Transcript of the Press Briefing

held by Jean-Claude Trichet, President of the European Central Bank
following the meeting of the Governing Council
on 2 August 2007

Trichet: Let me just say a few words and then I will be ready to respond to questions, as usual.

Recent economic developments and survey indicators confirm that sustained economic growth continued in the euro area through the second quarter. Rising oil prices, emerging capacity constraints and the potential for stronger wage and cost dynamics, among other factors, imply upside risks to price stability over the medium term. The existence of upside risks to price stability at medium to longer-term horizons is confirmed by the strength of the underlying rate of monetary expansion: strong vigilance is therefore of the essence to ensure that risks to price stability over the medium term do not materialise.

Both, our previous economic and monetary analysis as expressed in particular in the last press conference have been fully confirmed by the ongoing information we have received since the last meeting of the Governing Council. Let me also stress that we never pre-commit, we decide at the moment of the meeting of the Governing Council on the basis of the information that we have, facts and figures, and according to the judgement that we make at that moment. I re-emphasise that we never pre-commit.

Let me also say that we are experiencing a period of market nervousness, a period where we see volatility in markets in general and re-appreciation of risks. We think that these developments in financial markets deserve attention. Shifts in market sentiment need careful monitoring. We will continue to pay great attention to the developments in the market over the period to come.

I am now open to questions.

Question: Just three quick questions: First of all, in your brief remarks, do you intend for us to reinterpret the meaning of “strong vigilance” as opposed to how it has been used in the past? My second question is: much of the nervousness that you describe and that we have been seeing in financial markets has to do with the unwinding of novel financial instruments, which we are now learning have become conduits for instability around the world, but I wondered whether you could also say whether you felt that was the whole picture or whether recent financial innovations were also contributing to the stability of financial markets? And my third question is: could you comment on the macroeconomic effect of rising interest rates through this year, especially now that long-term interest rates have done what they historically have done and now that risk premiums are being reassessed? Do you see macroeconomic effects of rising interest rates?

Trichet: On the first question, I do not ask for any new interpretation of the words I have pronounced. They have exactly the same meaning as before. I have always said when using the words “strong vigilance”, do not forget that we never pre-commit. There is nothing new there.

On the second point, I told you and colleagues that are here that we thought at the level of the Governing Council, and also in the constituency of central bankers at a global level, that there had been in the past a degree of under-pricing of risks, some under-assessment of risks. And I said that at a moment when there was no particular turbulence on the market, but it was our judgement, our collegial appreciation. In the present episode, we see a process of re-appreciation of risks in general. And I would qualify this episode as a process of re-appreciation of risks which can be interpreted as a phenomenon of normalisation of risk pricing in a number of markets. We will follow this evolution very carefully. I said a number of weeks or months ago – and I said it repeatedly – that we were calling for an orderly and smooth re-appreciation of risks. We asked market participants and investors to be as keen as possible to avoid sharp and abrupt corrections.

Now let me turn to your third question. The information we are giving at the moment is very much in the minds of a very large number of observers, economists and market participants. And I trust that what we are doing is to pave the way for economic growth to be as sustainable as everybody hopes. We have good news in the real economy. You gave a lot of attention to the fact that the IMF had revised up global growth and euro area growth. A lot of attention was also given to the fact that our unemployment rate in the euro area is now at the lowest level since 26 years, so this is something which is substantial. It is our duty to preserve stability, to anchor inflationary expectations, and through that mean, to permit sustainable growth to continue as everybody expects it will do. This is the way we are contributing to sustainable growth.

Question: Following up on that question: the current phase of market movements that we see, is that something that you would characterise as a smooth re-appreciation of risk or is that something that is abrupt and undesirable? And then also, as a second question, I know that the ECB never pre-commits itself, but sometimes you find it necessary or advisable to give guidance to financial markets, and in the wake of announcements from the ECB, markets essentially are now priced very heavily for the ECB raising rates in September. Is that something you think is appropriate and what is your view on the pricing of risks for December, which has actually fallen back a lot in the space of the recent market turbulence?

Trichet: On the first question, I will stick to what I said. We are in an episode where prices that were under-assessing an element of risk in a number of markets are normalising. I will not give any other qualification to the situation: it is a process of normalisation. The first quality to be demonstrated in circumstances when we see significant increases in measures of volatility in a large range of markets and asset classes by market participants and investors, and of course by authorities is to keep their composure. That is something important and it would permit the evolution of the market to be as effective as possible in terms of going back to a normal assessment of risks in general.

As regards medium-term future interest rates after September, I will say absolutely nothing. My message today is a message of strong vigilance without forgetting that we never pre-commit. Beyond that, I will say absolutely nothing. We will assess the situation and judge on the basis of facts and figures and the development of the situation.

