Introductory statement with Q&A

Jean-Claude Trichet, President of the ECB,Lucas Papademos, Vice-President of the ECBBrussels, 4 December 2008

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 press conference here in Brussels. I would like to thank Governor Quaden for his kind hospitality and to express our special gratitude to his staff for the excellent organisation of the meeting of the Governing Council.

We will now report on the outcome of today’s meeting, which was also attended by Mrs Lagarde, President of the ECOFIN Council, and Commissioner Almunia.

On the basis of its regular economic and monetary analyses, the Governing Council decided to reduce the key ECB interest rates by a further 75 basis points. This step follows the two 50-basis point reductions in the key ECB interest rates announced on 8 October and 6 November 2008. Overall, since our last meeting, the evidence that inflationary pressures are diminishing further has increased and, looking forward, inflation rates are expected to be in line with price stability over the policy-relevant horizon, supporting the purchasing power of incomes and savings. The decline in inflation rates is due mainly to the fall in commodity prices and the significant slowdown in economic activity. 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 of time. At the same time, while the underlying pace of monetary expansion has remained strong, it has continued to decelerate further. 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. In so doing, it 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, there has been an intensification and broadening of the financial market turmoil. Tensions have increasingly spilled over from the financial sector to the real economy, and the world economy as a whole is feeling their adverse effects. In the euro area, a number of the downside risks to economic activity that were identified previously have materialised, leading in the third quarter to a contraction of 0.2% in real GDP growth, on a quarterly basis, according to Eurostat’s first estimate. Available survey data and the monthly indicators for October and November suggest that economic activity has weakened further during the fourth quarter of 2008.

Looking further ahead, on the basis of our current analysis and assessment, we see global economic weakness and very sluggish domestic demand persisting in the next few quarters. According to the December 2008 Eurosystem staff macroeconomic projections for the euro area, a subsequent recovery should then gradually take place, supported by the fall in commodity prices and assuming that the external environment improves and the financial tensions weaken. Eurosystem staff project annual real GDP growth of between 0.8% and 1.2% for 2008, between -1.0% and 0.0% for 2009, and between 0.5% and 1.5% for 2010. These figures represent substantial downward revisions relative to the previous ECB staff projections for 2008 and 2009 published in September. Forecasts by international organisations have also been revised downwards and are broadly in line with the December 2008 Eurosystem staff projections.

In the view of the Governing Council, the economic outlook remains surrounded by an exceptionally high degree of uncertainty. Risks to economic growth lie on the downside. They relate mainly to the potential for a more significant impact on the real economy of the turmoil in financial markets, as well as concerns about protectionist pressures and possible disorderly developments owing to 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. This is the best way to support confidence. The significant measures announced by governments to deal with the financial turmoil should be implemented swiftly so as to help ensure trust in the financial system and to prevent constraints on credit supply to companies and households.

With regard to price developments, annual HICP inflation has declined substantially since July. According to Eurostat’s flash estimate, HICP inflation was 2.1% in November, after 3.2% in October and 4.0% in July. The significant decline in headline inflation since the summer mainly reflects the considerable easing in global commodity prices over the past few months, which more than offsets the impact of the sharp rise in unit labour costs in the first half of this year.

Looking forward, lower commodity prices and weakening demand lead us to conclude that inflationary pressures are diminishing further. The annual HICP inflation rate is expected to continue to decline in the coming months and to be in line with price stability over the policy-relevant horizon. Depending primarily on future developments in oil and other commodity prices, a faster decline in HICP inflation cannot be excluded around the middle of next year, mainly due to base effects. However, also due to base effects, inflation rates could increase again in the second half of the year, so that any sharp fall in HICP inflation should be short-lived and is therefore not relevant from a monetary policy perspective.

