Introductory statement with Q&A

Jean-Claude Trichet, President of the ECB,Lucas Papademos, Vice President of the ECBFrankfurt am Main, 15 January 2009

Jump to the transcript of the questions and answers

Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our first press conference of 2009. Let me therefore wish you all a very Happy New Year. I would also like to take this opportunity to welcome Slovakia as the 16th country to adopt the euro as its currency. Accordingly, Mr Šramko, the Governor of Národná banka Slovenska, became a member of the Governing Council on 1 January 2009. Following the adoption of the euro by Slovakia there are now 329 million citizens using the euro as their currency.

We will now report on the outcome of today’s meeting of the Governing Council, which was also attended by Commissioner Almunia.

On the basis of its regular economic and monetary analyses, the Governing Council decided to reduce the interest rate on the main refinancing operations of the Eurosystem by a further 50 basis points, bringing the total reduction since 8 October 2008 to 225 basis points. Today’s decision takes into account that inflationary pressures have continued to diminish, owing in particular to the further weakening in the economic outlook. Looking forward, we continue to expect inflation rates in the euro area to be in line with price stability over the policy-relevant medium-term horizon, thereby supporting the purchasing power of incomes and savings. After today’s decision we consider risks to price stability over the medium term to be broadly balanced. This takes into account the latest economic data releases and survey information, which add clear further evidence to the assessment that the euro area is experiencing a significant slowdown, largely related to the effects of the intensification and broadening of the financial turmoil. Both global demand and euro area demand are likely to be dampened for a protracted period. Monetary expansion is moderating further, supporting the assessment that inflationary pressures and risks are diminishing. All in all, the level of uncertainty remains exceptionally high. The Governing Council will continue to keep inflation expectations firmly anchored in line with its medium-term objective of inflation rates below, but close to, 2%. This supports sustainable growth and employment and contributes to financial stability. Accordingly, 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. Since September 2008 the financial market turmoil has intensified and broadened. Tensions have increasingly spilled over from the financial sector into the real economy. As a result, economic activity throughout the world, including in the euro area, has weakened further. In particular, foreign demand for euro area exports has declined, and euro area domestic activity has contracted in the face of weaker demand prospects and tighter financing conditions. The survey data and monthly indicators for November and December that have become available since our last meeting clearly point to a further weakening of economic activity around the turn of the year, indicating the materialisation of previously identified downside risks to activity.

Looking further ahead, on the basis of our current analysis and assessment, we continue to see global economic weakness and very sluggish domestic demand persisting in the coming quarters as the impact of the financial tensions on activity continues. At the same time, we expect the fall in commodity prices to support real disposable income in the period ahead. Furthermore, the euro area should over time reap the full benefit from the effects of policy measures announced over recent weeks

In the view of the Governing Council, this outlook for the economy remains surrounded by an exceptionally high degree of uncertainty. Overall, risks to economic growth remain clearly on the downside. They relate mainly to the potential for a stronger impact on the real economy of the turmoil in financial markets, as well as to concerns about the emergence and intensification of protectionist pressures and to possible adverse developments in the world economy stemming from a disorderly correction of global imbalances.

It is crucial that all parties concerned make their contribution to lay sound foundations for a sustainable recovery. For this to materialise as early as possible, it is of the utmost importance to maintain discipline and a medium-term perspective in macroeconomic policy-making, pursuing a stability-oriented and sustainable approach. This is the best way to preserve and enhance confidence. The significant measures being implemented by governments to deal with the financial turmoil should help to ensure trust in the financial system and to ease constraints on credit supply to companies and households.

With regard to price developments, annual HICP inflation has declined substantially since the middle of 2008, when it peaked at 4.0%. HICP inflation was 1.6% in December, after 2.1% in November. As we have emphasised on previous occasions, the significant decline in headline inflation in the second half of 2008 reflects mainly the sharp falls in global commodity prices over the past few months.

