With the transcript of the questions and answers
Ladies and gentlemen,
the Vice-President and I are here today to report on the outcome of today's meeting of the Governing Council of the ECB.
At today's meeting the Governing Council decided to increase the ECB interest rates by 25 basis points. As a consequence, the forthcoming main refinancing operations of the Eurosystem will be conducted as fixed rate tenders at an interest rate of 3.25%, starting with the operation to be settled on 9 February 2000. In addition, the interest rate on the marginal lending facility will be increased from 4.0% to 4.25% and that on the deposit facility from 2.0% to 2.25%, both with effect from 4 February 2000.
These decisions were taken on the basis of an assessment of the risks to price stability in the medium term in the context of the Eurosystem's monetary policy strategy. Considering the first pillar of this strategy, both monetary and credit growth continue to signal generous liquidity conditions. Monetary growth has consistently been above the reference value and credit to the private sector is continuing to grow at more than 10%. These developments are indicative of upside risks to price stability in the medium term. As for the second pillar of the monetary policy strategy, price and cost increases - including oil and non-energy commodity prices as well as producer prices - have been larger and more protracted than foreseen earlier and hence indicate risks of "second round" effects. Such risks, which are of a more enduring nature, are further increased by the fact that the international environment is showing continuous signs of improvement and the prospects of a cyclical upswing in the euro area are very strong. Indeed, internal and external factors reinforce one another and thereby contribute to intensifying the growth of the real GDP of the euro area. The depreciation of the euro which we have witnessed is contributing to increases in import prices.
Timely and appropriate monetary policy adjustments should ensure that these risks are kept under control, so that risk premia in financial markets will be diminished. The Governing Council's determination to counter threats of inflation should assure wage negotiators that the prospects for price stability remain favourable. In fact, it will be important to ensure that wage settlements themselves do not constitute a threat to price stability in the medium term.
Allow me to give you a more detailed overview of the main elements of our assessment of the latest information on monetary, financial market and other economic developments.
Starting with the first pillar, there has been an upward movement in most recent monetary developments in the euro area. Base effects have largely contributed to the fact that the three-month average of the annual growth rate of M3 - covering the period from October to December 1999 - rose to 6.1%, after having stood at 6.0% in the three-month period ending in November 1999. At 10.5%, the annual growth rate of credit to the private sector continued to be high in December 1999. Considering the prolonged deviation of M3 growth from the reference value of 4 1/2% throughout 1999, as well as the ongoing strong expansion of credit, monetary and credit developments observed remain an important factor contributing to the upside risks to price stability.
Turning to the second pillar, long-term nominal interest rates signal increased expectations of a lasting upswing in the euro area economy. Between the end of December 1999 and the end of January 2000 ten-year government bond yields in the euro area increased further to reach the highest level observed since late 1997.
Developments in the exchange rate of the euro are becoming a cause for concern with regard to future price stability. At the end of January the nominal effective exchange rate of the euro stood approximately 11 1/2% below its level in the first quarter of 1999. Given both the magnitude and the duration of this development, import prices can be expected to rise further, thereby increasing the risk that upward pressures on consumer price inflation might materialise in the medium term.
It is all the more important to take such risks into account given that the outlook for the world economy has improved further. There are increasing signs that the upturn in world growth has become more broadly based across economic areas. In addition to the US economy continuing to enjoy robust growth, activity is also accelerating in other industrialised countries and the recovery is strong in both Asian and Latin American emerging market economies.
Euro area growth developments are in line with global trends. Following the acceleration in real GDP growth from the second to the third quarter of 1999, economic activity in the euro area can also be expected to have seen a strong expansion in the last quarter of 1999. Inter alia, the high level of industrial and consumer confidence reached in the last quarter of 1999 and the prospect of ongoing employment growth and further falling unemployment, as reflected in most recent data, all point to ongoing improvements.
With regard to consumer price developments, the rate of inflation - as measured by increases in the Harmonised Index of Consumer Prices (HICP) - has moved up further. The rise in the annual rate of change in the overall HICP from 1.5% in November to 1.7% in December 1999 was almost entirely due to an annual increase in energy prices. Our expectation is that we shall see higher inflation rates in the next few months. Inflation rates are now approaching higher levels than expected earlier, and larger and more protracted commodity and producer price increases are heightening the risk of second round effects. Against this background it is crucial for wage negotiators to be able to rely on the maintenance of price stability in the medium term.