Consistent with this assessment, the December 2008 Eurosystem staff projections foresee annual HICP inflation of between 3.2% and 3.4% for 2008 and declining to between 1.1% and 1.7% for 2009. For 2010, HICP inflation is projected to lie between 1.5% and 2.1%. The HICP inflation projections for 2008 and 2009 have been revised downwards substantially in relation to the September 2008 ECB staff projections, reflecting mainly the large declines in commodity prices and the impact of weakening demand on price developments. In this context, let me remind you of the conditional nature of these projections, which are based on a series of technical assumptions, including market expectations for short and long-term interest rates, as well as futures prices for oil and non-energy commodities. In addition, the projections are based on the expectation of a decline in wage pressure over the projection horizon. Forecasts from international organisations give a broadly similar picture.

Looking through the shorter-term volatility in headline HICP inflation rates, risks to price stability at the policy-relevant horizon are more balanced than in the past. Unexpected further declines in commodity prices 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, various estimates of underlying broad money growth point to a sustained but moderating rate of monetary expansion in the euro area. Monetary trends therefore support the view that inflationary pressures are diminishing further, with some risks remaining on the upside in the medium to longer term.

It should be recognised that the intensification of the financial market turmoil since mid-September marks a potential watershed in the evolution of monetary developments. The most recent money and credit data indicate that this intensification has had a significant impact on the behaviour of market participants. Thus far, such developments have largely taken the form of substitution among components of the broad aggregate M3, rather than sharp changes in the evolution of M3 itself.

The latest available data, namely up to the end of October, reveal a continued moderation of the growth rate of loans to the non-financial private sector. At the same time, for the euro area as a whole, there were no significant indications of a drying up in the availability of loans. The annual growth rate of loans to households also moderated further, in line with the weakening of economic and housing market prospects and tighter financing conditions. The data do signal an impact of the intensification of the financial turmoil on bank behaviour. Looking forward, more data and further analysis are necessary to form a robust judgement.

To sum up, there is increased evidence that inflationary pressures are diminishing further and inflation rates are expected to be in line with price stability over the policy-relevant horizon, supporting the purchasing power of incomes and savings. The decline in inflation rates is due mainly to the fall in commodity prices and the significant slowdown in economic activity largely related to the global effects of the financial turmoil. A cross-check of the outcome of the economic analysis with that of the monetary analysis supports this view. While the underlying pace of monetary expansion has remained strong, it has continued to decelerate further. Hence, when considering all available information and analysis, the Governing Council decided to reduce the key ECB interest rates by a further 75 basis points. 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. In so doing, it 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 considers it crucial that discipline and a medium-term perspective are maintained, taking fully into account the consequences of any shorter-term action on fiscal sustainability. It is of the utmost importance that the public’s confidence in the soundness of fiscal policies is preserved, with the rules-based EU fiscal framework being fully applied and its integrity being fully preserved. The provisions of the Treaty of Nice and the Stability and Growth Pact require a medium-term perspective and allow for the necessary flexibility. Automatic fiscal stabilisers are relatively large in the euro area and provide a powerful source of fiscal support to a weakening economy. Where room for manoeuvre exists, additional budgetary measures could be effective if they are timely, targeted and temporary.

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: My question today is: could you give us a flavour of what led to your decision today? Why 75 basis points, why not 50 basis points? And is it reasonable to assume that there will be further rate cuts in the coming months?

And secondly, recent comments by policy-makers have suggested that a rate cut above 50 basis points might create a panic in the markets, so why have you changed your mind?

Trichet: On our second point, we did not change our mind, we took our decision today, there was no previous commitment. As always, we decide depending on the analysis that we are making on the basis of facts, data, all information available and the judgement, experience and collegial wisdom of the Governing Council. We are today 21 and we will be 22 as soon as next January.

On your first question, we had a consensus to decrease interest rates today by 0.75%. We considered it was appropriate, taking into account a further alleviation of the upside risks to price stability, as I have explained. Our analysis was that we had a substantial, a significant further alleviation of these risks, and that, in line with our framework, taking into account our two-pillar strategy and the cross-checking between our two analyses, it was appropriate to take that decision. For the future, I will only say that we are never pre-committed and we always do what is necessary to deliver price stability in line with our definition of price stability in the medium-term, less than 2%, but close to 2%. All observers, market participants, investors know that this is the way we are operating.