Looking forward, lower commodity prices and weakening demand confirm that inflationary pressures in the euro area are diminishing. Owing mainly to base effects stemming from the past behaviour of energy prices, headline annual inflation rates are projected to decline further in the coming months, possibly reaching very low levels at mid-year. However, also owing to base effects stemming from past energy price developments, inflation rates are expected to increase again in the second half of the year. Hence it is likely that HICP inflation rates will fluctuate sharply during 2009. Such short-term volatility is, however, not relevant from a monetary policy perspective. Looking over the policy-relevant, medium-term horizon, annual HICP inflation is expected to be in line with price stability. This assessment is supported by available indicators of inflation expectations for the medium term.

Risks to price stability over the medium term are broadly balanced. Unexpected further declines in commodity prices or a stronger than expected slowdown in the economy could put downward pressure on inflation, while upside risks to price stability could materialise particularly if the recent fall in commodity prices were to reverse or if domestic price pressures turn out to be stronger than assumed. It is therefore crucial that price and wage-setters fully live up to their responsibilities.

Turning to the monetary analysis, the latest evidence confirms a moderating rate of monetary expansion in the euro area. Monetary trends therefore support the view that inflationary pressures and risks are diminishing.

In analysing monetary developments it should be recognised that the intensification of the financial market turmoil since mid-September has the potential to affect the evolution of monetary aggregates significantly. Recent money and credit data indicate that this has already had a substantial impact on the behaviour of market participants. Both the broad aggregate M3 and, in particular, the components of M3 that are most closely related to the ongoing financial tensions – such as holdings of money market funds – have shown high month-to-month volatility of late. Overall, however, looking to the extent possible through this volatility, the rate of broad money growth continues to moderate in line with the trend established over the past 18 months, with the intensification of financial tensions since September leading to significant substitution among the components of M3, rather than, at least so far, sharp changes in the trend of M3 itself.

Turning to the evolution of bank loans, the tightening of financing conditions resulting from the intensification of the financial tensions has contributed to a slowdown in the flow of monetary financial institution (MFI) loans to the non-financial private sector in recent months. More data and further analysis are necessary to form a robust judgement about the severity and scope of credit constraints and their possible implications for economic activity.

To sum up, we decided to reduce the interest rate on the main refinancing operations of the Eurosystem by a further 50 basis points, bringing the total reduction since 8 October 2008 to 225 basis points. Today’s decision takes into account that inflationary pressures have continued to diminish, owing in particular to the further weakening in the economic outlook. The Governing Council recalls its operational decision, taken on 18 December 2008, to widen again the corridor formed by the rates on the Eurosystem’s standing facilities as of 21 January 2009. Looking forward, we continue to expect inflation rates in the euro area to be in line with price stability over the policy-relevant medium-term horizon, thereby supporting the purchasing power of incomes and savings. After today’s decision we consider risks to price stability over the medium-term to be broadly balanced. This takes into account the latest economic data releases and survey information, which add clear further evidence to the assessment that the euro area is experiencing a significant slowdown, largely related to the effects of the intensification and broadening of the financial turmoil. Both global demand and euro area demand are likely to be dampened for a protracted period. A cross-check of the outcome of the economic analysis with that of the monetary analysis confirms this view. Monetary expansion is moderating further, supporting the assessment that inflationary pressures and risks are diminishing. All in all, the level of uncertainty remains exceptionally high. The Governing Council will continue to keep inflation expectations firmly anchored in line with its medium-term objective of inflation rates below, but close to, 2%. This supports sustainable growth and employment and contributes to financial stability. Accordingly, we will continue to monitor very closely all developments over the period ahead.

