When: Today, Friday, May 6th at 6AM ET
Where: CNBC’s "Squawk Box"
Following is the unofficial transcript of a FIRST ON CNBC interview with European Central Bank President Jean-Claude Trichet on "Squawk Box" at 6AM ET. Excerpts of the interview will run throughout CNBC’s Business Day programming. Following are links to the interview on CNBC.com: http://video.cnbc.com/gallery/?video=3000020470, http://video.cnbc.com/gallery/?video=3000020433.
All references must be sourced to CNBC.
STEVE LIESMAN: President Trichet, thank you for joining us.
JEAN-CLAUDE TRICHET: It's a pleasure.
STEVE LIESMAN: I want to just start off with the news-- that was overnight, which was the sharp decline in oil prices. And my question is whether or not this makes you maybe more hopeful on the inflation outlook?
JEAN-CLAUDE TRICHET: Well I have to say that-- I-- not choose to comment on how to-- or even day-to-day-- the move of the market. We have to be cautious and prudent, and look at what's going on in the medium run, if I may or-- at least in a period of time, which is a little bit longer.
That being said, of course, it is everything that goes in the direction of calming the price of oil and commodities. It's good to take-- for all reasons. Certainly for inflation. Not only immediately, but with the danger of second round in the medium run. It's also good to take in terms of consolidating the recovery. Because any increase, further increase of the price of oil in commodity has an inflational impact, and a depressive impact. So again, these are good news, but I will not comment more than that because again, you have to look at it in the longer term.
STEVE LIESMAN: Earlier this week, the producer price index came out for your area. And some economists sort of contradicted what your concerns were, saying there were no second round effects evident in the producer price.
JEAN-CLAUDE TRICHET: Well I have to say that it is clear that what we feel the most, and namely, the materialization of the threat of second round effects on the various prices and also, in the social partners negotiation did not materialized. When it materializes, it's too late. We-- all our exercises is concentrated on precisely voting the materialization of the threats. The threats are there, that's absolutely obvious. Taking into account the hump in the CPI. But again, we are alert, and we proved that we were alert.
STEVE LIESMAN: Could you explain the strategy of the European Central Bank to an American audience, which is used to once the central bank starts raising, it keeps raising. And it's not used to this idea of you raise, you pause, you pause, and maybe you raise again. I don't know-- want to tell you, you know, what you forecast, what you're going to do, but this idea of raise and pause. What is the strategy there?
JEAN-CLAUDE TRICHET: Well, we did that of course, as you might remember in '05. December '05. We increased rates. We started increasing rates. And this was observed as an important move. By the way, we were had-- highly criticized at the time. It is, of course, with the benefit of the hindsight, absolutely surprising. Everybody would say now we were absolutely right of course to increase rates in December, 2005.
At the time ten governments out of 12 in the-- year of the time. And, I would say the international powerful institutions criticized us. But that being said, to respond to your question we are used to see exactly what we have to do to deliver price stability in the medium run. And, that is what we did at the time when we started the increase of rates in '05. And we are now in this mode. We have increased rates last month. We will have in the next month, as you know, our own new projections. Then we will have a full picture of the situation and we will take an appropriate decision. Again, all what we do is directed, concentrating on delivering price stability in the medium run. That's what we have as our mandate, if I may.
You know that we have that mandate very clearly. It is what our people are putting upon us. And when I look at all surveys, the people of Europe are calling upon us to deliver price stability, and it is what we have been doing over the first 12 years. 1.97 percent as an average inflation, yearly inflation, over 12 years. So, it's not words only. It is also deeds. And delivery.
STEVE LIESMAN: Can you talk about the different outlooks on inflation from, I know you hold Fed Chairman Ben Bernanke in high esteem, but he sees the oil price shock as transitory. Do you disagree with him on that?
JEAN-CLAUDE TRICHET: No. It's exactly the same vision that it is a hump in the CPI. We have no direct impact on the price of oil. And, I appreciate enormously what we have observed overnight. But we have no direct impact obviously. But we have to care for the medium run. It depends on us that it would be transitory. That's the idea. If we are alert, and if we take the right decision then it is transitory. If, we let the second round effects materialize, then it is not transitory. That's the issue for us.
STEVE LIESMAN: But if it's transitory then, one of the attitudes would be don't take any action at all because you create a depressing effect on the economy, on based on what is just a relative price shift.
JEAN-CLAUDE TRICHET: Again, we trust that as long as there is a threat of second round effects. If there is a threat of second threat effect, there is also a threat of incurring inflation expectations. So again, by mentioning, by doing appropriately what is needed to maintain both the credibility of the inflation being in line with our definition. By the way, we have the same definition on both sides of the Atlantic for price stability.