Question: I would like to know, do you see any risks that there will be a deflationary period in the euro zone in the coming months? And also, if you can elaborate about your confidence that the economy will recover, say, gradually in the second half of 2009. You mentioned weak commodity prices, are there other signs that the economy will recover? And lastly, can you tell us, is the ECB considering further direct intervention in financial markets to help boost confidence?

Trichet: On the first question, it is very important not to confuse the words and concepts themselves. Deflation is different from disinflation. Deflation is a concept which means that you are in the presence not only of a CPI that is going into a very low position, including negative. It also means that the inflation expectations themselves are exceptionally low, or even negative, and that you have, accordingly, prices that will remain very low or negative on a sustainable basis. And this entails a number of consequences for all other nominal evolutions in the economy concerned.

Disinflation is of a different nature, it means that you have headline inflation that is going down, including, perhaps, into the negative zone exceptionally, but that does not mean that the inflation expectations themselves are unanchored on the low side. They would remain anchored to what would be the appropriate definition of price stability in the medium term, and it means therefore that you have exceptional reasons for headline inflation to be, transitorily, very low.

We have experienced a period when oil and commodity prices went dramatically, sharply up to levels that were absolutely unexpected only a few months ago, or even weeks ago. And then, from this very high level, they went down, and the base effects I have been mentioning explain why at one time, we had extremely high headline CPI, and why afterwards, precisely because of those prices going down, you have a very significant decrease of headline inflation. But that phenomenon should not be associated with deflation as I defined it earlier. We have also to take into account that it was very bad news that the prices of oil and commodities were going up and up as they did. It was very bad news for inflation, it was very bad news for growth, because it had a depressing influence which was considerable. Now, when the same prices are going down, it is good for inflation because we are back to much more appropriate price levels for commodities and oil. And it also has an associated expansionary influence. Of course, that does not mean that you don’t have a number of other factors that are going in the other direction, particularly due to the financial turmoil and all the financial difficulties I have been mentioning. All that being said, you could see what are our projections, the Eurosystem staff projections, and you could see that, as regards inflation, we see inflation for next year as an average between 1.1% and 1.7 %, from 3.2% to 3.4 % this year, so the disinflationary process I was referring to is very clear and will extend into 2010, as I said a moment ago.

As regards the recovery, you see that for 2009, we have a range which is between -1% and 0 and clearly, we see negative growth, as projected by the Eurosystem staff for next year. Again, I have said that in comparison with the Eurosystem staff baseline scenario, the risks are on the downside for growth. And I have explained why we consider that the risks are on the downside. That being said, we will see exactly what will happen and we have reasons also to believe that progressively we will have the recovery that you were mentioning, but as an average for 2009, as you can see, the projections are negative, or between -1% and 0. That was for your second question.

As regards your third question on what we do ourselves: as you know, we’ve been very prompt in diagnosing, as early as 9 August 2007, very serious problems in the financial and money market. We have taken many decisions and we are permanently looking at what is their impact on the functioning of the money market. We will certainly have an occasion in 15 days to look again and wrap up all of what we are observing. The situation is tense, obviously, and we continue to see tensions, particularly as regards the spreads between the OIS and the three-month interbank market, that are substantial. We are observing that on both sides of the Atlantic, on both sides of the Channel, so it is a global phenomenon. Again, we will continue to look very carefully at everything and see when and where we have to take action.

Question: First, you said that there was consensus for a 75 basis point cut. Does that mean that the decision was unanimous today? And can you tell us whether any Governing Council members were calling for maybe 50 basis points or even more than 75 basis points?

Second, returning to Governor Quaden’s football analogy, some other central banks have been cutting rates fairly aggressively. For example, Sveriges Riksbank cut interest rates by 175 basis points this morning. So what is your response to people who say that the ECB football team is playing too defensively and that there is a risk of getting caught behind the curve?

