Question: First of all, as regards the increase in rates in July, could you elaborate a bit more on whether you believe you achieved your goals with this increase, particularly in relation to inflation expectations?
My second question is – and I just want to confirm that I’m reading this statement right: You noted in the risks to price stability “increasing indirect effects on consumer prices”, and I have in my mind that you used the word “pass-through” as well. I believe that this is a change from last month, and I was wondering if you could elaborate on why that went into the statement.
My third question, just to follow up on what my colleague asked, is: Why is slower growth – and as you’ve said, you anticipated the risks and they have materialised – not listed in the statement as a downside risk to inflation? That would seem to me to be, prima facie, a factor that we have to consider.
Trichet: First of all, as regards our decision last month, as I said on behalf of the Governing Council, all the information that has become available since our last meeting has, in our judgement, underpinned the reasoning behind our decision to increase rates in July. Everything that we have observed as regards inflationary risks has fully justified what we have done. I would say that, particularly as regards inflation expectations, all the information we have confirms that we were right to do what we did.
As regards inflation, I don’t see that there’s any comment to make. Our analysis is exactly the same as before, and you should not over-interpret any changes that you might have noticed. We are in a universe where we see all the risks that I have listed. They are exactly the same kinds of risk that were listed before. We see a pipeline effect in a number of other prices stemming from increases in the prices of inputs – particularly commodities – and that is something which is ongoing and undoubtedly creates more risks. We have the risk of second-round effects and the absolute necessity to avoid the materialisation of such risks. Again I see that we have a situation which is not of a different nature.
As regards your third question, again we had ourselves already priced in the fact that we would have a trough in the second and third quarters, so we will see what exactly happens. We are totally pragmatic, and this is one element which, of course, needs to be incorporated in our synthetic analysis. Let me nevertheless make one or two observations. Economists would tell you that the considerable changes we have observed in relative prices not only have the conjunctural effect of acting as a drain on the resources of the euro area and other consumer economies, but also change the overall growth potential of those economies, because you have a change in relative prices, which has a big impact on the productive sector itself and its capacity to produce. It seems to me that a number of effects in this respect are not taken into account by part of the analysis which is being done. So I would draw your attention to that point, too. There is not only a conjunctural effect, but also a structural effect.
Question: You’ve mentioned the financial market turmoil a number of times. It’s now a year since the very obvious onset of the credit crunch. How would you characterise the past year in financial markets? What will end the crisis and when, and do you think that more European banks are at risk of huge losses?
Trichet: As you know, from the outset we considered this to be a very serious market correction. We took decisions which were in line with the analysis that we were facing an important market correction with episodes of turbulence. We never considered that there was a “quick fix” that could allow us to resolve that situation, and everything that has happened since then has proved that our analysis was right. The central banks are cooperating. I’ve mentioned further examples of that cooperation. The Eurosystem has always been very alert in following everything that has happened as efficiently as possible. I am asked very frequently whether the worst is now over or whether we should expect further enormous difficulties in the future. I would stick to what I have always said, namely that it’s an ongoing, very important market correction with episodes of turbulence and high levels of volatility, and that it is absolutely no time for complacency. That, for me, would be the best definition. You have not mentioned the collateral issue but it is, of course, part of the interaction we have with the money market. I told you last time – and I will stick to that – that we consider that our collateral framework has served us pretty well since the beginning of this turbulence. In a way, we were perhaps more prepared for the turbulence than some others, because we had also the capacity to accept private paper as collateral, the primary difference between us and a number of other institutions. We had the capacity to refinance commercial banks over three months, which was not necessarily the case in other economic areas. We had, since the establishment of the Eurosystem and the euro, traditionally had a very large number of counterparts, which proved to be very useful in the circumstances, and we also, traditionally, had a large amount of outstanding of refinancing, which also proved useful in the circumstances. So, these were the various elements which allowed us to cope with this unpredictable situation from the outset. That being said, we are examining our rules with great care and watching developments carefully. And we will see what we have to do, if it proves necessary, to refine elements of our scheme – as we have done in the past, because we did that two years ago and four years ago. So, it’s just as I said last time, I have nothing new to tell you and that would be my comment on that.
Question: Mr Trichet, the IMF has recently published a report on the euro area. It is somewhat critical of the monetary analysis, stating that it does not really contain much information on future inflation. The IMF report also suggests that the two pillars should be consolidated into one. What is your take on that?
And second question: Do you have any advice for the IMF concerning their global analysis?
Trichet: First of all, it seems to me that the IMF was cautious in mentioning this. However, we do not agree with the IMF on this. We consider our two-pillar strategy to have served us extremely well. On a number of occasions I have explained why we consider the information from the monetary analysis to be very pertinent and how it has helped us to take decisions in difficult times and at difficult moments. And, presently, I can say that these decisions are considered by everybody to have been fully vindicated. In particular, I mention our decision to refuse to decrease in rates in 2004 and our decision to increase rates in December 2005. These decisions were very significantly helped by our monetary analysis and were certainly very important in strategic terms. Let me also point out that there is a paradox in this position, because increasingly I have been hearing praise among economists for the monetary analysis and the two-pillar strategy. It seems to me that, at the current juncture, we are in a somewhat different universe to that of ten or even five years ago. Furthermore, it is paradoxical because, the European Parliament said that it judged the two-pillar strategy to be a very good concept. Reference was made to this in the European Parliament’s resolution which was adopted recently. So, to conclude, I would ask the IMF to do its very important job, and I am in no doubt that it will continue to do the job very well.
Question: If, in the course of your ongoing review of the collateral policy, there were to be a change, how would you let us know?
Trichet: We would be as public as possible. But, in any case, we regularly have to do some updating and there is nothing special to say in this regard, in terms of communication. So, you will see when the time comes.
Question: You mentioned the structural changes. And I wonder whether or not the Governing Council in fact reassessed its notion of potential growth in the euro area; before it was 2.5%?
Trichet: No, at this stage, I cannot refer to analytic work that would respond to your question.