That's good. That's also another proof of the convergence of our concept. But that being said, if we are credible in the delivery of price stability, then we are anchoring the incurring of inflation expectations. And nothing is more favorable to growth and job creation that a solid anchoring of inflation expectations.
STEVE LIESMAN: Do you worry that it's possible the differential in interest rates around the developed world could grow too wide? That is there a limit to how far the European Central Bank can go, so long as the Federal Reserve remains where it is right now?
JEAN-CLAUDE TRICHET: Well, again, I don't want to comment on the decision with which are taken by other central bank. We have, as I used to say, a very great level of unity in purpose, delivering price stability in the medium run, and anchoring inflation expectations. We have observed in the past, difference of interests rates, level from time to time.
We are all over, both friends and partners, which is the case today. From time to time, we are below. I mean, we do what is necessary to preserve what is for us very important, this anchoring of inflation expectations. We are in different environments, different economies, different flexibility, or inflexibility of the economies. Different shocks. We are of course-- we have our world responsibility, which are also very clearly designed in our legal framework. So I think we really are all doing what we have to do.
STEVE LIESMAN: I noticed a couple times, certainly yesterday, you directly quote the Treasury Secretary on what he says about the dollar, and you quote the Fed Chairman on what he says about the dollar. Is that a sign or some sort of suggestion from you that you believe that policy should change to support the dollar more?
JEAN-CLAUDE TRICHET: No, it means that I trust what has been said. Recently, I quoted what Tim Geithner and Ben Bernanke had said because it was very recent. It was the 26th and 27th of April. So, I thought it was a proper way to remand that to our own audience and to the--. And I'm fully in agreement as I said with what they have said, which, I trust, is very important. Because there is from time to time confusion between the relationships between the major floating currencies. The dollar, the Euro, the sterling, the yen, and what we all consider as a proper yet vis-à-vis some emerging economies' currencies that are themselves on their way to be more flexible. And I think it was very important what Tim and Ben repeated. And again, which I totally share that it is in the interest of course of the U.S. but also of the international community that we have a credible, strong dollar.
STEVE LIESMAN: Could we take a step back on the discussion here of the history of things. Where are we now in this period coming from the financial crisis? Does it mean anything that you felt comfortable enough in the last month to raise interest rates? Is it a sign that we are further down the road of recovery that you feel the economy is able to withstand such a rate rise?
JEAN-CLAUDE TRICHET: As you know, we have-- since the very beginning of the crisis, for us that was a crisis, started in August, 2007. We took the first nonstandard measure. Very important nonstandard measure in August, 2007. It was really the start of the turbulences. So we have separated very strictly what we call the standard measures, and the interest rates, decisions, and the nonstandard measures, namely the allotment of liquidity. You know, special vote, full allotment with fixed rate and so forth at various duration, as an example of these nonstandard measures.
We decide on interest rates since the very beginning to deliver price stability in the medium run. That's our objective. That's the way we look at our concept of monetary policy. Now we have to cope with at certain moment extremely difficult behavior of the powerful markets, of the money market. And, of segment of market that are disrupted. Then we take the nonstandard measures. But for our interest rate decision, clearly we design it to deliver price stability in the medium run, and continuing to be credible in that delivery.
STEVE LIESMAN: There's some observers, economists, analysts who criticize the approach of the European Central Bank and the European governments to the financial crises, the sovereign debt crisis in Greece in Portugal in the following the way. They say the mistake you make is that it is not a liquidity problem, it is a solvency problem. Do you agree that that's a potential mistake you could be making?
JEAN-CLAUDE TRICHET: I would say the following, which is very, very clear. We have an absolute need for the countries concerned. And, by the way, it's a message for all countries. And we were, I think very-- I would say constant in our message for all countries that the fiscal policies were absolutely decisive. Even at the time where benign neglect was practiced.
But we are telling them, and particularly those of course who have the greatest difficulty that it relies upon them that they have the capability to surmount their difficulty as other countries did in the past. We have the example in Europe of Belgium, for instance, going down from a very, very high level of debt outstanding to-- very significantly-- below 100 percent and closer and closer to 60 percent, which is, as you know, some kind of benchmark.
But that depends on you. That depends on your decisions. I mean, the government decision depends on restraining spendings, augmenting the receipts in particular by-- proper measures. Of course, some taxation. Also, overall, the structural reform that would permit to elevate your gross potential.
And that's the strong message. Nothing is impossible. When you look at what the votes we recently have done, you see that everything is possible when you have the will, and I trust that, it is an extremely important to concentrate on what they should do in the present circumstances. We have programs now that have been negotiated, at the time negotiated, that are being processed. In particular in Portugal. Those programs are comprehending those adjustment measures. We call to internal the adjustment measures as I would say-- as possible.