Trichet: I confirm that we had a consensus for the decrease of 75 basis points and, second, as I have already told you on various occasions, each central bank does what is appropriate, taking into account all the elements that it has under its eyes. We trust that colleagues are doing what is appropriate, taking into account the shocks that they are experiencing, the structure of their economy, the flexibility of their economy and, of course, their own mandate and their own definition of price stability. Not so long ago, a number of our sister central banks had interest rates that were very significantly higher than ours. You could have said the same in reverse: that they were much too tough, or that we were too accommodating , but you know very well that it would have been a wrong analysis: we were doing what we had to do, taking into account the circumstances

Question: This is the biggest cut that the ECB has ever made. Would you exclude the possibility that you could cut interest rates again by the same amount, say in January, for instance? And the second question: the markets are pricing in the ECB’s interest rates at 1.5% for the middle of next year. Is this a reasonable expectation on the part of the markets, or not?

Trichet: As regards your first question, indeed, as you point out, 75 basis points is the biggest decrease in the interest rate ever made by the ECB, but I would add that, in the space of a little less than two months, we have decreased rates by 175 basis points. This is also something that we have never done before and that has not been done by a number of European national central banks since the Second World War, before the euro was set up. So, you are right to underline that we are clearly in circumstances where, in our eyes, there has been a very considerable decrease in the upside risks to price stability in a very short space of time, and that is why we have taken these decisions.

As regards your second question, I will not comment in any respect on what the market is predicting at a certain distance from now. We will do what is necessary to continue to deliver price stability, be credible in that delivery and to solidly anchor inflation expectations in line with our definition, namely below, but close to, 2% in the medium term. I will not comment in any respect on what we could do next time. Again, we will do what is necessary. At the moment of speaking, we consider that this decrease of 175 basis points in the space of two months, or less than two months, is exactly what is appropriate, taking into account all the available information.

Question: On commodity prices: do you consider the current drop in oil prices to be a lasting phenomenon and, if so, how long you believe it will last?

And on fiscal discipline: can you give us your assessments of the recent €200 billion package presented by the European Commission?

Trichet: On your first point, we are, as I always say, pragmatic. We take reality as it is, the situation as it is, and we have to be very careful when making projections. As you know, for the staff projections I have mentioned, the rules, i.e. the methodology that is applied, are very simple because we take the prices that are observed on the market at a certain moment and then we take into account the futures market. This is the methodology that is, to my knowledge, applied by all institutions. Of course, this does not mean that the futures market is a good predictor. So, we will see what happens, but it is very important that oil and commodity prices are at a much more reasonable level. This is extremely important because this is one of the automatic stabilisers that we have at the level of the global economy and at the level of its various components, including the euro area economy. So, everything that permits this market to function as smoothly as possible is welcome. And the spontaneous downturn in prices, as it is being observed at the moment, is something that is, to say it again, part of the automatic stabilisation of the global economy and we are badly in need of an automatic stabilisation in the present circumstances.

On our second point on fiscal discipline, as I have said on behalf of the Governing Council, we consider the Stability and Growth Pact to be absolutely essential. We are a single currency area which has no federal government and no federal budget. And we are told by observers from time to time that we have put the cart before the horse because we have a single currency, but no federal government. We respond by saying that, yes, we have an institutional framework that is not a federal government, but we have the Stability and Growth Pact, and the cohesion of the euro area is very much based on the Monetary Union, on the one hand, and on the Economic Union with the Stability and Growth Pact, on the other. This is very important and I will not elaborate more on this because it is the fundamental message that we give. We are telling all countries that they have to respect the orientations of the Stability and Growth Pact and, as I said on behalf of the Governing Council, that wherever there is room for manoeuvre, it can be used. Let us not forget on top of that that the various members of the European Union in general, but those of the euro area in particular, have already taken decisions with respect to the recapitalisation of their banks and the guarantees that they are giving to banks, as well as the rescue operations that have already been mobilised in some cases, as proof of their efforts. This is very important and we should not forget it. Nor should we forget that, when automatic stabilisation can be utilised and when there is room for automatic stabilisers to operate in full, we in Europe – in comparison with other industrialised economies – have a level of public spending as a proportion of GDP and a level of social safety net that is generally superior to what is observed in the other OECD countries. So, in terms of their volume, that makes automatic stabilisers more important in Europe – not only in the euro area – than is the case on the other side of the Atlantic, for instance.