Regarding fiscal policies, the Governing Council welcomes the European Council’s reconfirmation of its full commitment to sustainable public finances. In this respect, the current economic situation calls for particular prudence with regard to the adoption of extensive fiscal stimulus measures, taking into account the particular fiscal situation in each country. The operation of automatic stabilisers will provide a relatively large and powerful fiscal impulse to the weakening economy, in addition to already announced expansionary fiscal policy measures and the government support for the banking sector. Taken together, the additional measures decided so far put a considerable burden on public finances in a large number of euro area countries. If not reversed in due time, this will negatively affect in particular the younger and future generations. It is therefore essential to return to a credible commitment to medium-term budgetary objectives as soon as possible. The significant fiscal loosening and the implied increase in government debt should in any case not risk undermining public confidence in the sustainability of public finances, thereby detracting from the effectiveness of a fiscal stimulus.

Turning to structural policies, the ongoing period of weak economic activity and high uncertainty about the economic outlook imply the need to strengthen the resilience and flexibility of the euro area economy. Product market reforms should foster competition and speed up effective restructuring. Labour market reforms should help to facilitate appropriate wage-setting, as well as labour mobility across sectors and regions. The current situation should therefore be seen as a catalyst to foster the implementation of necessary domestic reforms in line with the principle of an open market economy with free competition.

We are now at your disposal for questions.

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Question: Could you give us a flavour of the debate in the Governing Council today? Most analysts would have expected a quite lively debate, because you have not really given any indication as to which way you were going to go this time, and you had effectively hinted that you might even pause. What was the assessment of how the previous three interest rate cuts have worked their way through the economy? How many and what other options were discussed? Is there still a feeling within the Governing council that there is a limit to how low rates can actually go? If you were to continue with this pace of rate cuts, do you think you might go in smaller steps or do you think that you are going to maintain the current size of rate cuts?

Trichet: First, it is important to note that we were unanimous in deciding today to diminish rates by 50 basis points. Why? As I have already said, we were taking into account a significant further alleviation of inflationary risks, owing in particular, but not exclusively, to the slowdown of the global and European economies. Unfortunately, this slowdown has been documented and substantiated since the last meeting of the Governing Council. We were anticipating a further significant slowdown compared with our previous Eurosystem staff projections. So our decision comprises both our observation of what has already happened based on the new information which has become available since our last decision-making meeting and the sentiment of the Governing Council that we have to anticipate further slowdown and therefore the further alleviation of the inflationary risk. With regard to the previous interest rate cuts, you remember that I said that we would look very carefully at the transmission of the previous decisions, in particular, the decrease by 75 basis points of our main policy rate at our last meeting. I have to say that we have observed that the short-term market rates have transmitted quite significantly our previous decision, particularly when you look at the three-month EURIBOR rate, which has shown a substantial diminishing. Although this occurred gradually, week by week and day by day, we were nevertheless able to observe that it was taking place. That does not mean to say, of course, that we do not still have abnormal spreads in the financial markets. However, taking into account the short-term rates that we are directly influencing, we can observe a clear diminishing in line with the decision that we took in December. As I have already said it is not the intention of the Governing Council to find itself in a liquidity trap. I will not give you and nor do you expect me to give you a figure, but it is our intention not to find ourselves in a position that would constitute a liquidity trap.

Question: Given that we have economic growth that no longer constitutes growth, but rather a contraction, can our interest rate, at 2 %, be considered restrictive?

Trichet: In our opinion, this decrease of 50 basis points not only takes into account hard data to date, but also takes into account a continued slowdown of the economy and further alleviation of inflationary expectations. Based on this, we believe that medium-term inflation is broadly balanced and in line with our definition of price stability. Let me add that we consider that our next important meeting for monetary policy will be the Governing Council meeting in March, when we will have substantial new information at our disposal and our new projections. Given that our decision-making meeting in February is only three weeks away, we do not deem it an important meeting for policy-making. The next important meeting will be in March. Again, we believe that we have largely anticipated today what is likely to be observed. In our view it was necessary to take into account this further slowdown. That said, you know our motto: “we are never pre-committed!”

Question:Two questions. First, you have trained us very carefully over the past few years to understand inflation as the needle in your compass. In this respect, should we understand this in a symmetrical fashion? I believe you know what I am asking when I ask if the Governing Council’s reaction on interest rates vis-à-vis inflation is going to be the same as inflation slips below the policy-relevant threshold as it was above.