STEVE LIESMAN: So you're saying it's a solvency problem if they make it into one, and they have the power to make it--
JEAN-CLAUDE TRICHET: Absolutely.
STEVE LIESMAN: --not-- interesting. Just two more areas to cover. Recently, the borrowing at the seven day repo market has been very high. Many banks have been there. Is there still a lack of trust, a lack of confidence between banks and borrowing? Is that still a sign of a financial crisis in relatively full bloom?
JEAN-CLAUDE TRICHET: Well, taking into account our own interest rates when I looked at what we observed on the money market, and the level and so forth, it seems to me that we are continuing to observe some kind of going back to a more normal functioning of the market.
And, I have been, I have to say a little bit encouraged by the fact that the volatility of these very short term rates have diminished over time. I remain cautious and prudent because we will see, and it's the market functioning. The bull market functioning. It depends very much on the decisions of the banks themselves.
Because, as you know, we continue to engage in a full allotment of liquidity one month, one week, and three months basis. So they themselves command by their own request the level of liquidity which is in the market, and depending on their own decision, of course, then you observe the very short term rates, volatile or not volatile. But, what I have observed in the most recent period of time goes in the direction of some more correct functioning of the market, which of course is what we hope.
STEVE LIESMAN: They want me to ask in Europe-- not for the Unite-- but as you wind down your term here, which is October, are you feel like you've done the right thing through the financial crisis? And are there things you would've done differently?
JEAN CLAUDE-TRICHET: I think first of all, in this time of very, very, very turbulent episodes-- unexpected turbulent episode, I think that what counts very much is that you take the decision as swiftly as possible, the right one, but you don't lose the sense of direction. Or what we have done, the team. Because, you know, all the decisions we took are the decisions of a team. Of the government considered or the executive board. It was the executive board who decided in the 9th of August to deliver-- a limited supply of liquidity to calm down this, you know, market which was totally upside down.
But we try to do our best to maintain a sense of direction and the strict separation principle that I have mentioned of course is part of it, and to take the decisions that are appropriate. I have to say that in our case, we have not only to do all the job, if I may, of important central bank, if I may, but we have also-- we to-- not to forget that we are issuing the currency for 17 sovereign countries. And our message and interaction with the governments, and our message in particular on then to improve governance is a very, very strong message that this institution, the ECB is sending to all governments.
It's absolutely clear that the lesson of the crisis is that we have to improve a lot the governance of the fiscal policies on a collegial basis, and also of the macro basis in general. It is a process which is being discussed now between the Parliament and the executive branches. We call them to make a quantum leap in the quality of governance of Europe.
STEVE LIESMAN: How does the value of the Euro itself play into the decision on monetary policy? It would be up-- straight economics that if the value would arise, it would help you fight inflation. Is that a factor now when you see the value of the Euro rise and do some of the work for you in the battle against inflation?
JEAN CLAUDE-TRICHET: Yeah. As any, I guess central bank; we look at all the parameters that are important when we design our monetary policy. There are a lot of them, of course. And one of them-- but only one of them is the level of the exchange rate which has an impact, of course, on our judgment on the threat to price stability. But I would say it is of course what we are doing every month when we look at the situation.
We have no target. But we look of course at all parameters including the exchange rate. That's one of the parameters we are looking at. And as we gauge our attitude with the other floating currencies, and particularly the U.S. dollar, I have a very clear mentioning of the position of the U.S. authorities as you know.
STEVE LIESMAN: Jean-Claude, we don't get a chance to talk to you that often. And obviously, we thank you for your time. But I just want to give you an opportunity. Is there something that the American markets need to understand better about the Euro area or ECB policy that you'd like to communicate?
JEAN-CLAUDE TRICHET: Well, I don't think that the U.S. public opinion has anything that they should understand better on that. We are trying to do all that we can to communicate in the best fashion possible. I would say what is important in the present circumstances that are difficult, and will remain difficult, because it would be naive not to think we will not have new challenges and shocks to cope with, I would say the-- what I used to say, the purpose of unity in the target that we all have, namely to deliver price stability and be credible in this, that is very namely to anchor inflation expectations.
This unity of the central banks in general, and particularly between the Fed and us is very important. We have an easy way to communicate with a chance to compare notes. We have a very confident way to engage in cooperation where needed.
The ECB is very grateful to the U.S. Fed because we had a very good cooperation in the heat of the crisis, on the-- for instance, U.S. dollar delivery in Europe. That was not only a theoretical abstract cooperation and meeting of minds; it was also indeed that we proved that we were close. And, I appreciate enormously that.
STEVE LIESMAN: Mister Trichet, thank you so much for your time.
JEAN-CLAUDE TRICHET: Thank you very much.
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