Question: Mr. Trichet, three quick questions. First two easy ones, the first one: you have bent over backwards to make clear that you are making decisions in the context of your primary mandate, the needle in your compass, of price stability. However, if I am not mistaken, the Maastricht Treaty also makes very clear that without prejudice to this primary mandate you can pay attention to other factors such as growth. I wondered if you could give us some insight into your thinking, on your rationale behind not laying out more clearly where you will go from now as other central banks have, because there is a risk on the other side of overemphasising your mandate that you come off a bit Calvinist at a time when expansionary policies are what is needed and what are being adopted.

My second question to you is, just to be clear on this, did you discuss any other options, whether 50 basis points or 100?

And then my third question to you is, does the ECB have the legal authority to engage in quantitative easing or some European species thereof ?

Trichet: As regards your first question on our primary mandate, there is a logical relationship between the primary mandate that we have and the other multiple objectives of the Union that are, without prejudice to the primary mandate, in the Treaty. It is that the primary mandate is a precondition, a necessary condition for sustainable growth and sustainable job creation. So I think that – and this on both sides of the Atlantic – we would certainly say that price stability, credible price stability in the medium run, is a prerequisite for sustainable growth and sustainable job creation. I do not think there is any disagreement on that. I said that our primary mandate is price stability, but I also added what our definition of price stability is, namely less than 2%, but close to 2%, in the medium term. And we consider that this definition of price stability, if credible, if solidly anchoring medium-term inflation, medium to long-term inflation expectations, in line with this definition, is a prerequisite, a necessary condition for sustainable growth and job creation. This is the way we are looking at it. It is because we consider that there has been a considerable alleviation of inflationary pressures and of upside risks to price stability that we have decreased rates by 175 basis points over a period which is a very short period of time, less than two months. So you have the clear illustration of the way we are operating. Now, you tell me that we did perhaps a little less than others. But a number of the others that you mention had interest rates that were much higher, significantly higher, than our own interest rates a few months before. So if you reason like that today, you should have reasoned in the same fashion yesterday, saying to us “Why have you got such low interest rates? They should be higher”. So let us not compare what is not necessarily comparable. We are all doing what we believe is appropriate. And we are not exactly in the same situation. We were not in the same situation six months ago or four months ago, and we are not exactly in the same situation now. But we all consider that delivering and being credible in the delivery of price stability – and I have stressed our definition of price stability – is something which is a prerequisite for sustainable growth and job creation.

On your second question, I have already responded. We had a consensus for 75 basis points.

On your third question, when I look at the size of our own balance sheet, I see that there has been a big increase over the recent period of time, which captures the exceptional decisions we have taken over the recent period. As you might remember, we were the first central bank in the world to identify that we were entering a turbulent episode of the first magnitude and that we had to be active and expeditious in decision-making in those circumstances. Again, we will look at what is necessary at any time, which is what we have done in the past, including the fact that we are as we speak supplying liquidity on an unlimited basis at fixed rates on a one-week, one-month, three-month, six-month basis, which is a clear demonstration of the extraordinary decisions we have been taking. All this has to be fully taken into consideration. We will continue to look, as I already said, very carefully at the situation of the market, at the situation of the economy. And if new decisions are needed, we will take new decisions. But at this stage I cannot say anything else.

Question: Will it be legal for the countries that are willing to join the euro area to have deficits of over 3%? You talked about timely and temporary measures. The European Commission is talking about temporarily expanding this 3% rate. So, would it be legal for these countries that are willing to join the euro area to have this kind of deficit of over 3% in a temporary manner for, let’s say, one year?

And a second question: you said that loans had not dried up. On the other hand, we hear from France, or from Germany, calls for the European Union to speed up acceptance of plans to pump money into some banks that are over-extended, after which they will lend to the real economy. So is it a kind of problem of loans having dried up?

Trichet: On your first question, the Maastricht Treaty is the Maastricht Treaty, and the criteria are the criteria, and they will be applied. And, to my knowledge, absolutely nobody – irrespective of whether in the Commission or the Council, and certainly not in the ECB – has asked or is envisaging to change the rules and to change the criteria for entry into the euro area. On the timely, targeted, temporary fiscal measures, these are also the qualifications that I use myself, as are – to my knowledge – used by the Commission and by the Council. So, we are all using the same qualifications.