Second, since events are moving very quickly in terms of assessing what kind of new regulatory framework will be necessary for the banking system, with the G20 meeting in London in April and so forth, what is the Governing Council’s stand regarding the need for a more global approach to regulation, possibly including a college of supervisors or something more, as well as the possibility of a European banking supervisor, perhaps even based right next door to the ECB?

Trichet: Our definition of price stability is below, but close to 2%. But I add immediately in the medium term, in the policy relevant horizon. In the past, we have observed humps in headline inflation that were particularly spectacular. Of course, headline inflation depends enormously on oil and commodity prices. On the basis of the present future market indications, there will be an exceptionally low level of headline inflation this year, particularly at mid-year. I do not want to give a figure at this stage, but I think that it will be very low and that it will pick up afterwards, because this is the arithmetic influence of base effects, of the previous picking-up and slowing-down of oil and commodity prices. Therefore, let’s not focus on this short-term volatility: the needle in our compass is medium-term inflation, in line with our definition of price stability. We believe that today’s decision is the right decision to ensure that we deliver inflation in the medium term in line with our definition of price stability, which is not simply 2%, but “below, but close to 2%”, meaning that “close to 2%” is part of our definition of price stability. In terms of anchoring inflation expectations, which is very important from both perspectives, it is important to avoid expectations of very high inflation – which we have done as responsibly as possible – and it is also important that inflation be anchored close to 2% – as it has been since the start of the euro – in order to avoid the reverse counterproductive effects.

In answer to your second question, we are actively participating, through all kinds of channels, in the present discussion at the global level on the many lessons to be drawn from what we are experiencing now. Market economies need to be much more resilient and the current situation calls for bold decisions in many domains. We will continue to be as active as possible in the various international groupings, both informal and formal. As regards a global approach to banking regulation, we are certainly in favour of as close as possible cooperation between banking surveillance authorities at the global level. This is a process that is ongoing and the concept of a college of supervisors would play a crucial part in this close cooperation. As regards the European framework, I will only say at this stage that the Governing Council has not taken a definitive position on this and that it is something that it will continue to discuss. I can mention that Article 105(6) of the Treaty itself explicitly mentions the possibility for executive branches to decide to confer upon the ECB additional responsibilities in the domain of banking surveillance – not insurance surveillance, but banking surveillance. This is something that is being examined by the European Parliament, as you will have gathered from its last plenary session in Brussels. I know that the de Larosière Commission might also examine the issue. I will not say anything else at this stage. These are suggestions and the Governing Council has no position as yet.

Question: So, in the Governing Council’s view, have the risks of deflation increased appreciably in the eurozone since your last meeting?

Trichet: No. The Governing Council has observed that there was a further alleviation of the inflationary risk.

Question: Mr. Trichet, I have two questions. In December, you emphasised that the ECB had decreased the rate by 175 basis points in less than two months. It was interpreted among some market participants as your reluctance to have another cut in January, but today the ECB has decided to have another cut. Did you change your views slightly compared to your thoughts in December or is it because the decline of the euro area economy has been bigger and faster than you previously expected?

And secondly, I would like to ask about your reaction to the move by the Fed and the Bank of Japan. The Fed cut the rate to almost zero in December and the BoJ also cut the rate to 0.1. Do you see any possibility – the slightest possibility – that the ECB might need to follow suit in the future?

Trichet: I placed great emphasis in December, on behalf of the Governing Council, on the fact that we had decided to decrease rates by 175 basis points in a very short time and you will have noted today that I said that in the space of three months we had decreased rates by 225 basis points. I said last time that we would look very carefully at the transmission of this decision in the real economy. I have explained that today’s decision was made taking into account developments since our last decision-making meeting and also anticipated what we expect to be the confirmation of a very significant alleviation of inflationary risks associated with a very significant slowing down of the economy. So, these are our reasons; we are anticipating what we expect to be confirmed, namely a significant further slowing down of the economy. I have already said that the next important meeting is in March and not in February.

