Introductory statement with Q&A

Jean-Claude Trichet, President of the ECB,Lucas Papademos, Vice President of the ECB,and Jaime Caruana, Governor of the Banco de EspañaMadrid, 6 June 2006

Jump to the transcript of the questions and answers

Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to the press conference here in Madrid. I would particularly like to thank Governor Caruana for his kind hospitality and express our special gratitude to the staff of the Banco de España for their excellent organisation.

Let me now report on the outcome of today’s meeting, which was also attended by the President of the Eurogroup, Prime Minister Juncker, and Commissioner Almunia.

At today’s meeting, we decided to increase the key ECB interest rates by 25 basis points. This decision reflects the upside risks to price stability over the medium term that have been identified through both our economic and monetary analyses. The further withdrawal of monetary accommodation will thus contribute to ensuring that longer-term inflation expectations in the euro area remain solidly anchored at levels consistent with price stability. As stressed on previous occasions, such anchoring is a prerequisite for monetary policy to make an ongoing contribution towards supporting economic growth and job creation in the euro area. Overall, also after today’s increase, the key ECB interest rates are still low by historical standards, liquidity is ample and our monetary policy remains accommodative. Given the outlook for price developments and the dynamism of money and credit growth in the euro area, we will continue to monitor closely all developments to ensure price stability over the medium and longer term.

Allow me to explain our assessment in greater detail, starting with the economic analysis.

All the main indicators of economic activity that have recently become available are positive. According to Eurostat’s first estimate, on a quarter-on-quarter basis, real GDP grew by 0.6% in the euro area in the first quarter of 2006, compared with 0.3% in the previous quarter, with domestic demand making a significant contribution. The expected re-acceleration of real GDP growth in the first months of 2006 has thus materialised, confirming our view that economic growth is broadening and becoming more sustained. This assessment is further supported by information on activity in the second quarter – such as various confidence surveys and indicator-based estimates – which continues to be encouraging.

Looking further ahead, the conditions are in place for growth in the euro area to remain close to its trend potential rate, despite the impact of the rise in oil prices. Growth in the economies of the euro area’s main trading partners remains robust, providing support for euro area exports. Strong investment growth is expected to continue, benefiting from favourable financing conditions, corporate balance sheet restructuring, and gains in earnings and business efficiency. Consumption growth should continue to strengthen gradually over time, in line with developments in real disposable income, as the labour market situation gradually improves.

This outlook is also reflected in the June Eurosystem staff macroeconomic projections, which provide additional input into our analysis of the prospects for economic activity. The projections foresee average annual real GDP growth in a range between 1.8% and 2.4% in 2006, and between 1.3% and 2.3% in 2007. The growth projections for 2006 are broadly unchanged from the ECB staff projections of March 2006, while those for 2007 are slightly lower, reflecting mainly the recent rise in oil prices. Most recent forecasts by international organisations and private sector institutions give a broadly similar picture. It is the Governing Council’s view that risks to these projections for economic growth are broadly balanced over the shorter term, while longer-term downside risks relate mainly to potential further oil price rises, global imbalances and protectionism.

Turning to price developments, according to Eurostat’s flash estimate, annual HICP inflation increased to 2.5% in May, compared with 2.4% in April and 2.2% in March. Although no detailed information is available as yet, this increase probably stems from energy price developments. In the months to come and in 2007, inflation rates are likely to remain above 2%, the precise levels depending on future energy price developments. While the moderate evolution of labour costs in the euro area is expected to continue in 2007 – also reflecting ongoing global competitive pressures, particularly in the manufacturing sector – indirect effects of past oil price increases and the announced changes in indirect taxes are expected to have a significant upward effect on inflation. Against this background, it is crucial that the social partners continue to meet their responsibilities.

Further input into our assessment of the outlook for price developments is provided by the June Eurosystem staff projections. Annual HICP inflation is projected to lie between 2.1% and 2.5% in 2006, and between 1.6% and 2.8% in 2007. Compared with the March 2006 ECB staff projections, these ranges imply a slight upward shift to the profile for HICP inflation in 2006, largely reflecting the assumption of higher oil prices.