As regards your second question on loans I would take advantage of your question to mention that we consider it extremely important at this stage that the decisions that have been taken at the level of the governments, and I have to say that we ourselves called for those bold decisions to be taken, in particular the possibility of recapitalisation, the possibility of granting guarantees, is something that is very important to implement as soon as possible. This has been announced. It is perfectly legitimate that it is examined with care by the Commission – it is its duty to do so. We ourselves contributed to this and I have to thank the Vice-President of the ECB because he was instrumental in enabling us to assist in determining the appropriate pricing of those guarantees and the appropriate utilisation of those recapitalisation schemes. But now we have to deliver. It has been announced, it has been decided, so now it has to be delivered. And I am sure that the Commission will do everything that is necessary to ensure a very rapid delivery. I thank the Commission for this because we are in exceptional circumstances. I am fully aware that it is not easy – as we know from experience – to adapt to circumstances that are so different from what are – I would say – normal circumstances. But it is very important that things are delivered rapidly, because that will certainly help to bring us back to a more normal level of confidence. I think that a number of operators, market participants, institutions and so forth are still waiting a little while to see how things are implemented, to see if this “package” is really implemented. I can reassure them that it will be implemented, but rapid implementation would be most welcome because we are in circumstances which call for not only bold decisions in principle, but also for effective implementation.

Question: Mr Trichet, I have two questions. First, could you explain why the ECB is keeping interest rates higher than in the period from 2003 to 2005, even though downward risks to price stability are now larger than a few years ago?

And, second, Slovakia will enter the euro area on 1 January – will the ECB introduce a rotation principle for voting rights in the Governing Council?

Trichet: On your first question: as I have explained, we have taken a decision that one of your colleagues has qualified as one of the boldest we have ever taken and I would confirm that. We decreased rates by 175 basis points in less than two months because what we had observed was an alleviation of upside risks of inflation. We think it was appropriate in consideration of the situation.

As regards your second question on the rotation, we will certainly have an occasion to indicate where we stand. And it will be before the entry into the Governing Council of the newcomer, namely Slovakia, which will become a full member of the Governing Council as early as 1 January next year.

Question: I also have a couple of questions. In the past you have stressed that the ECB wants to be predictable, and given that, in fact, the market anticipated the 75 basis point cut today, you were predictable. Now that the market is pricing in 50 basis points for January, would you take this opportunity to recommit yourself to being predictable?

Secondly, in the same vein regarding predictability, there is a bit of confusion in the market about whether or not it is actually possible for the ECB to make outright purchases of assets such as government debt or corporate debt. Firstly, is it possible? Secondly, is it being discussed?

And thirdly, you have this interesting sentence in the statement: “there were no significant indications of a drying up of the availability of loans”. So, there is still no credit crunch?

Trichet: As regards your first question it is not my habit to comment either on a second-by-second basis or on a day-by-day basis. Had you asked the question yesterday, it seems to me that you might perhaps have said that the market and most of the economists were predicting 50 basis points. There are permanent changes in the market, so I will certainly not comment on such things. Again, I will say nothing about January. We are in a situation where we are never pre-committed. We will see what happens in January, but let us not forget that we have already decreased our policy rate by 175 basis points in a very short space of time, which is unprecedented not only for the ECB, but also for those national central banks that are the “parents” of the ECB, in the period since the Second World War. So, we have to take that into account, and we have to observe what is going on now. We ourselves have decreased our rates by 175 basis points. Is that being channelled through all the various channels that are in operation? What about the spreads I have been talking about? What about the EURIBOR I have been talking about? What is going on? We have to work on that and we have to be sure that what we are doing is really effective, and that is the reason why I insisted on the fact that the decisions that have been taken – not only by us but also by governments – have to be implemented as quickly as possible, including the guarantees, including the recapitalisation. And that calls for all parties concerned to be very effective and efficient in working on that.

