
As the transmission of monetary policy works with lags, we expect that our policy action will progressively feed through to the economy in full. Hence, with all the measures taken, monetary policy is providing ongoing support for households and corporations. Once the macroeconomic environment improves, the Governing Council will make sure that the measures taken are unwound in a timely fashion and that the liquidity provided is absorbed in order to counter effectively any threat to price stability over the medium to longer term. By so doing, the Governing Council will continue to ensure a firm anchoring of medium-term inflation expectations. Such anchoring is indispensable to supporting sustainable growth and employment and contributing to financial stability. Accordingly, we will continue to monitor very closely all developments over the period ahead.
As regards fiscal policies, the latest quarterly euro area data and developments in individual countries confirm a substantial deterioration of fiscal positions in 2009, which is projected to continue in 2010. In finalising their 2010 budgets and medium-term fiscal plans, governments must now substantiate their commitment to ensuring a swift return to sound and sustainable public finances in line with the Stability and Growth Pact. In particular, it is crucial that ambitious and realistic fiscal exit and consolidation strategies, underpinned by concrete structural measures, are put in place. The structural adjustment process should start, in any case, not later than the economic recovery and the consolidation efforts should be stepped up in 2011. Structural consolidation efforts will need to exceed significantly the benchmark of 0.5% of GDP per annum set in the Stability and Growth Pact. In countries with high deficits and/or debt ratios, the annual structural adjustment should reach at least 1% of GDP. The focus of the structural measures should lie on the expenditure side, as in most euro area countries tax and social contribution rates are already high.
Turning to structural policies, it is likely that the financial crisis will affect the growth potential in the euro area. This outlook reinforces the need to strengthen reform efforts to support sustainable growth and employment in the euro area. It requires, in particular, appropriate wage-setting, sufficient labour market flexibility and effective incentives to work. At the same time, policies that enhance competition and innovation are urgently needed to speed up restructuring and investment and to create the business opportunities and productivity gains needed to ensure a sustained recovery. In this respect, an appropriate restructuring and consolidation of the banking sector plays an important role. Sound balance sheets, solid risk management, and transparent and robust business models are key to strengthening the financial soundness of banks and their resilience to shocks, thereby laying the foundations for sustainable economic growth and financial stability.
Question: As you will not be applying a spread on September 's refinancing operation does that mean that you do not intend to raise interest rates for the coming 12 months?
Question: And my second question is: was the idea of applying a spread on the 12-month operation for December on today 's agenda? And what did you discuss on this point?
Question: And my third question is: you have repeatedly said that the 1% interest rate level does not necessarily mean that you could go lower ; do you still stick to this message?
Trichet: First of all, let me mention that we were unanimous in judging that the present interest rates are appropriate. Second, we have no pre-commitment in any respect. You know pretty well the principle on which our monetary policy decisions are based: no pre-commitments. As I have said on behalf of the Governing Council, at the moment interest rates are appropriate. We have also taken a decision for the 30 September longer-term refinancing operations. This decision is for 30th September. I give you a rendez-vous for future possible decisions when the time comes.
Trichet: On your third question, I have nothing to add to what I have already said. There is no change in any respect our position. But let me only underline that today we have decided that 1% was appropriate and we were unanimous in our decision.
Question: There has been a lot of talk about exit strategies on both sides of the Atlantic. Does the improvement in the economic situation change any of your baseline scenarios for possible exit strategies in the future?
Trichet: Nothing has changed in comparison with what I have said in the previous press conferences. You know that we have always insisted on the fact that our non-conventional measures -- our enhanced credit support measures -- have been technically designed to permit an easy exit. They are constructed to permit that. And I trust that because everybody sees that they have been technically designed for an easy exit when the time comes, we have continued to anchor very well inflation expectations in the medium and long term in particular. All that I can say is that today is not the time to exit. But again, we are alert, we are permanently looking at the situation and we are making judgements on the basis of our analysis.
Question: You 've previously said -- on the exit strategy, again -- that the ECB will not commit on whether it will withdraw liquidity first and then increase rates, or do the two simultaneously. Do you still stick to that? And I would also like to know what you generally consider the advantages and disadvantages of the two approaches.
Question: The second question is: Some Governing Council members have said that the ECB will not start unwinding its current policies before financial markets appear stable enough. I was wondering how you will discern whether they are stable enough and if there are any specific criteria you are looking out for.