In the view of the Governing Council, risks to the outlook for price developments remain on the upside and include further increases in oil prices, a stronger pass-through of past oil price rises into consumer prices than currently anticipated, additional increases in administered prices and indirect taxes, and – more fundamentally – stronger than expected wage developments due to second-round effects of past oil price increases.

Turning to the monetary analysis, the Governing Council again had a thorough discussion of underlying developments in money and credit. In a context of already ample liquidity and very strong monetary and credit growth, the annual growth rate of loans to the private sector has increased further in recent months to reach double-digit levels. Credit growth has also been broadly based across sectors. Borrowing by households – especially for house purchase – and by non-financial corporations has been growing very strongly. At the same time, monetary growth has risen further over the past few months, with the annual growth rate of M3 standing at 8.8% in April.

The rapid rate of monetary growth continues to be driven mainly by the expansion of its most liquid components. Thus, the latest developments confirm that the stimulative impact of the low level of interest rates remains the dominant factor behind the current high trend rate of monetary expansion, which signals inflationary risks over the medium to longer term. The further acceleration of monetary and credit growth in this environment of already ample liquidity points to increased upside risks to price stability at longer horizons. Monetary developments, therefore, require careful monitoring, in particular in the light of strong dynamics in housing markets.

To sum up, annual inflation rates are projected to remain elevated in 2006 and 2007, with risks to this outlook on the upside. Given the strength of monetary and credit growth and the ample liquidity situation, a cross-check of the outcome of the economic analysis with that of the monetary analysis confirms that upside risks to price stability over the medium term prevail. A further adjustment of interest rates was therefore warranted. By acting in a timely fashion, the Governing Council is helping to keep medium and long-term inflation expectations in line with price stability, thereby making an ongoing contribution to sustainable economic growth and job creation. Overall, our monetary policy remains accommodative and the Governing Council will continue to monitor closely all developments to ensure that risks to price stability do not materialise.

With regard to fiscal policies, the forecasts published recently by the Commission point to a broadly unchanged situation in the euro area in 2006 and 2007; deficit ratios are expected to remain at around the 2005 level of 2.4%, while debt ratios, after declining only marginally, are forecast at levels still above 70% of GDP. This is disappointing against the background of the economic outlook. Most countries with an excessive deficit have not corrected their position in a timely manner. Furthermore, there is a risk of consolidation delays in other countries. It is crucial to avoid the mistakes of the past, when many countries failed to consolidate sufficiently in good times. The Governing Council considers that more determined progress is required towards sound public finances in a number of countries, that concrete and credible measures should be implemented swiftly as part of a medium-term-oriented strategy, and that it is vital to consolidate confidence in the revised Stability and Growth Pact by ensuring the sustainability of public finances in the euro area.

In terms of structural reforms, the Governing Council reiterates its call for the implementation of firm measures to ensure open, competitive and well-functioning product and labour markets, so as to foster an attractive environment for investment and innovation and to promote flexibility in wages and prices. There is a broad and firm consensus that such reforms are beneficial in promoting growth and employment and in enhancing the resilience of the euro area economy to external shocks. At the same time, these reforms would further facilitate intra-euro area adjustments by reducing rigidities that contribute, in some economies, to wage developments that lead to high and persistent unit labour cost growth, higher inflationary pressure and losses in competitiveness. Examples of such rigidities are low productivity growth due to a lack of competition in some sectors and an explicit or de facto indexation of nominal wages to prices. All in all, a comprehensive set of reforms is essential to strengthen the foundations for sustained growth in output and employment across the euro area, to underpin the ongoing economic recovery and to further smoothen the functioning of adjustment mechanisms in the euro area, thereby facilitating the conduct of the single monetary policy.

We are now at your disposal for questions.

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Question: Did you discuss today a 50 basis point increase in interest rates? And if you did, how close were you to that decision, and how did the appreciation of the euro against the dollar influence your decision today?