As regards the decisions that are taken by the Fed and the BoJ, they are of course their own decisions and their own responsibility. As far as we are concerned, taking into account our own economic and financial environment, we are very keen to avoid ending up in a situation that, for us, would not be appropriate, namely a liquidity trap.

Question: I had just an additional question to the supervision topic. You said you had not taken any position yet. Are you already developing your position and when will you communicate it? I think that Mr De Larosière has to present his report at the end of February. So you should be almost ready.

Trichet: Well, when we are ready, we will say so. The De Larosière Commission is under quite tight time constraints; that is absolutely right. And it is not our intention to waste time. We will discuss the matter as expeditiously and professionally as possible. Again we are not speaking of something which is abstract and up in the air. There is an article in the Treaty – Article 105.6 – that says explicitly that, following agreement by the various executive branches, we could be given further responsibility.

Question: Three questions, if I may. Firstly, can I ask you about the overnight interest rates, which have fallen quite a bit below the main rate? Are you worried about that? Do you think that needs to be brought back under control, particularly if you are worried about falling into a liquidity trap? You mentioned, yourself, the widening of the corridor, which could have an effect.

Secondly, to give you another chance, you did not answer the question about whether there was any discussion or whether there were any voices that proposed a smaller or no change in the interest rates, or even a larger cut than the 50 basis points. Perhaps you could tell us.

And thirdly, you obviously noticed the downgrading of Greek debt yesterday. Is the eurozone at risk from a default from one of its governments?

Trichet: On the handling of the money market, you know that our main aim is to revive the money market, to help it to function as well as possible. It was what has inspired practically all of our decisions – including bold decisions – since the very beginning of the financial turmoil. When I look at the policy rate on the one hand and the three-month money market on the other hand, which is important for a large number of borrowers, I have already said that we were quite impressed by the fact that the transmission of our own decisions has taken place quite visibly. We will continue to monitor very short-term rates closely. I will not elaborate more on that. You remember that we recently decided to re-widen our corridor. The main aim of this re-widening of the corridor is to push the banks as much as possible into returning to their own intrabank transactions. This is something that we will follow very carefully by monitoring the volume of intrabank transactions.

On the second question, I said that we were unanimous in taking that decision. We considered that a reduction in rates was, in any event, necessary taking into account the alleviation of inflationary pressure. The question was rather whether we should do it now or a little later. We decided, unanimously, to do it now, as I have said, with the idea that we will have a new rendezvous in March. That said, as you know, and as we show at each of our meetings, we are never pre-committed.

On your last point, I would totally exclude any kind of hypothesis such as the one you suggest. We see market spreads. I am not too surprised to see that there are tensions in this particular segment of the market because we have tensions in all markets. This is part of the overall financial turbulence that we have to cope with. I would only add that what we observe gives us an additional good reason to say: let’s use all the room for manoeuvre that is offered in the Stability and Growth Pact – but only the room for manoeuvre that is in the Pact. And so the fact that the Governing Council of the ECB always calls on Member States to stick to the revised Pact is fully backed not only by the legal consideration that the Pact is the uniting framework on which the executive branches were unanimous, but also by financial consideration and by economic consideration and, particularly, the Ricardian effect that I mentioned on behalf of the Governing Council in this Introductory Statement, namely the fact that confidence in the sustainability – the long-term sustainability – of the fiscal position is very important for the economy – for the confidence of economic agents, whether households or corporate.

Question: The Fed has increased its balance sheet since September quite significantly – more than doubled it – by buying up securities, and it seems to be intent on keeping it that way and even growing the balance sheet even further, and one of the objectives is to improve the possibility of the US government to increase its debt. Now, the ECB also has increased its balance sheet quite a bit since September, but I am not sure about its intentions – do you want to keep the balance sheet as big, or even grow it further, or is the intention to shrink it again? It seems that next week’s move of widening the corridor is going in the direction of shrinking the balance sheet again, but could you clarify that?