Question: And finally, there have recently been a lot of warnings on the health of the banking system and the ongoing reluctance to lend. I am wondering whether these warnings come in reaction to what the ECB considers undue optimism, or whether it is actually banks ' failure to recapitalise up until now that has increased your concerns?
Trichet: Let me mention that the Governing Council has noted some figures that were better than expected -- in particular as regards surveys, but also some hard figures -- and has also noted that our staff were suggesting that the previous projections be revised upwards somewhat. That being said, the sentiment of the Governing Council is that prudence and caution are of the essence in the present situation. We see that uncertainty, as I have said on behalf of the Governing Council, is very high, and we have to be fully aware of that. We probably have a bumpy road ahead of us, taking into account the full complexity of the situation and, again, the fact that uncertainty is high. If I have a message on behalf of the Governing Council, it is that prudence and caution are still of the essence. As regards the unwinding of the present non-conventional measures as well as the unwinding of conventional measures, namely interest rates, as I have just said, we consider that everything we have decided has been technically designed to allow an easy exit. We will see -- when the time comes ; it is not time today -- what is appropriate in terms of utilising the various tools that we have introduced. As I have already said, we are not pre-committed to exiting the long-term operations before increasing interest rates, or vice versa. We are free to do what we judge the most appropriate when the time comes.
Trichet: As regards lending, we are permanently telling the commercial banks that enormous amounts of effort have been made by us in terms of exceptional measures. Governments have themselves taken decisions that are important and exceptional in terms of the support provided to the financial sector and banks, and we expect banks to be fully aware of that. We do not want a centralised or administrative economy, but we call on banks to be fully responsible and fully aware of their responsibility, which is to finance the real economy. Again, as I have said on behalf of the Governing Council, they should do whatever is necessary in order to reinforce their capital base -- including, of course, taking advantage of the possibilities offered by public authorities. These possibilities, in particular, have by far not been fully utilised.
Question: This is just a little additional question following on from what you have just said. How do you judge the endeavours or plans of the German government to grant loans via the Kreditanstalt für Wiederaufbau to small and medium-sized companies? Maybe I do not understand it correctly, but somehow it implies that the central banks are not doing a good job. You are trying to inject liquidity into the market, it is not reaching companies, and now the government is stepping in. And what are they actually doing? Should they do that? Is that OK with you?
Trichet: I do not want to comment on the specific decisions or intentions of any particular government. The only thing I would say is that, indeed, governments and parliaments have themselves also stepped in. Again, when I add up all the risk -- the risk to taxpayers -- that has been put on the table after the intensification of the crisis in mid-September 2008, when you look at the option of recapitalisation, the option of guarantees of all kinds, including for medium-term refinancing, the option of impaired assets in a number of cases and so on, we end up with an enormous amount of public money -- public risk. So, governments have stepped in, and this was necessary in these circumstances. And as regards central banks, I do not want to comment on what the other central banks are doing. We have all taken exceptional measures and observers are -- I think -- looking at what we have been doing and what we are continuing to do and are very impressed by the non-conventional measures that we all have taken.
Question: The International Monetary Fund is allocating special drawing rights equivalent to USD 283 billion and they will raise an extra USD 50 billion by selling bonds to China. Do you welcome the IMF injections as a kind of credit enhancement on a higher level or is it a cause of concern for you?
Trichet: It is a decision which, as you remember, was taken by the G20 and is now being implemented. I would say it is of the same nature as the extraordinary decisions taken by both central banks and governments in terms of non-conventional measures of extreme audacity and magnitude. These were necessary in order to avoid the meltdown of the global financial system and national finance sectors that were under extraordinary stress, after the intensification of the crisis. Of course they will have to be unwound when the time comes. So I would give you exactly the same response at the global level as I gave with regard to the enhanced credit support that we ourselves are providing. It is important that the fiscal policies, which were justified as extraordinary measures given the gravity of the circumstances, should also have an exit strategy in view. At the national level, the continental level and at the global level, for the central banks on the one hand and the governments on the other hand, the exit strategy is very important for confidence. By providing the prospect of returning to a sustainable mode of functioning of the global, national and continental economies, we would improve confidence and, then, facilitate the recovery. And I think we can never insist sufficiently on the key factor that is confidence.