Trichet: As regards today’s discussion, it was a very deep discussion, weighing the advantages and disadvantages associated with the various options that we had. There was an overwhelming sentiment that 25 basis points was appropriate, but we also weighed the advantages and disadvantages of having a 50 basis points increase. But again there was an overwhelming sentiment that 25 basis points was appropriate. On the elements that were in our analysis: as usual, and as I have repeated very often in such press conferences, we take absolutely all elements into consideration, including exchange rates, and our synthesis of those elements is based on a comprehensive overall analysis. Our decision certainly does not depend mechanistically on any particular input, including the input from the projections, which are an important piece of information for us. We look at our own staff projections, as well as the wealth of information which is coming from the public sector and the private sector, and, again, all of the various data and figures and models that we consider. We do not depend on any single piece of information or any single model of the economy. We want to be as comprehensive as possible.

Question: Could you tell us whether the Governing Council is at all concerned about recent volatility in global stock markets and whether that played any role in your decision today? And secondly, markets are expecting you to continue to raise interest rates at a pace of a quarter point per quarter. Is this a realistic assumption, or could you envisage increasing the pace of monetary tightening?

Trichet: First, the question on volatility. We had a discussion on what we have been observing in financial markets over the last few weeks. And we observed that volatility had augmented in a large number of markets. We considered that it was certainly something which was important and to be taken into consideration in our overall assessment. That being said, we also looked at the fact that it came after a long period of very low volatility, something which could be regarded, according to some analysis, as a normal correctional phenomenon. Again, we will also continue to monitor closely developments in financial markets. In a way, the re-appreciation of risks in the financial markets also corresponds to a view of the Governing Council. That view which is shared at a global level by the constituency of central bankers - I say that as Chairman of the G10 -, which thinks that there has, to a certain extent, been an underpricing of risks in the global financial markets. Again, if this pricing of risks were to increase somewhat, it would perhaps be going in the direction of an improved pricing of risks. As regards the second question, I would only say that we are in exactly the same mood as before. If our assumptions and scenario – our baseline scenario – are progressively confirmed, and until now we have been very happy to see that it has been confirmed, then the progressive withdrawal of monetary accommodation would be warranted.

Question: I have a question about the projections; namely that you have changed your methodology concerning short-term interest rates, assuming that they will evolve in line with market expectations as opposed to being constant, and you observed yourself, Mr Trichet, that the forecast for HICP inflation in 2006 has been raised slightly. Isn’t the increase actually somewhat more pronounced than that, given this change in your assumptions about short-term interest rates?

Trichet: No, our slight change in methodology has not had a significant impact on the projections themselves. It is a technical change that we in the Governing Council judge appropriate, taking into account all the elements at stake. But as far as the assumptions about long-term rates are concerned, we - in taking a long-term rate assumption - took the yield curve foreseen by the market. Therefore, the change that we introduced is not as big as suspected by some, and consequently, I would not underline any significant change in the projections that could be attributed to that change. When I look at the projections, the changes in the growth projections for next year, which have been revised slightly downwards, are fully in line with other projections, for instance the Commission projection. And the main driving parameter has been the change in the assumption about oil prices.

Question: You just said that Mr Juncker was present at the meeting. He said recently in Brussels that he wrote a letter to you asking for closer cooperation and meetings on issues such as exchange rates and the economic outlook. Apparently, he is still waiting for a reply. What are you going to reply to Mr Juncker and are you going to reply? And further on this issue: We know that Mr Euro’s first name is Jean-Claude. Could you tell me what his last name is?

