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. The incoming information and analyses since our last meeting in early September have confirmed our previous assessment. While annual HICP inflation was still slightly negative in September, according to Eurostat 's flash estimate, it is expected to turn positive again in the coming months and to remain at moderately positive rates over the policy-relevant horizon. At the same time, the latest information further supports our view that the euro area economy is stabilising and is expected to recover at a gradual pace. However, uncertainty remains high. As regards medium to longer-term inflation expectations, they 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 moderate. Against this background, we expect price stability to be maintained over the medium term, thereby supporting the purchasing power of euro area households.
Let me now explain our assessment in further detail, starting with the economic analysis. Available survey indicators continue to signal an ongoing stabilisation of economic activity. In particular, the euro area should benefit from a recovery in exports, the significant macroeconomic stimulus under way and the measures taken to restore the functioning of the financial system. In addition, following the substantial negative contributions in the first half of 2009, the inventory cycle is expected to contribute positively to real GDP growth in the second half of the year. However, uncertainty remains high and the volatility in incoming data warrants a cautious interpretation of the available information. Overall, the recovery is expected to remain rather uneven. It will be supported in the short term by a number of temporary factors but is likely to be affected over the medium term by the process of ongoing balance sheet correction in the financial and the non-financial sector of the economy, both inside and outside the euro area.
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, the labour market deterioration may be less marked than previously 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 financial sector, renewed increases in oil and other commodity prices, the intensification of protectionist pressures and the possibility of a disorderly correction of global imbalances.
With regard to price developments, annual HICP inflation stood at -0.3% in September, according to Eurostat 's flash estimate, compared with -0.2% in August. The current negative inflation rates are in line with previous expectations and reflect largely base effects resulting from the movements in global commodity prices a year ago. Also owing to base effects, annual inflation rates are projected to turn positive again in the coming months. Thereafter, over the policy-relevant horizon, inflation is expected to remain in positive territory, with overall price and cost developments staying subdued reflecting ongoing sluggish demand in the euro area and elsewhere. In this context, it is important to re-emphasise that 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.
Risks to this outlook remain broadly balanced. They relate, in particular, to the outlook for economic activity and to the evolution of 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 that developments in broad money and credit growth remain subdued. In August, the annual growth of M3 and loans to the private sector declined further to historically low rates of 2.5% and 0.1% respectively. This parallel deceleration in money and credit growth confirms our previous assessment of a moderate underlying pace of monetary expansion and low inflationary pressures over the medium term.
The ongoing deceleration in annual M3 growth has continued to be accompanied by a strengthening in annual M1 growth, which in August rose further to 13.6%. The strength of M1 reflects the fact that narrower spreads between the rates on different short-term deposits have fostered shifts in the allocation of funds from, in particular, short-term time deposits to overnight deposits. At the same time, the steep slope of the yield curve may have supported shifts from M3 to longer-term deposits and securities outside M3.
The overall flow of bank loans to the non-financial private sector remained subdued in August. In the case of households, the latest data suggest that the decline in loan growth has been levelling off at low rates of expansion. In the case of non-financial corporations, following a few months of negative flows, the flow of loans was again slightly positive in August. Looking through the volatility in monthly data, loan growth continues to be very subdued. This is in line with the lag that normally prevails between trends in economic activity and developments in loans to enterprises. In this respect, given the subdued levels of production and trade, as well as the ongoing uncertainty with regard to the business outlook, further weak developments in loans to non-financial corporations in the coming months appear likely. At the same time, the ongoing improvement in financing conditions 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 current rates remain appropriate. The incoming information and analyses since our last meeting in early September have confirmed our previous assessment. While annual HICP inflation was still slightly negative in September, according to Eurostat 's flash estimate, it is expected to turn positive again in the coming months and to remain at moderately positive rates over the policy-relevant horizon. At the same time, the latest information further supports our view that the euro area economy is stabilising and is expected to recover at a gradual pace. However, uncertainty remains high. As regards medium to longer-term inflation expectations, they remain firmly anchored in line with the Governing Council 's aim of keeping inflation rates below, but close to, 2% over the medium term. Cross-checking 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 moderate. Against this background, we expect price stability to be maintained over the medium term, thereby supporting 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, including our latest 12-month longer-term refinancing operation of 30 September, monetary policy is providing strong ongoing support to the economy. 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 need for ambitious and realistic fiscal exit and consolidation strategies is becoming increasingly pressing. It is vital that governments put in place concrete structural measures and convincingly communicate that they are committed to ensuring the sustainability of public finances. Governments should design their consolidation plans in line with the provisions of the Stability and Growth Pact, ensuring that consolidation starts as soon as possible and at the latest when the recovery takes hold. These plans should also be accompanied by a strengthening of national budgetary frameworks. Consolidation efforts should be stepped up in 2011 and 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 deficit and/or debt ratios, the annual structural adjustment should reach at least 1% of GDP. In view of the rapidly increasing public expenditure ratios, as well as projected further expenditure pressures owing to higher interest burdens and ageing-related costs, countries ' structural measures should focus on the expenditure side.