Question: My first question is how you view the risk that the economy could contract again next year as unemployment rises and government stimuli expire. You said that unemployment might rise less markedly than expected, but how do you view these risks?
Question: The second question is how concerned are you that the current excess liquidity floating around in the world financial system might lead to inflationary pressures in the medium and longer term?
Trichet: As regards growth next year, which will of course also be influenced by growth this year since we have the carry-over, uncertainty remains a major factor. If I take the most recent projections for 2010 made by our staff, we are in a range of between -0.5% and 0.9%. The mid-point is slightly positive. The range shows that there is a large degree of uncertainty and so prudence and caution are of the essence. We have to remain prudent.
Trichet: As regards excess liquidity, we designed the non-conventional measures in such a way that we would have all of the means necessary for withdrawing the excess liquidity when the time comes and we are permanently alert and permanently analysing the situation. Alertness is one of our major principles. So today it 's clearly not the time. When it is time, we will do it.
Question: Firstly, you said today that there will be no spread on the next 12-month offer at the end of September. As you know, last time a lot of the money ended up being parked back in the ECB 's deposit facility. Is it an option for the ECB to follow the example of other central banks and impose a negative interest rate on your deposit facility?
Question: And the second question: in your statement discussing growth prospects, you stressed how the euro area would benefit from a recovery in exports. Could you give us your view on growth prospects in other major world economic regions -- I 'm thinking of the United States and Asia -- whether you see a rebound there comparable with that of the euro area, better or not as strong?
Trichet: On your first point, I think one has to examine very carefully exactly what happens in terms of providing liquidity on the one hand and utilisation of the deposit facility on the other hand. It is not obvious, that the same institutions are doing both, taking the liquidity and replacing the liquidity in the deposit facility of the Eurosystem. It might very well be, in a large majority of cases, that these are not the same institutions. In our eyes, as is of course also confirmed by today 's decision of the Governing Council, the 12-month LTRO has been a success. It might be that a significant number of institutions are themselves without any liquidity needs, are not asking for liquidity to the central bank and for a variety of reasons are replacing their own excess of liquidity in the deposit facility. So a too simple analysis which relies upon the working assumption that the same institution does both -- asking for liquidity and replacing in the central bank - does not seem to be right ; it is more complex than that. Of course, it also demonstrates that we still have to make a lot of effort to get our money market totally back on its feet because it proves that the market is still not functioning appropriately.
Trichet: It is not our intention to change our deposit rate and we consider that what has been done elsewhere is within a context which is very different from ours with regard to the handling of the money market. So I do not consider that this is something we should look at now.
Trichet: As regards the global economy, we see elements that are clearly positive in emerging Asia in particular, and in Brazil, to quote one particular emerging country that is currently experiencing significant dynamism. We have also seen the new hard and soft data in the United States and this is an important part of the overall global picture. But even at the global level, prudence and caution remain of the essence for a number of reasons, certainly including the fact that we have this permanent adverse feedback loop between the real economy 's previous free fall and the financial sector. But also because we have the question mark regarding the price of oil as well as the price of commodities and, in addition, the temptation of protectionism is real. Let me stress as done in the past that we are very strongly calling for a successful conclusion of the Doha round. One of the most important elements for giving the global picture a much better colour would be to achieve this negotiation. That would certainly be important.
Question: On exit strategies: I wondered whether you would comment on the importance of the upcoming G20 meetings. Would it be sufficient for those meetings to outline the principles of exit strategies from fiscal stimulus, or is it time to set out a more detailed process on how to unwind them? And even, would it be possible to set a timetable now?