Trichet: First of all, if I take the increase of our balance sheet, if all is taken into account, including the collateral which is the counterpart of the dollar liquidity supply that we are engaging in, I would say that our balance sheet has doubled in comparison with July 2007, that is, just before the turmoil. So it is something which is very substantial, as you have said yourself, and it is something which is associated with the fact that, since the beginning of the turbulence, we have had a very high level of openness as regards collateral eligibility. This was a major difference from some other central banks. It is also closely associated with the liquidity-providing that we do on an unlimited basis at fixed rates now for all maturities. It is certainly, in our view, necessary to permanently reflect on the exit strategy – and I trust that all central banks in the world are reflecting on exit strategies – but it is not our present vision that it is time to embark on an exit strategy, I would not say that at all. The time will come when we will observe that we are back to a much more normal situation. But this is not yet what we are observing today. So we will continue to be as pragmatic, effective and efficient as possible in this domain. I stress the pragmatism, because what we have done on several occasions was very bold, very pragmatic and entirely designed to fit the problems and difficulties that the euro area had. For the future, I would say that we will continue to act in exactly the same spirit.

Question: I have a couple of questions. I would like to return to this topic you have stressed today, which is that the Governing Council does in fact see a lower limit to interest rates – are we there? And maybe more importantly, why? I mean, haven’t other central banks across the world and even some policy-makers on the ECB’s Governing Council been quite eloquent about the options central banks have as rates approach zero?

Secondly, overnight deposits at the ECB’s window are high and had been rising in recent days, and ECB policy-makers before the holiday break mentioned that a euro zone clearing house for interbank lending was an idea worth considering – is it still?

And finally, you just mentioned the easing in three-month EURIBOR rates as evidence of a functioning monetary policy transmission mechanism; all else being equal, would that make the Governing Council more or less likely to consider lowering the rate?

Trichet: We are, after today’s decision, at 2%. We did not say that it is the limit and that we will not move anymore. We did not say that. We said – and it seems to me that it is a very important observation – that we are anticipating bad news from the real economy and a further alleviation of inflationary risks. If you look at the past, 2% is the lowest level of interest rates we have ever decided since the setting-up of the euro. It is something like the lowest level ever decided or even lower than the lowest level ever decided by the founding fathers’ institutions, that is, the central banks of Europe that created the euro and the ECB. So it is, in historical terms, a very low level. But again, I don’t say that it is the lowest point that is in the view of the Governing Council the appropriate one. I said that we will have a new meeting in March, and we will see in March what we will do. We have a needle in our compass which is very important because, as I have said on many occasions, it is the only one: less than 2%, close to 2% in the medium term. We will certainly look when we meet in March to see whether the needle in the compass continues to be in the appropriate position. We will take into account all elements, the inflationary risks, the expectations. I have to say that, so far, I am happy that we have a definition of price stability which is precise, which is an arithmetic definition, because it helps to anchor inflationary expectations, avoiding both that they go up and that they go down. When I compare our inflationary expectations with those observed in a number of other economies, I see that we are helped by our solid, clear definition of price stability. I would not make any close link between what we have observed in the three-month money market EURIBOR and the decision we took. It is true that we said that we would look very carefully at that, and the fact is that the three-month money market has correctly transferred the decrease in rates that we decided on in our last decision-making meeting. But the reasons why we decreased rates today are entirely those I have already mentioned.

Question: What about the possibility of a clearing house?

Trichet: At this stage we have no particular sentiment, we are open to anything, but at this stage we have absolutely no decision as regards an orientation. We will see exactly what the best solution would be. Until now our orientation has been - with all that we are doing with our abundant supply of liquidity and with all the efforts that are made by governments to help banks, all actions which are very important to help the financial sphere - that we should normally see the spontaneous progressive revival of the money market. But we are pragmatic.