Turning to structural reforms, in all countries more efforts are crucial to support sustainable growth and employment as it is likely that the financial crisis has affected the productive capacity of our economies. In particular, appropriate wage-setting, sufficient labour market flexibility and effective incentives to work are required. 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. An appropriate restructuring and consolidation of the banking sector should also play an important role. Sound balance sheets, sound risk management, and transparent as well as 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: You have just said that the euro zone economy is stabilising, that a recovery is expected at a gradual pace. Does this mean that the euro zone economy has turned the corner or not?
Trichet: We have signs of stabilisation. We have signs that, since the second quarter of this year, we have come out of the freefall mode that had characterised two successive quarters at the level of both the global economy and the euro area economy. This calls for uncertainties also to be taken into account -- uncertainties that are exceptionally high in the view of the Governing Council. We have to remain alert and we do not declare that the difficulties are over. We believe that we still have to be cautious and to be prudent. We are of the opinion, as I have said, that there are signs of stabilisation. We feel that our current monetary policy and the prevailing level of interest rates are appropriate. This, is the view of the Governing Council. We have come to a judgement today that is very close to the judgement we had a month ago.
Question: I have two questions today. First of all, the five-year break-even rate, which is one of your favourite gauges of inflation, shows that inflation expectations are at their highest since 2005. Is this a cause for concern?
Question: And then, secondly, are you concerned about the level of the euro, and is there anything you can do about it, other than admire the United States ' strong-dollar policy?
Trichet: As you know -- and I am saying this on behalf of the Governing Council -- the anchoring of inflation expectations is extremely important to us. We consider it to be essential to enable us to deliver price stability, which is our primary objective. And let me also say that the very solid anchoring of inflation expectations has helped us in both of the directions involved. We were able to avoid the materialisation of deflationary risk in the euro area, because we benefited considerably from the solid anchoring of inflation expectations. In comparison with a number of other economies, we had a more solid anchoring that allowed us to avoid any un-anchoring of inflation expectations. And, in terms of the effectiveness of our own monetary policy action after the crisis, we were helped considerably by the fact that there was no dramatic deterioration of inflation expectations in a downward direction. This anchoring plays an equally important role in avoiding that inflation expectations move upward, which is, of course, something that is also key for a recovery. If we had inflation expectations going upward, this additional spread would be incorporated in the medium and long-term market rates and we would be in a financial environment that would be far more adverse for the recovery we are all aiming for. We are monitoring all the information we receive from the financial markets very carefully: you mentioned the five-years forward on five-years break-even inflation rate. We are also keeping a very close eye on all surveys, those that we undertake ourselves and the surveys that are conducted by the private sector. At the moment, we are of the opinion that, taking into account all aspects, including technical factors, we are maintaining a solid anchoring of inflation expectations. And you can count on the fact that we will continue with great care to ensure that this anchoring remains solid.
Trichet: As regards your question on the dollar and the euro, I would say that where the floating currencies, the major floating currencies, are concerned, we, the Governing Council of the ECB, believe that excess volatility and disorderly movements in exchange rates have adverse implications for economic and for financial stability. And, as you know, we are in agreement in this respect on both sides of the Atlantic. We will continue to monitor the exchange markets closely and cooperate as appropriate. I would also say that I trust that the statement of the US authorities on the strong-dollar policy is extremely important in the present circumstances. When the Secretary of the Treasury and our friend Ben Bernanke say that a strong dollar is in the interests of the US economy and that they are pursuing a strong-dollar policy, this is a judgement that is obviously very important for us and for the global economy.
Question: You have mentioned budget discipline before. Can you please assume for one moment that there will not be a return to budget discipline? Would you regard such a development as a potential upside risk for price stability over the medium to longer term? And if so, on what factual evidence would you base this assessment?