Trichet: I have said often enough that I am Mr Euro. There is no doubt: we issue the currency and I sign the banknotes. My signature is on the notes. As far as the letter is concerned, I will only say the following. In my understanding, the relationship that the ECB has with the executive branches, in line with the provisions of the Maastricht Treaty, is probably the best organised at the global level. I invite, on behalf of the Governing Council, the President of the Eurogroup and the Commissioner to each meeting of the Governing Council, i.e. twice a month, which allows as much contact as possible. It allows not only informal contact with me but also the opportunity to see, from the inside, the deliberations of the Governing Council. Once a month I am invited, along with the Vice-President, to the Eurogroup meetings. This facilitates all kinds of contact and a deep understanding by Lucas and myself of the way the Eurogroup is reasoning, because we are present in the room. I do not think that you would find such an intimately organised relationship between a monetary authority and an executive branch anywhere else in the world. I think it is remarkable and I will take this opportunity to mention that it is something really exceptional in the world, but not unusual in Europe. For example, the Council of the Deutsche Bundesbank used to invite the members of the government to its meeting every fortnight, and, as a former Governor of the Banque de France – now it is Christian Noyer – I also invited the relevant member of the government – the Minister of Finance – to the meeting every fortnight. Of course, in the European tradition and in the Maastricht Treaty, this is accompanied by what I would call the inflexible independence of the monetary authority, which is in the Treaty and which forms the basis of our credibility.

Question: You made the statement:” looking further ahead, the conditions are in place for growth in the euro area to remain close to its trend potential rate, despite the impact of the rise in oil prices”. Just to draw the line with your previous comments about market volatility, because that in some senses reflected the conviction that perhaps central banks will have to do more than simply remove accommodation, but rather tighten monetary policy, and if, in reading that statement, I am correct in assessing your thinking in this respect, that you see this possibility as well. As to my second question, you said previously that you don’t necessarily have to act quarterly, even though you have since December, that you can act at any time, that the magnitude can change and that you can even do things outside Frankfurt, as we have seen here today. If we were to write tomorrow that you are now going to be more data-driven rather than less, would that be incorrect?

My third question is on exchange rates: you talked about not taking certain elements into account mechanistically, and I thought you were going to mention the exchange rate but you didn’t. Is that one element where it is generally presumed that when the euro strengthens, this, ipso facto, has some sort of dampening effect on whatever tightening you might be engaging in? And is it correct to say that you did not do that mechanistically?

And I also have one last question for your Spanish host, Mr Caruana. I realise that you have probably answered this question, Mr Caruana, a million times already, but I am myself in Spain for the first time in ten years, and am seeing the extraordinary amount of building that has gone on, and is continuing to go on. Can you give us a sense of how you see this sector of the Spanish economy developing and whether you see the growth contours of the Spanish economy balancing out in the future, reflecting greater growth in the industrial or services sector rather than this heavy reliance on construction and real estate?

Trichet: In answer to your first question, if our scenario is confirmed, and until now it has been confirmed, the further withdrawal of monetary accommodation would be warranted, and this is clearly what I have been saying since December. We will see what happens. Of course, you can refer to this as a tightening of monetary policy, but I like to use the expression “withdrawing monetary accommodation” to refer to what we will do or could do according to the confirmation of our baseline scenario. It is absolutely clear that we have no pre-commitment and that this is the way the Governing Council has been looking at it since December, when I said for the first time that we were not committed ex ante to a particular sequencing of decisions. We are always conditional and we are always free to do what we judge to be appropriate. We do not make any unconditional commitments. We have never done so. Not even when we were at the very low historical level of 2% did we commit to maintaining that level for a considerable period of time. We always at any time do what we judge to be appropriate for countering the existing inflationary risks and ensuring price stability over the medium run and for continuing to anchor solidly inflationary expectations in line with our definition of price stability. In response to your third question, I would only say that I have already answered it. We look at absolutely all input, without any exception, and we have no mechanistic response to any particular individual input. We synthesise all the inputs, so to speak.

Caruana: You know that over the past few years, we have had a very active and dynamic housing market in various respects: in terms of prices, in terms of activity, the number of new houses has been increasing dramatically, and also in terms of the credit granted to the households to buy these houses. Recently, we have started to see prices moderate. One year ago, the price increase was 17%, it then moved to 14%. Now it is around 12%.It is cooling off a little bit, but it is not yet clear that activity or credit has started to calm down. In terms of the evaluation, we have sometimes expressed that when you look at fundamentals, the present evaluation was above these fundamentals. We have signalled several times that this poses risks, but at the same time, we have also expressed that, in addition to the increasing debt, there has been an increase in the wealth of households, which is a positive development, and that the central scenario is still that this over-valuation could be corrected smoothly and not necessarily through an abrupt correction. We see risks that this could happen, but it is not our central scenario. We are very much following the development of this market. The preoccupation is not really the financial sector, but more the sensitivity of the consumer to developments in fundamentals, such as interest rates or the prices of homes, etc. Thank you very much.

