Trichet’s Prepared Speech and Q&A:
Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. We will now report on the outcome of today’s meeting of the Governing Council.
On the basis of our regular economic and monetary analyses, we decided at today’s meeting to leave the key ECB interest rates unchanged. The information that has become available since our previous meeting has further underpinned the reasoning behind our decision to increase interest rates in July. It has confirmed that annual inflation rates are likely to remain well above levels consistent with price stability for a protracted period of time and that risks to price stability over the medium term remain on the upside. This assessment is underpinned by continued vigorous money growth, with so far no signs of significant constraints on bank loan supply. In such a context, it remains crucial to avoid broadly based second-round effects in wage and price-setting. The latest economic data point to a weakening of real GDP growth in mid-2008, which in part was expected after the exceptionally strong growth in the first quarter. Against this background and in full accordance with our mandate, we emphasise that maintaining price stability in the medium term is our primary objective and that it is our strong determination to keep medium and long-term inflation expectations firmly anchored in line with price stability. This will preserve purchasing power in the medium term and support sustainable growth and employment. On the basis of our assessment, the current monetary policy stance will contribute to achieving our objective. We will continue to monitor very closely all developments over the period ahead.
Allow me to explain our assessment in greater detail, starting with the economic analysis.
The information on economic activity that has become available since the July press conference suggests that real GDP growth figures for mid-2008 will be substantially weaker than for the first quarter of the year. As indicated on previous occasions, this represents partly a technical reaction to the strong growth seen in the first months of the year. In addition, it also partly reflects a weakening in GDP growth due to factors such as slower expansion at the global level and dampening effects from high and volatile oil and food prices. In order to assess the underlying momentum of euro area economic activity and to avoid being misguided by highly volatile quarterly outturns, it is necessary to look through the volatility in quarter-on-quarter growth rates and monthly indicators.
Taking this perspective, growth in the world economy, while moderating, is expected to remain relatively resilient, benefiting in particular from sustained growth in emerging economies. This should support external demand for euro area goods and services. As regards domestic developments, in a medium-term perspective the fundamentals of the euro area are sound and the euro area does not suffer from major imbalances. Investment growth in the euro area has provided ongoing, though moderating, support to economic activity. Moreover, employment and labour force participation have increased significantly, and unemployment rates remain low in historical terms. However, these developments, which support household disposable income and consumption, are unlikely to fully compensate the loss of purchasing power caused by higher energy and food prices.
In the view of the Governing Council, the uncertainty surrounding this outlook for economic activity remains high, owing to, among other things, the very high and volatile levels of commodity prices and the ongoing tensions in financial markets. Overall, downside risks prevail. In particular, risks stem from the dampening impact on consumption and investment of further unanticipated increases in energy and food prices. Moreover, downside risks continue to relate to the potential for the financial market tensions to affect the real economy more adversely than currently anticipated. The possibility of disorderly developments owing to global imbalances also implies downside risks to the outlook for economic activity, as do concerns about the emergence of protectionist pressures. In this respect, the failure of the recent negotiations in the context of the World Trade Organization’s Doha round on trade liberalisation is a major setback.
With regard to price developments, annual HICP inflation has remained considerably above the level consistent with price stability since last autumn, reaching 4.0% in June 2008 and, according to Eurostat’s flash estimate, 4.1% in July. This worrying level of inflation rates results largely from both direct and indirect effects of past sharp increases in energy and food prices at the global level. At the same time, while labour productivity growth has decelerated, there are some indications that labour cost growth has been rising in recent quarters.
Looking ahead, on the basis of current futures prices for commodities, the annual HICP inflation rate is likely to remain well above a level consistent with price stability for quite some time, moderating only gradually in 2009..