Question: I also have a second question about your liquidity operations: the amount allotted came down really sharply in the September long-term 12-month operation, but the number of banks participating was still very large. I was wondering whether you regard the sharp drop in the amount allotted as a positive sign, or are you instead concerned about the fact that there are still a large number of banks participating? Also, maybe you can tell us something about the banks participating? What types of bank are they, and are they relevant for the financial system?
Trichet: On your first question, first of all that budget discipline is enshrined in the euro area as a crucial part of the single currency area. The Stability and Growth Pact was the response of the euro area when we were criticised for putting the cart before the horse because we had a single currency but no federal budget or federal institutions. The correct response is that it is true that we do not have a federal institution and we do not have a federal budget, but we do have a framework which ensures coherence as regards fiscal policies inside the single currency area. Second, the sound management of fiscal policies is essential not only because you have to pave the way for your children and grandchildren not to be overburdened by today 's spending, but also because if we want to facilitate the recovery, we have to consolidate and improve confidence for economic agents. Moving towards a sustainable fiscal position at a sustainable pace is a key element of that confidence -- and thus of the recovery. This is true for households, which have to play a crucial role in the recovery. It is true for the corporate sector, whether financial or non-financial, and it is true from the perspective of the markets. If you want to facilitate the financial environment necessary for the recovery, you have to convince the markets that you are moving at a sustainable pace towards sound fiscal policies. We have a very good example in the euro area because we have a single currency. So, no elements of spreads are due to the currency. We have different fiscal policies, with differing levels of credibility for those fiscal policies, and we can see the difference in the spreads, which are very important in terms of facilitating the recovery -- or not. As far as we are concerned, we will always do whatever is necessary to deliver price stability, whatever the situation. Because it is our primary mandate, and because the people of Europe are calling on us to deliver price stability and be credible in that delivery. So, we will do our job -- whatever happens. But it is absolutely clear that for the sake of our economy, for the sake of the sustainability of the recovery, it is extremely important that sound fiscal policies be pursued along the lines that I have just mentioned in the Introductory Statement on behalf of the Governing Council.
Trichet: As regards your question on the recent one-year LTRO, it is clear that the shift from more than $ 440 billion to around $ 75 billion was something which we all noted. I will not draw definitive conclusions on that at this stage. It is not too surprising that it was much less than in the first operation, because with the first one-year LTRO we provided liquidity to the market and to commercial banks in very abundant quantities, so they did n't need an equivalent big amount. On the other hand, it is true that $ 75 billion might appear to be a sign of stabilisation, and this is the way that most observers have looked at it. Again, I will not draw definitive conclusions. I would only say that I tend to consider that it does indeed signal that money markets are progressively beginning to function more normally again. We continue to monitor the market very carefully.
Question: There have been two summits in recent weeks, in Pittsburgh and Istanbul, and now today 's meeting in Venice -- what kind of message do you want to send to the public through this?
Question: And can I ask the same question to Governor Draghi, and, if you do n't mind, could you answer in Italian for Italian television?
Trichet: I personally think that in the present situation, where we have the most dramatic challenge for global finance and the global economy certainly since the Second World War and perhaps since the 1930s, it is remarkable that we have a global consensus on the methodology between emerging markets and industrialised countries and in the G20 in particular. I have experienced in the past a world where there was strong opposition between the East and the West and the North and the South. Now we are all united both on the methodology and on the avenues of necessary reforms. And this is the very positive outcome of the successive meetings of the G20 with heads of state, ministers and governors, and of the formidable work done by the Financial Stability Board, which Mario is active in steering. The various workshops taking place and the Basel Committee work in particular form part of the global, collective work that is being carried out with an agreed methodology and agreed major courses of action. I was extremely happy that between London and Pittsburgh we were even able to advance a number of elements, including in the Basel Committee that were very important for global reform. So we are all working actively. I am positive about what is being done. Of course, it is commensurate to the challenges and it is not yet time to declare victory because the challenges are still there: we need encouragement and we need to continue to work very actively. And those that are suggesting that it is now almost back to" business as usual '' are plain wrong. I know that we share the view with Mario that we must continue working to ensure that global finance and the global economy will become much more resilient than it is at present.
Draghi: Well, I was going to say more or less the same thing, because the message is that we want to be able to continue supporting the recovery, which has been rather slow and not very strong. That is the first message.
Draghi: The second message is that we have to try to build a financial system that, from the point of view of the Italian economy and generally speaking, is such that the banks will ultimately be able to finish repairing their balance sheets and which will ensure that the cycle starts up again, so that we will have the freedom to really work properly once more. These are the two messages that stem from Pittsburgh and Gothenburg, which we would also like to pursue following Istanbul.