Question: A quick question about the economy: you said earlier that you think that the staff projections given last month are now too optimistic. Could you give us a more realistic number? I think last time they said it could shrink as much as 1% this year. Do you think maybe 2% is possible, as many analysts think?

And can you just be absolutely clear for us: you mentioned that some people today in the meeting discussed maybe waiting a bit before cutting rates. So did some people argue to keep rates on hold?

And finally a fairly simple question, you said that there is a lot of uncertainty surrounding it, but at the present moment how long do you think the recession in Europe will last, and can you give us a rough time frame of when you think the bottom of the cycle will be?

Trichet: First of all as regards the decision, we were unanimous to decide to decrease rates by 50 basis points.

As regards the projections, I would say that the sentiment of the Governing Council is that we will have a level of growth which will be significantly lower than our last staff projections. The next meeting with the new staff projections will be, as I already said, in March. We did not discuss a precise figure but we expect that whatever will come from the various institutions before the March meeting will confirm what we trust, namely that global growth and European growth would be lower than has been previously projected. That was the answer to two of your questions. You had a third one?

Question: Whether or not it was discussed that you’d delay the rate cut today?

Trichet: I said that there was unanimity to decrease the rates by 50 basis points today.

Question: Back to liquidity management. When you first announced that you would widen the corridor of your standing facility again, the ECB failed to repeat previous comments saying that it would steer liquidity to keep short-term market rates close to the main refinancing rate. Does that mean that you have abandoned attempts to steer liquidity towards the main refinancing rate?

Trichet: Certainly not, that being said short-term rates do not mean only EONIA. As you might have seen, we have a view of looking at what happens in this shorter part of the very short yield curve. Everybody can see what we have been doing – it’s very open and we have a policy rate which is obvious and clear. We are presently refinancing at that fixed rate on a one-week, one-month, three-month, six-month basis. So the policy rate is crystal clear and what we are doing is that we are trying to help revive the money market spontaneously. And this calls for appropriate handling. I mean it’s a matter of doing exactly what we trust would be the best to help revive that market, but our policy rates are crystal clear.

Question: A few questions: First, some analysts say that the ECB is behind the curve and your presentation sounds like February is wait and see and any decision will come in March. How do you respond to this “behind the curve” theory among the economists?

The second question is, in December you mentioned that the so-called quantitative easing, including the outright purchases of the assets from the banks, is a possibility. In today’s discussion did you discuss anything about embarking on this approach?

And the third and final question relates to the tenth anniversary of the euro currency. Congratulations on this! I would like to ask what have been the achievements in the remaining subjects. As other colleagues pointed out, there is a so-called north-south gap problem. We haven’t seen the UK or the Nordics joining the common currency, so how do you summarise the achievements and the remaining subjects, for example the coming ten years?

Trichet: Your question is a very wide one, which would call for a long exposition. But let’s start with the first question. We do what we have to do at any time; we consider that it is our duty and our responsibility to be, if I may say so, neither behind the curve nor ahead of the curve, but to do at any given time exactly what we judge appropriate. If I look at the anchoring of inflation expectations that we obtain ourselves and compare them with what is observed in comparable economies, I think that we are doing our job pretty correctly. So we follow the approach that each time we meet we try to do exactly what is appropriate to allow us to deliver price stability in line with our definition of below 2% but close to 2% at any time in the medium term.

As regards the quantitative aspect I already said that we had a balance sheet that had doubled since the start of the turbulences in August 2007. It is something which, in terms of risk-taking by this institution, is extremely significant, extremely substantial. It is our function of risk-taker in an environment where we are under a considerable new set of constraints in the economy and in the finance associated with the financial turbulences which started in 2007 and increased considerably in mid-September last year. I always said that we are very pragmatic. We proved that we were pragmatic – nobody could have expected that our balance sheet would double since July 2007 – and I exclude nothing ex ante. We look at what we could do or should do, taking everything into account.