Trichet: From our perspective, we look at the euro area as a whole. At the level of the euro area as a whole, credit to finance housing is very dynamic, despite the fact that it is much less dynamic in Germany.

Question: Mr Trichet, I know that you have said that the ECB has no pre-commitment, and that there is no ex ante decision, but a few months ago you did make a comment that the ECB was on a path of normalisation of interest rates, which led some people to think that maybe there was an end-point in mind. Can you still say today that you are on a path of normalisation, or could it be that the ECB stops this progressive withdrawal of monetary policy accommodation at a level that is still accommodative?

Trichet: As I have always said, we think that our interest rates are correct and correspond to what is needed to counter inflationary risks. What we are see when we look at our baseline scenario is, that we have progressively gone to a level that is close to our potential. In a sense, this is going towards a more “normal” situation as regards growth and, it calls for countering increased inflationary risks and to progressively withdraw monetary accommodation. There has been no change whatsoever since December in the way we look at what is happening.

Question: Mr Trichet, would you kindly give us your opinion on the merger of Euronext and the NYSE, particularly against the background that the EU institutions would like to see a more integrated European capital market. Is that in line with this or is it not?

Trichet: We, the Governing Council, have no position on such matters and we have no power over them as a central bank. It is clear that, all other things being equal, my personal sentiment is that a European option would be better than an external option for whatever issues are at stake, whatever dossier is involved, and whatever question asked. I would also say that a euro area option is preferable to an extra-euro area option. And you can draw whatever conclusions you like from the various attempts, ideas and proposals that have been made thus far. All other things being equal, I would personally prefer a euro area option to another option, and a European option to another option. That having been said, it is not our responsibility to decide on the matter.

Question: The terrorist leader Al-Zarqawi was killed in Iraq today. Did you take also this issue into consideration, and may I know what point you discussed, where financial markets are concerned? Is there any concern in the Governing Council as far as the future is concerned?

Trichet: We had no sentiment on that particular event. When we list the risks at a European and global level, I would say that we have the risk of a disorderly unwinding of global imbalances, we have the risk of protectionism, we have the risks that are associated with a disorderly evolution of the global financial markets, given the underpricing of risks that I have already alluded to. We also have the oil price risks that we have now come to know rather well over a very long period of time, and I would say, in that respect, any event that occurs in the geopolitical sphere obviously has an influence. So, I would say that anything we have that goes in the direction of an alleviation of this combined risk of oil prices, commodity prices and geopolitical risk would go in a good direction, but I have no other comment.

Question: Mr Trichet, can you briefly tell us two or three of the key reasons for the fact that the Council decided to keep the rate hike today to 25 basis points rather than 50 basis points? And also, you mentioned that there was a thorough discussion of the monetary aggregates today and that risks prevail. My question is whether you see those risks increasing and whether there is any information available to the Council now that would suggest that the pace of monetary tightening needs to accelerate this year.

Trichet: First of all, I have already responded to your last question and I said that we will do precisely what is necessary at any time, according to our own analysis, and that we will progressively withdraw monetary accommodation in line with the development of the baseline scenario. In our opinion, risks to price stability augmented sufficiently during the preceding period to trigger our interest rate increase in last December, a new interest rate increase in March, and the new interest rate increase today. It is obvious that we now see this baseline scenario developing in line with what we had already judged in December, and even before December.