Trichet: One of the reasons why we say that we have to be very prudent and cautious and why we say that we have a bumpy road ahead of us, even if we are out of this dramatic period of freefall, is unemployment. There is the possibility of unemployment increasing because there are lags. So, even after recovery has begun and positive growth has returned, we might have to cope with an increase in unemployment. This is, of course, part of the reason why we have to be as active as possible in improving confidence, because this scenario is a result of an absence of confidence. And to sum up what the Eurosystem and what the Governing Council of the ECB tries to do, it would be to anchor and consolidate confidence, within our field of responsibility. Confidence has evaporated with the crisis that struck us in mid-September last year and even before then. So, anything we can do to improve confidence is of the essence today.
Draghi: Could I just add something? The other message that is quite clear is that the international banking and financial system must be increased and improved in such a way that it enables the banks to contribute to this upswing in the economy as a whole.
Question: A few questions for Mr. Trichet and one for Mr. Draghi, if that 's ok.
Question: Mr Trichet, in your references to the exchange rate you talked about how you would coordinate as appropriate. Might that include joint intervention between the US and the ECB?
Question: Secondly, a technical question. You 've got a calendar of market operations -- which, if I am correct, expires at the end of January -- setting out your medium and longer-term operations. Can you tell us when that calendar would be renewed -- when you would update that calendar for months beyond January next year?
Question: And, thirdly, just a quick question on Latvia. I wonder whether you could comment on the situation on Latvia and whether the risk of contagion is perhaps lower than it was a few month ago.
Question: And my question for Mr. Draghi was whether he might just give us an outlook for the Italian economy and whether the outlook might be affected by recent political and legal events, here, in Italy.
Trichet: As regards the first question, I said -- and we are saying on both sides of the Atlantic -- that we cooperate as appropriate. I stick to that, and as you know, you will never have any comments from me on the intervention concept. If we have anything to communicate we will do so. But I do n't comment in any respect.
Trichet: As regards your second question, we will see what we say exactly when the time comes, as we have done in the past. I will not comment in advance. We will again communicate, at the moment that is appropriate for the market to have a full understanding, on the future of such operations, if any.
Trichet: On Latvia, we did not discuss this issue at all at this Governing Council meeting and so I have no particular comments at this stage. I stick to what we have already said, particularly as regards the help of the European Community and the help of the IMF.
Draghi: As regards your question on the economic outlook for Italy, it 's a short answer: no change in the economic outlook as a result of recent political events.
Question: I would like you to focus on credit to enterprises. Italian enterprises keep complaining because that credit has become tighter and government help is considered unsuccessful. Is the financial system in a condition to provide credit to enterprises over the coming months, including very small enterprises.
Trichet: First, as I said on behalf of the Governing Council -- loans to non-financial corporates are, over twelve months, slightly positive. When I look more carefully at loans to non-financial corporates, I see an increase of 5% in the loans of over 5 years and quite a substantial fall in the loans that are of 0-1 year -- -8.9% in the latest statistics for August. This calls for a better understanding of what exactly is happening in this duration of loans. It is absolutely clear that our non-standard measures have been designed to facilitate credit -- the loans and the financing of the private sector of the real economy -- as much as possible. Had we not done all that we have been doing we would be in a totally different situation, so that is something which has to be noted. We also call for the banks to take advantage of all possibilities in terms of improving their balance sheets in order to be able to finance the real economy as well as possible. This is important ; it is a message that is again one of the messages of the Governing Council. It was the same last time. And I see that now in the euro area there are a number of issuances of new capital. I think it 's an important sign, and we should certainly encourage this as much as possible. On the financing of the real economy, I would also mention the survey on Small and Medium Enterprises, -LRB- SMEs -RRB- in particular, which helped us gain a sense of what they were feeling themselves when they asked for financing. You will remember that in the findings we published, 77% of the SMEs surveyed said that they had a positive response from their banks when they 'd asked for financing and only a very meagre proportion received a fully negative response. But that said, it 's clear that, given the contraction of the economy, the demand for credit is much less buoyant than it was before. So, we have to disentangle supply and demand. In short, everything we do, particularly with our standard and non-standard monetary policy measures, we do to avoid supply constraints. We also call on banks to contribute actively to avoid these supply constraints. What is done by governments is considerable. What is done by us is considerable. It is justified only because we want banks to do their job and to finance the real economy ; otherwise we would n't do all that we are doing. That 's absolutely clear. They should also be up to the responsibility they have at present.
