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Press release
Trichet on financial market turmoil, interest rates and purchasing power
Economic and monetary affairs - 26-03-2008 - 16:29
Committees
Committees
ECB President Jean-Claude Trichet said that inflation would stay relatively high for longer than expected and that the outlook for growth was "unusually uncertain" when he met the Economic and Monetary Affairs Committee on Wednesday for the first of four Monetary Dialogue sessions in 2008. He was questioned by MEPs about the ECB's response to the financial market turmoil and its focus on controlling inflation.
The ECB President told MEPs that risks to the medium term outlook for inflation were on the upside and "the period of relatively high inflation rates will be more protracted than previously expected." He said it was imperative that "second round effects on price and wage-setting from current inflation rates are prevented. This is the key to preserving price stability in the medium term and thereby the purchasing power of all euro area citizens." While ongoing growth was expected, albeit at slower rates than previously projected, "uncertainty about the prospects for economic growth remains unusually high."
On conclusions to draw from the financial market turmoil, Mr Trichet said, "I would call for a further significant change of culture at the national, European and global level. I would sum up this culture change with two words: transparency and anti-cyclicality." (The full text of Mr Trichet's opening statement is available via the link below.)
Improving behaviour in the financial markets
Alexander Radwan (EPP-ED, DE) asked about herd behaviour and the need for transparency in financial markets. Would politicians need to act to provide a framework for a change in behaviour? Mr Trichet responded that "the observation that transparency is of the essence is not new"; it had been the key to avoiding contagion during the Asian crisis, and was so now: "where the is absence of transparency, it is conducive to hectic, herd behaviour and turbulence on markets." Public authorities, he said, "have to create an environment which is conducive for private institutions to behave as effectively as possible. The current situation is not appropriate and needs to improve."
A number of MEPs, including Committee Chair Pervenche Berès (PES, FR) pressed Mr Trichet on whether it was time to look beyond codes of conduct or other measures of self-regulation and turn to regulation by public authorities to solve market failures. Mr Trichet said "We always need to ask market participants to improve behaviour themselves. If their response is not convincing, or if they cannot do it, then the time has come for regulation. I don't rule out regulation ex ante but it is good practice to see whether you can proceed by setting out best principles and benchmarking." He also emphasised the need to work with other jurisdictions, notably the US, on such issues, something he said was going on via the Financial Stability Forum.
An "ongoing market correction"
Was the worst of the current financial market crisis over, asked Wolf Klinz (ALDE, DE)? "The present situation is of an ongoing process of very significant market correction with episodes of turbulence, a high level of volatility and overshooting. This market correction is ongoing" said the ECB President.
Robert Goebbels (PES, LU) contrasted the ECB's holding of interest rates with the cuts made by the Federal Reserve in the US. He spoke of the ECB providing "unlimited liquidity" to banks – was this not encouraging further debt by assuring banks that they could always rely on the ECB, when a cut in interest rates might have helped both the financial sector as necessary and the wider economy? Mr Trichet strongly disagreed: "If we had reduced rates for a reason other than maintaining price stability, we would in effect have been asking our fellow citizens to subsidise the banks via their suffering from inflation." He noted that the ECB and the Fed were operating in different environments, facing different shocks in different economies.
Inflation and purchasing power
Noting that the ECB's projections showed inflation above its target in the months ahead, John Purvis (EPP-ED. UK) asked whether other factors were now influencing interest rate decisions. "Resolutely no," said Mr Trichet. "If we have maintained rates at their present level, it is because we believe this level corresponds to what is necessary to deliver price stability in the medium term... We have only one needle in our compass."
Donatella Gottardi (PES, IT) asked what could be done to maintain people's purchasing power and prevent the emergence of more "working poor". Mr Trichet stressed that in normal time pay rises should be linked to improving productivity. But in times of external price shocks the economy had to adjust to transferring more to external suppliers. "Once that higher price is there, if you do not accept it as the price it is, you are paving the way for an inflationary spiral and increasing unemployment... Mass unemployment in Europe started after a very bad policy reaction to the first oil price shock in the 70s."
25/03/2008
Committee on Economic and Monetary Affairs
In the chair : Pervenche Berès (PES, FR)
In the chair : Pervenche Berès (PES, FR)
Monetary Dialogue with the European Central Bank
REF.: 20080325IPR24801
Further information :
- The full text of Mr Trichet's opening statement is available from the ECB website
- Before each session of Monetary Dialogue, a panel of expert advisors prepares detailed analyses of current issues facing the ECB. You can find these papers in the "Monetary Dialogue" section of the web pages of the Economic and Monetary Affairs Committee.
- Economic and Monetary Affairs Committee - web page