In conclusion, it is the responsibility of the Governing Council to maintain price stability, thereby contributing to ensuring sustainable growth in the euro area. In order to maintain price stability, monetary policy needs to act in a forward-looking manner, counteracting external and domestic risks in a timely fashion. Growth in the euro area is now robust and, in order to maintain favourable conditions for a lasting economic expansion, social partners will need to keep wage increases consistent with price stability, as well as compatible with continued growth in employment. Governments will have to enhance the structural reform process in order to strengthen the economy in a durable manner. Such reforms will not only make a great contribution to the euro area remaining attractive for domestic investors, but will also contribute to increasing its attractiveness for investors located abroad. Overall, consistently acting in line with these responsibilities appears to be most conducive to maintaining price stability at the domestic level and to ensuring robust growth. This will lead to a strengthening of the euro. Indeed, a strong economy goes along with a strong currency.
We are now at your disposal, should you have any questions.
Question (translation): Mr. President, why did you not believe it advisable to wait a little longer to see whether the increase in interest rates of November leads to lower M3 growth rates?
Duisenberg: Because what we expect regarding the movements in M3 in the coming months is that they will be very much influenced by base effects and that they will be very difficult to interpret. That is one thing. We expect - just for statistical reasons - to see lower figures in the coming months. And why wait? If you are convinced that all indicators, as well as the two pillars on which our monetary policy strategy is based, are already now pointing towards increased risks to price stability - and that does include recent developments in the exchange rate, which cannot be ignored and which is one of the main indicators we look at - then we were afraid to wait. If we had waited, we would have run the risk, honestly, of being forced to do more than we are currently doing in the future.
Question: Mr. Duisenberg, it seems to me that there is a danger here - and the big picture is - that the euro area could have its policy mix dictated by what is going on in the United States. In other words, we are importing inflation, but a great deal, in fact the major part of what is happening in commodity prices and producer prices as a result, is happening as a result of the fact that commodities and raw materials, etc., leaving aside the oil prices for a minute, are denominated in US dollars. My question to you is this: if commodities were not denominated in US dollars, we would not have those import price rises of above 8% that we have at the moment. Would you have raised rates today, if commodities were denominated in euro?
Duisenberg: Well, that is a very hypothetical question. My mother always said: "if the skies are falling down, all the birds would be dead." So I would rather not comment on that.
Question: We have been pulled along by the United States?
Duisenberg: Pulled along by the United States? No. We are, of course, influenced by developments in the United States; we are being influenced by the startling phenomenon of a continued, extremely and even surprisingly high rate of growth in the United States, which helps to underscore the strength of the US dollar vis-à-vis the euro. Of course, that is an influence with which we have to cope, but - as I indicated in my introduction - we have the feeling that we are rapidly getting into step with the US economy and that could, and it even should, lead to a - let me call it - more balanced development of the exchange rate as well.
Question: The rate rise was very moderate compared with your hawkish introduction. So, does it mean that you still think that there is a prominent tightening bias left, or was this mostly a warning to labour markets?
Duisenberg: Well, as for the future, it is, on the one hand, a signal to the labour markets. On the other hand, it is also an assurance to the labour markets that we are here to maintain price stability. And that is our goal. That is what underlies our considerations for today's increase. The size of the increase - I do not know how you want to qualify it - but you should not see it as a bias in any direction you might think of.
Question: Until now you have had a policy of making substantial interest rate rises, but not too often, and of signalling them well in advance to the markets. All of these things you have publicly stated as being your policy. By departing from that practice on this occasion, are you not giving the impression that this rate rise and this action is a panic reaction to what has just happened?
Duisenberg: Well, listening to the statements I made on behalf of the Governing Council a month ago and to the statements I made only a week ago, I think that they do not in any way point to a panic reaction. At least, that is not the feeling we have. I believe we have prepared markets well enough in their, as it so happens, justified expectation that something would happen. And I do not think that today's decision will have come as a big surprise to any of you here.
Question: Could you tell us if there was any discussion today of making the increase a 0.5 percentage point increase? And also, whether the vote was taken by consensus, by unanimous consensus, or whether there was a formal vote?