As far as the monetary analysis is concerned, we utilise it to cross-check the economic analysis and the result of both analysis explains why we increased rates in December and March and why we have done so again today. As regards the sentiment of today, there was an overwhelming majority that thought that 25 basis points was more appropriate. This was the judgement of the Governing Council as regards the level of risks that we have to counter at the moment and it was in line with what – to my understanding- the market itself was appreciating. We are totally candid and totally open: everybody knows what our definition of price stability is, everybody knows the figures, everybody knows our two-pillar strategy, and everybody can make his own judgement taking that into account. As you know, not all central banks are as candid and transparent regarding their definition of price stability and their monetary policy concept. So the decision we took was fully in line with our monetary policy strategy.

Question: Two hopefully fairly short questions? First, let us go back to the politics in your discussions with Mr Juncker at the Eurogroup meeting in Luxembourg yesterday. There was a lot of commentary from politicians about the appropriate level of exchange rates and whether it should be allowed to go much higher. Is it appropriate for eurozone politicians to be discussing such issues? Is that their role? And my second question you just talked about how candid the ECB is. You also have some of the best economists in the world working for you. I am sure that lots of eurozone citizens – particularly here in Spain, maybe if they are considering buying a house and borrowing lots of money – would like to know where interest rates are going to be maybe next year or a little bit further forward? This time we have not yet seen your forecasts, but if I understand you correctly, they are based on market rates. Can you tell us perhaps, or give the 300 million euro area citizens an idea of where interest rates might be in the next year or so? Are these market expectations in your forecast? Are they reasonable?

Trichet: On the first question I will stick to the statement made in the Communiqué of the G7 and on the paragraph that deals with exchange rates. I have no other message. And when I have a message you know pretty well by past observations that I give it! On the future trajectory of our interest rates, we are working on the assumption that we will proceed with a further withdrawal of monetary accommodation; not unconditionally, but conditional on the confirmation of facts and data, and on the basis of our own future observations. We have no ex ante commitment. This is the working assumption. We will do what is necessary, when necessary, and we are not stuck to any pre-commitment of any sort. We can proceed more rapidly or less rapidly. We are free and we remain free to do at any time whatever is needed. The fact that we have increased rates three times at intervals of three months is not due to some ex ante idea that we would increase rates by a certain amount at regular intervals. We judged these increases to be the best and most appropriate way of dealing with the risk that we had analysed.

Question: I have a couple of questions for Governor Caruana. Since you became Governor of the central bank of Spain you have tried to get financial institutions to slow down their provision of credit to households. Recently these institutions have been offering even longer mortgage repayment times and are trying to push the market for credit. Are you disappointed? Is this your biggest disappointment in your tenure as Governor? And the second question it was commented yesterday at the Eurogroup in Luxembourg that one of the reasons why the ECB has to increase rates is because of high inflation in several countries, and everyone pointed to Spain in particular. Is that true and is there a consensus to say that Spain’s high inflation is driving interest rates higher?

Caruana: Regarding your first question about credit, what a central bank does and what we have been trying to do is to signal very clearly the need for banks to measure properly the risks involved in lending. We do not tell banks what is to be done, what is to be increased or what lending figures they should have. What we are signalling is that they should take into account all factors, and not just today’s factors. They should also work with scenarios that provide information on the capacity of borrowers and on their own capacity if a scenario were to change even if the central scenario is not going to change. It is a necessary analysis. So what we have been asking for is prudence, measuring properly the risks, taking into account properly the risks and in that sense I think we have achieved a lot. I think the dynamism of the credit reflects to some extent the dynamism of the economy and I think it would be appropriate to have a little bit of a slowing but again, it is a question of each bank deciding and taking the measures necessary to ensure that they can handle the risk that they are taking.