Trichet: We will see exactly how the London meeting goes at the level of ministers and governors -- I believe that previous decisions taken by and the strategy previously defined at the level of the G20 ministers and governors and at the level of Heads of State and Government, has been effective. Again, we had to cope with the threat of a meltdown of world finance and of the global economy. We had to cope with a period of perhaps two quarters or seven months of a free-fall in the global economic activity, as well as in each individual economy. We were able to observe this in the euro area in the final quarter of last year and in the first quarter of this year. The overall decisions and orientations, taken by the G20 have made it possible, on the basis of a broad consensus at the global level, to avoid the materialisation of these threats that were extremely dangerous. But that having been said, a lot of work remains to be done. And, as we said prudence and caution are of the essence. We also said that we still have many challenges ahead of us. The worst possible attitude would be to say that, now that we can see that the financial markets are functioning much better again, now that we can see that asset prices are going up again, now that we can see that we have a number of indications of our returning to normal, it can be" business as usual '' again. Some are saying:" let us forget about the fragility of global finance and the global real economy that we have had to cope with, because we are now in a" business as usual '' world again. All this would be absolutely wrong -- simply and plainly wrong ! We have to carry on with the job at hand. We have to continue with everything that has been put in place in terms of reinforcing the resilience of global finance. And we all still have a great deal of homework to do. Both surveillance at the global level and the close monitoring of macro-policies have also to be reinforced substantially, because, if we do not do so, we will have only prepared the ground for the next major crisis.
Question: To come back to the exit strategies. There has been a lot of talk about cooperation, the coordination of fiscal exit strategies. Do you think that central banks should coordinate their exit strategies as well? And their exit from non-traditional measures, as well from lower rates? And is this even realistic, in your view? Do you think that you would do that?
Question: Second, I would like to know, since you said that the 12-month tender has been a great success, whether you consider doing more of those, besides the three that you have already announced. And, in general, how long do you think you will be going on with full allotment in your tenders?
Trichet: On the first question, I insist on the fact that, at the level of the central banks -- and I think that I am echoing the position of all central banks -- we are all united in our purpose, we are united in our endeavours to deliver price stability in the medium - and long-term, and in coping with the threat of inflation and in avoiding the materialisation of deflation in circumstances such as those we are currently experiencing. That having been said, we are all finding ourselves in different situations. We have different economies, we have different shocks to cope with and we have different degrees of flexibility in our economies. Our capacity to anchor expectations differs and we face different levels of threat. We are taking decisions that are appropriate to our respective situations. We have a very strong unity of purpose, and I think that this is very important. I believe that the central banks have played a decisive role in avoiding the catastrophe. And history will say that we most certainly here in Europe -- and we trust our colleagues in the other institutions as well -- have done so by being able to react very promptly in very difficult circumstances in the recent period. Again, we have not all taken exactly the same decisions, because we are in different situations, which was true in the past and will be the case also in the future.
Trichet: As regards the long-term refinancing, I have nothing to add to what I said earlier. We took a certain decision today and we will see which decision we will take when the time comes for the next 12-month refinancing operations.
Trichet: And as regards the exit strategy, once again, it is not the time for starting it today. In the future we stand ready to do whatever is necessary to permit us to deliver price stability and to firmly anchor inflation expectations.
Trichet: And let me say that, if inflation expectations have been correctly anchored, I believe that this was because the Governing Council is trusted to be able to avoid the materialisation of the risk of deflation in the short term. And it seems to me that this has now been clearly established, even if we always have to remain alert. With regard to the inflationary risk in the longer term, I can reassure our fellow citizens on behalf of the Governing Council. The 330 million people of the euro area can have confidence -- we are facing up to our responsibility -- we will avoid inflation in the future, in line with our mandate, in line with our primary goal. You can have confidence in that, and I think that this message is important, because confidence is of the essence for the recovery which we will, I hope, be seeing from now on. I would say that it will be a very gradual recovery -- as is the judgement of the Governing Council - a very gradual recovery, but confidence is of the essence for this very gradual recovery.
Question: Does the improvement in the growth projection also imply a return to positive growth before the middle of 2010 as you were saying before?
Trichet: I do not exclude, taking into account all the new information that we have had, that we could have, on a quarter -- on-quarter basis, a return to positive growth before mid-2010. But nor do I exclude a bumpy road. So, I do not rule out the possibility that we could have positive quarter-on-quarter growth and then a much less flattering evolution in the next quarter. We certainly have a higher probability than before, taking into account what we have seen in the past month, of having positive growth, but again a bumpy road is also pretty possible and we have to be fully aware of that.
Question: What are you afraid of most? Unemployment or resurgent oil prices, commodities, and so forth?
Trichet: We have a set of very complex elements. Taking into account the fact that the job of the Governing Council is to make a synthesis on the basis of a multidimensional situation which is extremely complex, we will do whatever is necessary to fulfil our mandate and you can count on us. We trust that, by doing so, we are reinforcing the anchoring of our economy, reinforcing confidence and helping the recovery.