Question: President Trichet, I understand that you have used the word “strong vigilance” and this also goes hand in hand with “no pre-commitment”, but could you tell us as we interpret this word whether policy will still be on the accommodative side in September?

Trichet: I will tell you that when the time comes in September, after our decision, in the press conference.

Question: I have two short questions. In light of recent market turbulences, what is your assessment of the liquidity in the euro area at the moment? And you will release the bank lending survey tomorrow, so do you have any new information on credit standards within the euro area, and are you seeing changes in the credit standards from banks vis-à-vis corporate and household borrowers?

Trichet: I would only speak about the figures that were published and to which I alluded in my brief words at the very beginning. Drawing on the figures we have on the monetary analysis side of the two pillars, loans to the private sector grew at a rate of 10.8% in June, a little bit more than in May, and loans to non-financial corporations at 13.3% in June, against 12.8% in May. M3, as you know, is very dynamic. So we are in a universe which is characterised by a continuation of the observation that we had made before.

Question: I have three questions. Is calling this press conference today part of an effort to ensure that market participants keep their cool? Secondly, would you say that financing conditions remain favourable as you have said in the last two statements? And third, is the concept of consensus getting a reworking on the Governing Council right now? Can you give us a little sense of how the discussion was and whether or not there is more debate over the topic of consensus?

Trichet: On your first question, I will only repeat that keeping one’s composure is important in any circumstances, but certainly in circumstances of market nervousness, as is the case presently.

As for the second question, I will say how I qualify the situation at our next press conference. Today I have said that we are in a situation which in our opinion calls for strong vigilance, and that our previous diagnosis has been fully confirmed.

On the third question, I would say that we have had absolutely no change in our own methodology and way of assessing the situation and expressing views.

Question: The recent turbulences in financial markets have had an effect on private sector financial institutions to an extent which at least provoked the German authorities to step in and rescue a German lender. There were times in economic history when central banks also felt they had to do something in order to prevent a banking crisis. Do you think we have reached this stage now and should the ECB take part in these rescue operations we are seeing?

Trichet: I will stick to what my colleague Axel Weber has said on this particular case and what has been said since last Monday. I will not add anything to that.

Question: A question on Italy: there is a lot of talk in Italy about the possibility of selling reserves to reduce debt and selling gold in particular. Do you have any reaction on this?

Trichet: At this stage I have no other comment that the rule of the Treaty must be respected fully in all circumstances. On the basis of very recent news that has come we will analyse the situation very, very carefully. But I repeat: the rule of the Treaty must be fully respected. And this calls for a very rapid and precise examination of what is at stake.

Question: Mr President, was the decision to use the word vigilance today unanimous?

Trichet: We had exactly the same kind of methodology as we had before. I convey this message and this word on behalf of the Governing Council.

Question: What role did the strength of the euro play in your discussions today? And are you seeing excessive volatility in the currency movements?

Trichet: Our decision today was not to change interest rates. And we always look at all parameters without any exception in taking our decision, without giving this particular parameter that you have mentioned more than its share in our overall assessment.

Question: I don’t think anybody expected this outturn today with the press conference. It was seen as probably the least likely scenario as to how you might communicate the message that you had to communicate today. What accounted for that and are you concerned that there will be some questions about the communication parameters? And my final question is do you think that this might lead you to consider having a regular press conference every August in the future? I mean we've had two years now where there have been last-minute surprises.

Trichet: This is not a press conference, this is a press briefing; and we are very keen to issue information not anonymously but publicly as frequently and as soon as it is necessary because, as you know, we have a policy of communicating only publicly. All other communications are null and void and are made on the basis of something which is not in line with the decision of the Governing Council. That being said, we constantly reflect on what we could do in order to be as efficient as possible in terms of our relationship with you. Let me add that it was worth having this press briefing also in view of how many of you did come.

Question: Are you worried about a possible banking crisis? There is a German smaller bank so to say which, instead of having a hole of €3.5 billion is possibly going to have a €17 billion and so on hole, and people are already saying in the market that this will entrain very big consequences especially also in the German market.

Trichet: On the particular issue that you have mentioned, I will not add anything to what has been said by the German entities concerned themselves, by the authorities and by Axel Weber. On the overall assessment of the situation on the markets, I feel that we are observing a reassessment of risks. I mentioned already what our judgement was some time ago and, again, I see a phenomenon of normalisation of the assessment and pricing of risks. I also said that, in circumstances that are characterised by increasing volatility and by the reassessment of a number of risks in a number of markets, it was important that the market participants, investors and authorities, keep their composure, maintain their “sangfroid”.