As for the tenth anniversary: we started with 11 countries in an environment which was quite sceptical as regards our capacity to run a new currency from scratch, to run a new institution from scratch, the Eurosystem, the ECB, to have an appropriate decision-making process with the combination of the Executive Board and the Governing Council. And now, ten years later I can tell you that we have a single currency which is credible; I can say that in Berlin as well as in other capitals. We promised you that you would have a currency that would be credible and inspire confidence. And nobody is challenging that. So, this is something that I humbly present you as a success. Again we started with 11 countries and we are now 16 countries. Who would have expected that ten years after the creation of the euro we would be 16? And now we have a lot of challenges. I say that of course this might be time for a celebration and congratulations. But I also said in the plenary session of the European Parliament last Tuesday that it is no time for complacency – it’s never time for complacency - but particularly not in the present universe of constraints and threats that we have. So we will continue to be up to the challenges. And we have not only all the challenges of the Federal Reserve, or the Bank of England, or the Bank of Japan and also other sister institutions, but we have also the challenges that we have ourselves, namely that we are transforming our own economy structurally by our own making, by the very existence of the single currency, and that is not simplifying our own decision-making process, because we cannot rely on an extrapolation of past observations for the future. We have to make up our mind on what the future will really be, taking into account the important structural transformation of the European economy. And we have enlargement, which is a historical endeavour that calls for a very high level of professionalism to be sure that everything goes correctly. This is the reason why complacency is certainly not the appropriate mindset in the present circumstances.

Question: When we saw you on Monday, after the Global Economy Meeting, you were actually quite upbeat about the global economy in 2010. You said on a number of occasions that you expected a significant pick-up in global economic activity. And yet here you are quite gloomy about the economic outlook for this year in the euro area. So, did your upbeat outlook for the global economy include or not the euro area economy for 2010?

Trichet: No, I see the global economy and the European economy very much in sync. So I would confirm that, in comparison with 2009, we certainly see quite a slowdown vis-à-vis our previous projections. I would also say, as I said with regard to the global economy at the press briefing following the Global Economy Meeting in Basel, that I see 2010 as the year of recovery and pick-up. I make no distinction on the profile of growth between the global economy and our own economy, which is itself, of course, a significant part of the global economy. We will have a considerable slowdown in 2009 and a pick-up in 2010.

Question: And is that why you are frontloading the rate cuts at the moment to just basically…

Trichet: I have already said what I had to say.

Question: Just one question regarding exit strategy, because I believe you use that metaphor in the context of providing term liquidity in the balance sheet. One can equally ask that question with regard to having arrived at the historical level of 2%. I realise that you have a medium-term orientation, but one of the main lessons of the crisis is, of course, that the cheap credit for a long time bears some responsibility for where we find ourselves now. So, as you arrive at 2%, is this a moment where we should reflect on the fact that there will come a time for an exit strategy from 2% and that it will be perhaps more expeditious than last time?

Trichet: I said that the next important meeting would, in my opinion, be in March, even if we are not pre-committed – I insist on that because it is our own fundamental framework – but we will see what we have to do: it will depend entirely on the needle in our compass: delivering price stability in the medium term, in line with our definition: “below 2 %, but close to 2%”. I am not saying that 2% was considered ex-ante by the Governing Council as a low level which could not be displaced. If this were the case, I would tell you that we are at 2% and now we consider that we will stay at 2% and will wait for the possible future increase. This is not what I say. At the same time I told you that we will not fall into what we consider to be a possible liquidity trap, which is something that we would deem dangerous for our own economy, taking into account our own circumstances, and that we also have other means, other ways, if necessary, of embarking on “non-standard action”.

Question: What is your exact definition of a liquidity trap? Is it in the Keynesian sense or how do you define it?

Trichet: It is Keynesian if you wish, but the problem is that experience has demonstrated that once you were there it was very difficult to get out.

Question: You mean zero?

Trichet: A very low interest rate.