Duisenberg: First, there was no formal vote. Again, as I had hoped and as it was, it was a consensus decision. Of course, we did discuss the size and the timing of the increase. There was no discussion of the direction. But, of course, we discussed the size and the timing. Well, with regard to the timing, the outcome of the discussion - by consensus - was that it was to be today, rather than later. And, with regard to the size, the outcome of the discussion - also by consensus - was that a ï¿½ percentage point, i.e. 25 basis points, was by far the preferable option.
Question: To what extent was your decision co-ordinated - if at all - with the US Federal Reserve? And also, as far as the euro goes, is it the euro - or the development of the euro - that tipped the scales for the ECB in this decision?
Duisenberg: It just so happens that the FOMC meets once every six weeks. We meet once every two weeks. And the schedule is known in advance. So, it is pure coincidence that the decision by the Federal Reserve's FOMC yesterday came one day before our decision. I can assure you that there were many contacts in the weeks that have passed and that the development of the exchange rate was not a decisive move that tipped the scales. But, of course, as I indicated in my introductory remarks, in our decision today, we carefully looked at the recent developments in the exchange rate as one of the main indicators which could have a lasting effect on future price developments and which we wanted to counteract.
Question (translation): Mr Duisenberg, you have referred to what you have said previously on your attitude in the past months. But, clearly, you were somewhat obscure, no more or less than Mr. Greenspan, because - following the ECOFIN meeting in Brussels - the Ministers of Finance thought that there was no risk to price stability and they thought there would be no increase in interest rates after that ECOFIN meeting. So, clearly, your communication did not get through to the 11 Ministers of Finance. And it does not seem to me that they got your message.
Duisenberg: Well, even though I had hoped to relay this question on to Mr. Noyer, this time I have to answer it myself. May I refer you to the statement I made after the meeting in Brussels last Monday, which, admittedly, I prepared rather carefully. It did give an indication that we did see increasing dangers to price stability and I can assure you that it was in the same way, in the same words and the same message I gave one hour earlier to the Ministers of Finance. And they understood it perfectly well.
Question: Mr. President, according to all external accounts that I am aware of, the whole of the European System of Central Banks is holding far more US dollar reserves than they would need for monetary policy purposes. Now, given that you are so firmly convinced that the US dollar should depreciate against the euro again, can the public expect of its asset managers at the central banks that they will sell their assets when they are likely to depreciate?
Duisenberg: The reserves that the Eurosystem holds are a legacy of the past. We have them and we hold them as a responsible "head of household". So you can assume nothing about efforts on our part to try to spend them. There is no need for it. It would even be dangerous if we did that.
Question: Mr. Duisenberg, I have not yet understood to what degree you base your decision on real economic data and monetary data and to what degree you look at the markets. How important was what has happened on the financial markets for your decision?
Duisenberg: I cannot quantify it precisely. We make an assessment of developments in all markets, of the development of real economic data, of all those data that belong to the broad range of indicators we look at, alongside the purely monetary developments. And what we try to achieve - given that Europe has entered into a phase of strong economic recovery which has even led us to the statement that we are now experiencing robust growth - is a period of prolonged non-inflationary growth in the years to come.
Question: Mr. Duisenberg, can we take it from this decision that you are feeling less confident now that the depreciation we see of the euro would, in fact, be a short-term phenomenon?
Duisenberg: No, you cannot take this from that. I will be quite honest with you - of course we have our explanations with the benefits of hindsight about why the euro exchange rate is where it is. We did and we do believe that the euro has a strong upward potential, for the reasons which I have given to you so often. I am no less confident now that that expectation will materialise at some point. I do not know when.
Question: Mr. Duisenberg, you underlined in your statement the importance of wage settlements twice. But in the great majority of European countries we already have very reasonable wage settlements and quite slow wage growth. Why did you send this signal?
Duisenberg: Because I do not agree with your statement that we already have wage settlements in the great majority of the euro area countries. The process is still very much underway and we are not just looking at one country, we are looking at 11 countries simultaneously. And with a view to this process our decision is, on the one hand, giving a warning to the social partners. On the other hand, by our actions, we are also giving assurance to the social partners that they can - so to speak - rely on the European Central Bank to deliver price stability over the medium term and that they should also take that into account in their wage negotiations.