As regards your second question on the outright purchases, I think it is possible. Again, I will say that at this stage I have no further indications to give. We are looking at the situation as cautiously and attentively as possible. What we are doing through our present weaponry – namely the provision of liquidity on an exceptionally forthcoming basis; namely the fact that our overall collateral framework has also been amended in order to be extremely forthcoming; and you will remember that we were more forthcoming than all of our sister central banks at the very beginning of the turmoil – all that must be taken into account.

On your third question on loans, it is clear that our bank lending surveys are indicating that there is a general toughening of the lending standards. That is a message that we have received regularly over the last few surveys. We can clearly see, particularly since mid-September, as I have already said, that we have had a big change in the overall attitude of a number of institutions, and there are a number of signs that are indicating that attitudes have hardened. On the other hand, you can see, because they have been published, the figures that we have in front of us. So, if we look at the growth rate of outstanding loans to non-financial corporations, we see 11.9% in October. That comes after 12.2% in September. So, there is a slight decline in this rate of growth, but it remains very impressive. For a number of months I have said that we have to take these figures with a pinch of salt. This is something which is complex, which might incorporate elements such as increased drawing on previously agreed credit lines, a number of phenomena relating to decisions already taken, or the use of loans to replace securities, which are enormously difficult to issue now because of the illiquidity of a number of markets. So we have to look at this very carefully. But the figures are the figures, and we have them in front of us. I remain very prudent, very cautious in this respect. We have to do all that is possible in order to get the money market functioning normally again, to get commercial banks granting loans and credit normally again. And we call on them to take fully into account all that has been decided already, which will be implemented as soon as possible by authorities.

Question (translation): You have mentioned the financial turmoil a lot. Could we say today that the worst is over?

You also explained very clearly the difference between deflation and disinflation. Do you think that we are closer to the risk of deflation, because the confidence of households is low, isn’t it?

Trichet (translation): As regards your first question, we are facing a significant market correction. We were the first ones really to diagnose it. This correction is occurring before our very eyes, with some peaks such as the one we witnessed in September. In such exceptional circumstances, courageous decisions are certainly required from central banks and governments as well. I think that this is the best analysis I can give of what we can see around us.

As regards your second question on the difference between deflation and disinflation, this is an important distinction, which I hope I made clear. One should not confuse these two concepts, as some tend to do. However, if we look at the CPI and the nominal data which are available, I do not think that we are in a deflationary period today. Also, our definition of medium-term price stability of below, but close to, 2% is not a novelty: it has been valid ever since I became President of the ECB.

Question: You noted before that the ECB is providing an unlimited amount of liquidity over three-month maturities, but you also noted that the relevant spreads continue to remain high. First, given how forthcoming you have been, are you surprised that this is still the case? Second, given the impact that this has on the monetary transmission mechanism, how are the high interbank spreads influencing the Governing Council’s decision-making?

Trichet: The two questions seem to me to be related to the spreads between the overnight index swap rate and the various EURIBOR interest rates. What is important is that we probably have a combination of liquidity-hoarding by the commercial banks, by the participants in this particular market, and of credit risk assessment, as well as perhaps some other premia that have also to be taken into consideration. It is a complex and a very new phenomenon. It should also be noted that the same phenomenon can be seen in all the major market places. So, it is a global phenomenon, despite the fact that central banks are making exceptional efforts through the various means that are adapted to our various situations, various economies and also various central bank armouries. We have to continue to analyse the situation and do whatever we can to diminish these spreads that we consider abnormal. And, after the measures we have already taken, namely a 175 basis point decrease in a very short time span, it is appropriate that we should ensure that this is fully transmitted to the real economy. Again, it is a significant phenomenon and one that is global.

Question: Do you have a message for banks whose attitudes are hardening, who may be reluctant to lend, but are more worried about their own capital reserves than about lending to the real economy? And would you ask them to make sure that they pass on rate cuts to the borrowers or to consider special circumstances for homeowners in trouble or small businesses?

