Brussels, 05/07/2007 (Agence Europe) - The Governing Council of the European Central Bank (ECB) decided on Thursday to keep its interest rates unchanged in the euro area. The minimum bid rate applied to main refinancing operations therefore remains at 4% and the marginal lending facility and deposit facility rates stay at 5% and 3% respectively. During the press conference that followed the meeting, Jean-Claude Trichet confirmed that there were risks for the general medium-term price level, saying that monetary policy was “still on the accommodative side”.
The president of the ECB then intimated that expectations of a rise in rates were justified, but did not give preference to either hypothesis envisaged by the markets, which are still hesitating between September (for the most part) and October. Intending to act “in a firm and timely manner” to ensure price stability in the medium term remains warranted, he said, repeating like last month (EUROPE 9440) that the Frankfurt institution will continue to “monitor closely all developments”, a term generally used to announce a monetary turn of the screw two months later. In answer to journalists' questions, he simply said that there is no reason to “over-interpret” the terminology used and, if the expression is the same as that used in June, “it does not mean that this contradicts market anticipations for September and October”. He went on to ensure that, although “vigilance” was necessary in August, a month for which a press conference is not scheduled at this stage, he would find a way to make it known “without any difficulty”.
Conditions are now in place for the euro area economy to continue to grow at a sustained rate, beyond its potential 2.25% of GDP, Trichet stressed. As regards the external environment, global economic growth has become more balanced across regions and remains robust, supporting exports from the eurozone where domestic demand is expected to “maintain its relatively strong momentum”. Benefiting from overall financing conditions that remain favourable, investment should remain strong and consumer demand should be boosted by wage developments and improved labour market conditions. Fears of increased protectionist pressure, possible future oil price rises and possible disorderly developments owing to global imbalances and potential shifts in financial market sentiment remain the main risks for growth.
Inflation rates have not changed over recent months, settling at 1.9% in June 2007, and forecasts for coming months have not changed either. The consumer price profile should continue to fall in coming months to rise again “significantly” by the end of the year. In the medium term, there are upward risks for price stability with stronger than expected wage developments. Hence the repeated call for responsibility and the definition of salary agreements. Wage agreements in particular should be sufficiently differentiated to take into account price competitiveness positions, the still high level of unemployment in many economies and sector-specific productivity developments. Mr Trichet went on to stress “the importance of avoiding wage developments that would eventually lead to inflationary pressures and harm the purchasing power of all euro area citizens”. Upside risks to price stability arise from increases in administered prices and indirect taxes beyond those anticipated thus far, and the potentially procyclical stance of fiscal policy in some countries are also questioned. Such an economic analysis is confirmed by monetary expansion, which is reflected in the rapid growth of M3 (10.7% rise in May), and the high rise in credit.
Turning to Paris as regards fiscal policy, the Governing Council “notes with concern the pressures emerging in a number of countries to relax previous fiscal consolidation targets”. With just a few days to go before the Eurogroup meeting attended by French President Nicolas Sarkozy, Mr Trichet called on all eurozone finance ministers to “honour the commitments they made at the Eurogroup meeting in Berlin on 20 April 2007”, in order to achieve their objectives by 2010 at the latest. All indications given here and there, whereby decisions may be taken to slow down budgetary consolidation, would be in contradiction with the commitments of the governments themselves and this is also true for countries including France and Italy and others, he said, seeking to clarify matters.
We would note, moreover, that the ECB also adopted an opinion on Thursday on the opening of the Intergovernmental Conference (IGC) with a view to drawing up a treaty to amend the existing treaties. As regards the status, mandate, tasks and legal regime of the ECB, the Eurosystem and the European System of Central Banks, the ECB understands that, “in line with the IGC's detailed mandate, the changes to be introduced by the IGC to the current treaties, which will remain in force, will be limited to and will comprise all the innovations agreed at the 2004 IGC”. (ab)