Question: There are some experts who say that after the crisis is like before the crisis with the dollar and euro situation where oil prices develop in a way that they were negatively correlated to the fall of the dollar. Are you afraid of such a situation again? Are we running into the situation again because the experts are saying that actually the US are not doing anything at all to improve the dollar 's strength and it is again" the dollar is our currency but it is your problem ''. That means it is our problem, we are paying for the imbalances. What do you say to that?
Trichet: I would say that your reference, which is a reference to Secretary Connally, many, many years ago does not correspond at all to the present situation. I mentioned what was said by the Secretary of the Treasury and I said that I appreciated that as being a very important element in the present overall situation. I will not comment more on the exchange rate. On the oil and commodity price, I have mentioned this as an element of uncertainty in the present circumstances, which is a risk for inflation in particular and for the economy. If the price of oil and commodities is going up we have both risks, indeed the worst possible risk, that is to say a risk of falling growth and rising inflation. So all that can be done to stabilise those markets, through more transparency, and more visibility in the markets concerned. Behaving responsibly for all, whether producers or consumers is extremely important in the present conjuncture.
Question: I was hoping that we could go back to the long term refinancing operation. I was wondering if you could perhaps tell us a bit about the banks that participated in the last long term refinancing operation. What type of banks are they? Are they of systemic relevance? Or are they rather small banks which are not that relevant?
Question: And on my second question I would like to ask if the next long term refinancing operation in December, will that be also at the current rate or are you considering to introduce a spread?
Trichet: On your second question: we will tell you when the time comes what we will do in December. As for the first question, I have already responded to it and I have no further comments to make.
Question: I wonder if you could say whether your decision on rates and so on was a unanimous decision, and if any other options were considered?
Question: And secondly if you could comment on the possibility that monetary policy can remain accommodative longer if governments comply with your call to reduce fiscal stimulus in 2011?
Trichet: On your first question: We were unanimous.
Trichet: On your second question, we always make our decisions according to the situation we are in, taking into account, all elements: fiscal policies, the situation of the economy, the situation of all parameters that are pertinent. This is because we must deliver price stability, be credible in that delivery and anchor inflation expectations, which is good for growth, good for the recovery, good for avoiding deflationary pressures and, furthermore, good for the financial environment. So we are very clear about that. Whatever happens we will do what is necessary. In addition, we encourage governments very strongly, as I said on behalf of the Governing Council, to be as sound, reasonable and credible as possible, because again it is their way of reinforcing confidence and ensuring that their own financial environment is as good as possible. In each country, the Treasury 's signature is a benchmark for all other signatures. At least that is what one observes generally, although not necessarily in absolutely all cases. And of course it is the responsibility of the executive branch and parliament to be as credible as possible, in order to facilitate the financing of their own economy ; not only the financing of the treasury, but the financing of all other entities -- including private entities -- in the economy.
Question: It is actually a question for Mr Draghi. Mr Draghi, if it is not indelicate to ask, you have done a very good job of answering our questions today, and I wondered if one day, you would be interested in having Mr Trichet 's job?
Draghi: As I have said, we have a President and he could not be better.
Question: Cooperation and coordination seem to be two of the key words for this recovery. How do you think the European governments should play their exit strategies in this scenario, which seems to be a jobless recovery scenario?
Question: And the second and last question: would you like to see the euro become the official currency for commodities trading?
Trichet: On your first question, I would say that coordination, when it is suggested very strongly by the European Commission, as it has been in a number of cases, means coordination between governments, and you might have heard Commissioner Almunia being very clear on that both in Istanbul and in Gothenburg recently. And I think it is true that we need coordination between executive branches in those circumstances. The domain in which it is particularly clear where we need coordination is support to the financial sector, which is being given by various governments in various ways -- recapitalisation, guarantees and so forth -- to ensure that we continue to have an appropriate level playing field. It is important that this is coordinated, and it is indeed being coordinated very well. We have contributed: the Vice-President in particular has contributed by steering task forces for this level playing field to be maintained, in very close cooperation with the European Commission.
Trichet: As regards your second question on the international role of the euro, I will only say that, since the setting up of the euro, my predecessor and I have always said that we are not campaigning for the international use of the euro. We have no strategy or campaign to foster the international use of the euro and have always said that very clearly. The euro is a currency. The various savers and investors have various possibilities. We are not campaigning for the international use of the euro.