Question: Mr. Duisenberg, Greece is expected officially to apply to join the euro area in early March. How do you judge the convergence process of Greece so far and what do you say about the still very high interest rates?
Duisenberg: I will not in any way make a judgement now which we have to make some time in April, as - I think - is our timing. On the state of the convergence process of Greece, so far, I must say, we do expect - we have to expect - that convergence will continue in the course of this year, so that interest rates in Greece will be virtually in line with euro area interest rates at the time Greece actually endeavours to enter.
Question: Mr. Duisenberg, your goal is an inflation rate of below 2%, the goal of the ECB. Now you see price risks. Can inflation, will inflation rise above 2% in the next few months? What are your expectations and what are your expectations for the whole year?
Duisenberg: As higher oil prices are working their way through and as import prices are higher due to the exchange rate, we do expect inflation in the coming months to continue to increase somewhat and to taper off a few months later, so as to remain - on average - well below the maximum of 2% in the year as a whole and in the next year. And that time horizon is what we are looking at when we take monetary policy decisions today.
Question: But there may be some months in which we could have more than 2% inflation?
Duisenberg: Well, there are some countries where it is above 2%. And there are other countries where it is still far below that. But, looking at the whole of the euro area, I doubt whether your prediction will come true.
Question: Mr. Duisenberg, you said there is no bias left. But your statement reads as if there is still a strong upward potential. Can we expect another step very soon?
Duisenberg: You can expect that we will act appropriately whenever the circumstances give rise to do so.
Question:I have two questions. The first one goes back to what you said about the benefit of hindsight and the reasons for the euro's erosion. Could it be partly political, such as the diplomatic situation with Austria within the EU or the financing scandal in Germany? That is one question. The other question is: do you have any concerns that the euro, which fell more than most people expected, could have an effect on public confidence? Thank you.
Duisenberg: I am repeating myself, but - with the benefit of hindsight - you can find many factors that explain the movements in the exchange rate. The main factor is still, I believe, the different cyclical situations in the euro area compared with the United States, which make it quite normal for the exchange rate to move as it has. But then, of course, in modern financial markets, political factors, like those you have mentioned, do not fail to have their impact on the exchange rates either.
Question: And about the public confidence? Can you say anything?
Duisenberg: We hope to underscore public confidence by our actions and by an appropriate policy to preserve the people's confidence in their currency to the maximum extent possible.
Question: Mr. Duisenberg, I am sorry, I think you will not like my question. When you justified, when the ECB justified the last two policy decisions, each time you were proud to have been very clear in your step and to have taken the expectations out of the market, and you said so. And this time, you say, "we act whenever we think it is appropriate." To the outside, what you did convey was a little of the impression of uncertainty, of not really knowing. And certainly, you did not do anything to take the expectations out of the markets. Could you please comment on this? I mean, there is a difference between the two first policy decisions and this one here. Certainly, there will be expectations in the markets for higher rises now. Could you just comment on this?
Duisenberg: Well, I believe that, regarding our last move of 4 November last year, we deliberately, let me say, massaged the markets in that direction between 15 July and 4 November. Again, with the benefit of hindsight, we are now of the opinion that that period may have been on the long side. This time, nobody can say that we did not give indications or warnings that something was going to happen to the public at large and the markets, in particular. Of course, we cannot say precisely when it is going to happen and by how much. This is decided at the time of the decision at the last minute. But I cannot agree with your statement that, this time, we did not prepare the markets at all. I think the opposite is true. If you listen carefully to or read the statement I made last Monday, the statements the Vice-President and some of my colleagues made in the weeks before that, even the statement we delivered together a month ago, then there were many signs that you could expect something.
Question (translation): To what extent have you moved your views on the publication of forecasts? You have not published any forecasts yet, but you have said that you agree with the inflation forecasts of the European Commission - 1.5% for this year and next year - which has led to the fact that the IG Metall, for instance, has referred to this 1.5% and has referred to your press conference. Have you considered this further? And when are you actually going to make a public ECB-forecast for inflation?
Duisenberg: I think in the second half of this year. We are not discussing this in the Governing Council at the moment. We are actively preparing it inside the ECB, with our staff, preparing for what and how we shall publish forecasts. But I can assure you they will come.
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