Trichet: I turn to the question on the differential between inflation rates inside the euro area. I had a number of occasions, including contacts with the executive branches both individually and collectively in the Eurogroup, to say that we, the ECB’s Governing Council, are responsible for average inflation and the inflationary expectations in the euro area as a whole: the average inflation for the 313 million inhabitants that are our fellow citizens in the euro area. In a way we are responsible for the level of the sea, but some swimmers, if I may, can swim above that level other ones below. The inflationary expectations have to be anchored for the euro area as a whole. The difference between the average euro area inflation level and the national inflation level is the responsibility of the national authorities. Again, at the level of the Eurosystem we can only ensure price stability and the credibility of price stability over time for the euro area as a whole, and that is very important. And of course we call on the national authorities to be fully conscious of their responsibility vis-à-vis their inflation differential with the average. That being said I would also draw your attention to an argument which I see from time to time and which does not seem to me to be appropriate. Some argue that the real interest rates in some euro area economies are precisely influenced by this inflation differential and that some economies are benefiting from low real rates while others are suffering from high real rates. I would draw your attention to the following: the level of inflation, which is closely correlated with the unit labour cost and the costs in general in the economy, functions in such a way that what one particular firm would theoretically gain out of a theoretical abstract computation of real interest rates is much more than offset by a loss in terms of cost competitiveness: what is lost when inflation is above the average is much greater than what you could theoretically gain with a lower level of real rates. This is very important.

Question: Mr President, you said that one of the risks to growth is protectionism and you said also that this is now the moment for sound fiscal policies to avoid the mistakes of the past. Do you have in mind some examples of protectionism and of mistakes in the past? Last question is it your opinion that a stock exchange of the euro area is better? Is it also your opinion that the Milan stock exchange should withdraw from the proposed alliance with the New York Stock Exchange?

Trichet: On protectionism you cannot expect anything from the Governing Council of the ECB but the demand for completion of the single market. Full completion of the single market is a target which seems to us extraordinarily important, not only because it is one of the major goals of Europe as a whole, but because it would considerably improve the functioning of the European economy. It would elevate the level of growth potential; it would raise the “speed limit” of growth in Europe, and in the euro area. It will also facilitate the functioning of monetary policy, because the more an economy is flexible, the more an economy is competitive, the more you can obtain price stability with ease. I will not comment more on stock exchanges. I have said all that I had to say and, again, we have no power in this domain ourselves.

Also on the issue of protectionism in commercial banking, which is particularly topical in cross-border mergers or cross-border cooperation, I would say that the most recent evolution that we have observed has been moving in a much more favourable direction than previous observations. On the issue of sound fiscal policies it’s an allusion to the fact that in good times a great number of countries and economies have unfortunately not paved the way for coping with more difficult periods of time and this issue is very closely associated with the preventive aspect of the Stability and Growth Pact. We believe that repeating the mistakes of the past would be terrible because as we know, those mistakes had an enormous cost and were extraordinarily difficult to cope with.

Question: I have four questions, but they are rather short. The first question is: who presented today’s proposal for the rate hike? Was it Mr Stark in the Governing Council? And the second question is: when did you receive the letter from Messrs Juncker and Almunia? And when did you share it with the other members of the Governing Council? And when did you discuss it in the Council? The third question is: can you give us an idea of the outcome of the monetary inflation forecast, which will be published in next week’s Monthly Bulletin? And the fourth question relates to the ECB’s stability report, which has voiced concerns about hedge funds and their role in the financial market. The Deutsche Bundesbank has proposed that hedge funds should get voluntary rankings by ratings agencies. How do you assess this proposal and do you support it?

Trichet: As regards our deliberations, we did exactly as we always do. There was absolutely no change. A presentation was made by José Manuel González-Páramo on the one hand, as Gertrude Tumpel-Gugerell used to do, on the financial markets. We had a presentation by Jürgen Stark on the economic and monetary side of the coin. And in line with the majority view of the Executive Board, there was a proposal made by Jürgen Stark, as always. So there was absolutely no change as regards the functioning of the Governing Council. As you know, all our decisions are collegial decisions. There are no individual decisions in our decision-making process and our credibility is the credibility of an institution – and it cannot be anything but the credibility of an institution, because we must be credible on a 10, 20, 30 and 50-year basis. There are bond issues on a 50-year basis! The institution is there, and the women and men in the institution are replaced. Nobody stays here forever. We were on this occasion paying homage to Otmar, and it was also a good occasion to welcome Jürgen.

As regards the letter, it was a personal, individual letter, which Jean-Claude Juncker did not, to my knowledge, discuss with the members of the Eurogroup. I did not discuss that with the Governing Council. I told you what my own views are. It was an exchange of personal views.