Trichet: We have to see to what extent commercial banks, in particular, are in a situation which is exceptionally difficult. If they had not been in an exceptionally difficult situation, we would not have done all that we have done, and the governments would not have done all that has been done. Of course, we did all that, because the banking sector plays a systemic role in the economy and it is in the interests of the economy as a whole, of workers and employees everywhere, in all our economies, in the interests of all businesses. It is vitally important that we get back to normal as rapidly as possible. That being said, the worst possible attitude would be to make anybody a scapegoat. All institutions have to cope with exceptionally difficult situations, and it seems to me that it is up to all of us to be up to our responsibilities – the private sector as well as the public sector. As far as the public sector is concerned, we have to deliver what has been promised, decided and voted in many cases by parliaments. That is very important and essential. Part of our difficulty to get back to normal comes from the fact that a number of things that have been mentioned or announced are not yet operational and that is important. For the commercial banks and the private sector in general, I would say be up to your responsibilities and take fully into account all that has been decided and will be implemented.

Question: You would not tell us what other options were discussed today. I’m not quite sure if I understand why you won’t tell us, but would I be right in assuming that – you talked about consensus – the dissenting voices were in favour of a smaller cut rather than a larger cut?

And secondly, the Swedish central bank in its statement today said they expected to maintain interest rates at the low level for quite some time. I know you don’t give a forward path of interest rates, but the idea that there is a natural base below which interest rates should not fall – is that a concept which you would share, or would you perhaps agree that in these exceptional circumstances, when markets are not functioning, you need to cut further and faster to compensate for the disfunctioning of the markets?

Trichet: On your first question, I repeat that we had a consensus for 75.

On your second question, as I said, we consider at this stage that it is important that we ensure that the 175 basis point decrease that we have already decided is effective, in terms of going through the various channels and going to the real economy. So, in a way, this is something that explains perhaps why I do not say anything on January, for instance. Again, we have to concentrate at this stage on getting what we have already decided really operational. On the other part of your question, i.e. do we have the feeling that there is a limit to the decrease in rates? At this stage, certainly, yes. We have to beware of being trapped at nominal levels that would be much too low. It seems to me that it is certainly something which we have in mind and we will have to examine that and reflect on that. But as you know, we do not pre-commit, we have no path for the medium-term and, again, we have one needle in our compass. I always stress that in whatever circumstances, and circumstances can be extraordinarily different. We will deliver what is necessary in our eyes and to the best of our judgement, information and experience, to deliver price stability in line with our definition and our definition is less than 2%, but close to 2% in the medium term.

Question: You have always said we should wait to see the impact of all the measures you and the governments have implemented. Last week, your colleague Mr Bini Smaghi said that a sharp reduction in rates could add to worsening sentiment. I was wondering whether you think this is a sharp rate cut, 75 basis points, and if so, why didn’t you wait to see the effect of your previous policy?

Trichet: I have already responded that it was the appropriate rate cut, that it was obviously an important one, and by all measures it was what we had to do in the view of the Governing Council.

Question: You say you are waiting to see how effective the measures you have already implemented will be. Can you just tell us what exactly you’ll be looking for and how long it might take? I mean, you say you don’t want to say anything about January. Do you expect to see the results of previous measures by the end of this year, or further forward?

Trichet: We will look at all parameters. You know that they are very numerous: you have in particular the EURIBOR on a one-week basis, on a one-month basis, on a three-month basis, the absolute diminishing of these various interest rates, and you have the spreads that have been mentioned between the OIS and the various term rates I have been mentioning. And we have a number of other parameters including the effective interest rates set by the commercial banks themselves when they deal with their clients. So all this has to be analysed very carefully.

Question: Did you discuss any possible changes to the deposit facility? That was one thing that you held out the possibility of at the last press conference.

Trichet: No, we did not discuss that. But again, a number of possibilities are being examined on a permanent basis. We are flexible. We want to be sure that what we are doing is entirely appropriate, taking into account the circumstances, which are abnormal. There have been changes in the circumstances, and our experience clearly indicates that we have to stand ready for new challenges. Again, on 15 September we had a new challenge, and we had to take the appropriate new decisions. As I have said, I will rule nothing out, but at the same time I am not pre-committing to anything.