As regards monetary inflation, we will – and it was said by Otmar – publish the results of this exercise. I draw your attention to the fact that it is a work in progress and not underwritten by the Executive Board. It is very interesting and stimulating work, which is being done at staff level, and we consider that this is good to work on, but we clearly have more work to do in this particular domain.

As regards hedge funds, the Vice-President, as you know, presented the sentiments of the ECB, of the Governing Council, in the last issue of our own Financial Stability Review, which was very comprehensive, and for the first time included a box on hedge funds, a section on hedge funds, which was considered by the global media to be an important one. Perhaps you could say a word on that, Lucas.

Vice-President: In the Financial Stability Review, we focused on risks associated with the operations of hedge funds. Hedge funds are, by definition, institutions that are in the business of taking and diversifying risk. And they have played an important role in the diversification of risks and in contributing to the efficiency of the financial system. One important issue is how the counterparties of the hedge funds, i.e. banks and businesses, can assess risks that are associated with the products that are being offered, as well as with the hedge funds as institutions. And to this end, we emphasised various issues. Of course, one important issue is that the risk management systems are further improved, and they have improved a lot in recent years. But we also emphasised the importance of enhanced information and disclosure. So, in this context, the proposal, because you asked specifically about the proposal made by the Bundesbank, is a proposal which merits consideration and further study.

Question: My question goes to Mr Caruana. Yesterday, quite late, we heard about your departure to the IMF. I would like to hear your thoughts on this. When did you hear the news?

Caruana: I have not much to say about this, really. I would just like to say that I have spent my years here working on monetary policy, central banking and financial stability issues, and I now look forward to working in these areas from a different perspective in the IMF, which is a great institution, in a few months’ time. But today, and for a bit more than one month, I will continue to be here and will continue to do my work as Governor and as a member of the Governing Council of the ECB.

Trichet: Can I seize this opportunity to say that Jaime has had the confidence of the whole of the international community in chairing the Basel Committee, which is one of the most important positions you can have in the constituency of surveillance authorities and central banks. As Chairman of the G10, I conveyed to Jaime the incredible debt of gratitude that we have to him. I said that we were expecting him to continue to play a major role in the international financial community. Jaime, we are extraordinarily happy that you will indeed continue very soon to play that role.

Question: Thank you very much. I have additional questions. First, as far as the Chief Economist is concerned, does this figure, which does not appear in any of your statutes, still exist, even de facto, or did you abolish this function? My second question is about what you said about the time-lag with which your decisions have an impact on the economy. Given the fact that you just said that for 2007 you foresee a slightly lower growth rate, that the euro is increasing still and is foreseen to increase further, and that the United States is showing first signs of slowing down, was there anybody in the Governing Council who raised the concern that the ECB might be over-tightening?

Trichet: I will respond to the second question first. As I said, we all considered that a further withdrawal of monetary accommodation was clearly appropriate. For 2007 our main understanding of why the growth rate is projected to be slightly lower is associated with the oil price impact. It does not hamper the trend that we have over the medium run of growth around potential.

As regards the Chief Economist, it is not a position that we ever decided upon. Such qualification was given by the external world to Otmar as a very appropriate denomination, but we did not take such a decision. I very much insist that we are a college and all decisions are collegial. There is no dominant influence. If there were to be, it would be the influence of the President. But there is no dominant influence precisely because we rely upon collegial wisdom and that is absolutely essential in monetary policy. All central banks that are independent rely entirely on collegial wisdom and that is absolutely crucial. Furthermore, I am particularly attached to team spirit within the Executive Board, which is a collegial body. The Vice-President and I have a special responsibility for that team spirit to be as good and deep as possible. I was able to mention the team spirit of the Eurosystem and of the Governing Council yesterday in front of all our colleagues. We are a team: the 13 – and very soon 14 – institutions that make up the Eurosystem are a team. I must confess that I am impressed and very heartened by the team spirit that we have been demonstrating very well for a number of years now.

Thank you, Jaime, for the organisation of today’s Governing Council meeting and all the best in your future position.