Willem F. Duisenberg, President of the European Central Bank, Christian Noyer, Vice-President of the European Central Bank, Frankfurt am Main, 10 May 2001
With a transcript of the questions and answers
Ladies and gentlemen, the Vice-President and I are here to report on the outcome of today's meeting of the Governing Council of the ECB.
The Governing Council conducted its regular examination of monetary and economic developments and analysed their implications for the maintenance of price stability in the euro area. It decided to lower the key ECB interest rates by 25 basis points. This reduction is to be seen as an adjustment of the level of interest rates to somewhat lower inflationary pressure over the medium term. On the basis of the information available, this is the appropriate level of interest rates to ensure that the euro area economy will be able to maintain price stability and thereby to contribute to sound economic growth over the coming years. In order to explain today's monetary policy decisions in some more detail, let me share with you our assessment of the information provided under the two pillars of the ECB's monetary policy strategy.
As regards the first pillar, also taking into account the latest available information, monetary developments no longer pose a risk to price stability. M3 growth has been on a gradual downward trend since spring 2000, reflecting the increase in the key ECB interest rates which occurred in the period from November 1999. The three-month average of the annual growth rates of M3 was 4.8% in the period from January to March 2001, which is close to the reference value of 4 1/2%. In the past few months, some slowdown in credit aggregates has also been visible. In addition, as already stated on several occasions, there have been indications that the monetary growth figures are distorted upwards by non-euro area residents' purchases of negotiable paper included in M3. This has now been confirmed by clear evidence, and the magnitudes involved are significant. As regards holdings of money market fund units/shares by non-euro area residents, on which we now have solid statistical data, the distortion has become more sizeable over recent months and currently amounts to around half a percentage point. In addition, there have been non-negligible upward distortions to the annual growth of M3 as a result of non-euro area residents' holdings of other marketable paper included in M3, for which precise statistical information is currently being developed. The ECB will keep the public informed about ongoing developments in these categories of M3. As these factors can be broadly identified, the information content under the first pillar is ensured. Taking into account these upward distortions, as well as all information from the first pillar, it can now be concluded that there is no longer a risk to price stability over the medium term emanating from the first pillar.
As regards the second pillar, upward risks to price stability over the medium term have diminished somewhat. This view is supported by all forecasts. The evidence available, however, requires continued monitoring of growth trends and wage developments, in particular.
First, owing to the less favourable external environment, a moderation in real GDP growth in the euro area will contain upward pressure on consumer prices arising from the demand side. Notwithstanding the high uncertainty surrounding the outlook for external developments, forecasts suggest that actual economic growth will nevertheless be broadly in line with trend potential growth, supported by domestic demand. Second, wage moderation has so far been maintained for the euro area as a whole, despite the effect of the oil price shock. This has been a very positive factor and lends support to those forecasts which assume that current inflation rates will not spill over into future wage negotiations. This notwithstanding, wage developments need to be continuously monitored. An abatement of domestic cost pressures on HICP inflation remains conditional on the continuation of wage moderation. For the Governing Council, it is of utmost importance that wage negotiators should have full confidence in monetary policy maintaining price stability in the euro area over the medium term.
For some months to come, this medium-term trend will be overshadowed by temporary developments in unprocessed food prices following the health concerns related to meat consumption and the consequences of the outbreak of foot-and-mouth disease. Moreover, the pass-through of the indirect effects of past rises in oil prices and the past depreciation of the euro is likely to continue for some months. The effects of these extraordinary factors should, however, gradually diminish over the course of this year, implying an improved outlook for inflation to fall below 2% in 2002.
The Governing Council has to focus on the outlook for price stability in the medium term as only this perspective allows for the time lags for monetary policy to work its way through the economy. The information under the first pillar indicates that price stability can be maintained over a medium-term horizon. The information under the second pillar indicates that upward pressure on prices can be contained. The Governing Council will continue to monitor wage developments as well as external and domestic demand trends. The picture from the two pillars taken together is positive. At the same time it underlines the need to remain vigilant.
Fiscal policy will have to continue the consolidation process in line with the Stability and Growth Pact and the commitments made in the context of the stability programmes. The avoidance of inflationary pressures on a permanent basis in an environment of solid growth requires that governments and social partners implement decisively the structural measures in labour and product markets that are essential for lifting the growth potential of the euro area.
Let me now give the floor to the Vice-President, who will inform you about two other issues relating to the production and introduction of the euro banknotes.
First, I should like to address the production of euro banknotes after 2001. As you are aware, the euro area national central banks (NCBs) are producing the euro banknotes they will need for the initial supply at the end of this year. With regard to the production after 2001, the Governing Council has decided to apply a so-called decentralised production scheme with pooling. This means that not all banknote denominations will be produced by every printing works involved. In 2002 some 4.8 billion banknotes will be produced. This volume is based on the estimated national requirements of the NCBs. As the future national needs for euro banknotes cannot be reliably determined on account of the potential impact of banknote migration between countries, production from 2003 onwards will be allocated to the NCBs, taking into account their launch stock requirements, the capital key and the specific situation of banknote demand in some countries.
Second, many of you will be aware that this is the "Week of Europe" and that yesterday marked the 51st anniversary of the Declaration of Robert Schuman. In this context, the ECB participated in the European Institutions' open days in Brussels and in Strasbourg, which offered another opportunity for the public to obtain information about the introduction of the euro banknotes and coins. Furthermore, as previously announced, a series of conferences on euro changeover issues is being organised by the NCBs in the framework of the Euro 2002 Information Campaign, in which the members of the Executive Board are actively participating. These conferences aim to bring together the key parties involved in the euro cash changeover process. Two such conferences have been held so far: one on 6 March in Brussels and one on 4 April in Madrid. Two further such conferences will take place next week: on 15 May in Lisbon and on 16 May in Frankfurt.
I should also like to remind you that comprehensive information related to the introduction of the euro banknotes and coins can be obtained in all 11 official Community languages from the Euro 2002 Information Campaign website (http://www.euro.ecb.int).
Finally, the Governing Council has decided that its two meetings outside Frankfurt in 2002 will be held in Maastricht on 7 February to celebrate the 10th anniversary of the signing of the Treaty on European Union ("Maastricht Treaty") and in Luxembourg on 4 July.
We are now at your disposal for questions.
Transcript of the questions asked and the answers given by Dr. Willem F. Duisenberg, President of the ECB and Christian Noyer, Vice-President of the ECB
Question: Mr. President, you just spoke about the wage policy on a very general level. Recently, your colleague, President Welteke, made some critical remarks, in particular, with regard to the wage negotiations of German pilots. In your view, do you think that there is a danger that these negotiations could send out the wrong signals for price stability in Europe?
Duisenberg: I will not comment on any particular wage negotiations occurring here and there. I am aware that in some pockets of the euro area, wage developments do heighten our need to remain vigilant. But, as I said in my introduction, so far, wage moderation has been gratifyingly present across the euro area as a whole and we hope to keep it that way.
Question: Two questions: how should we see this move? Does this clear the horizon for a while? Or does a small 25 basis point move mean that there is room for more to come? And the other question I have is: how much is today's move related to what is going on in the United States? Did Greenspan spook you with something he said at the G7? Is it still fair to say that the US slowdown is just the "weak wind", as you once called it, for the European economy?
Duisenberg: As regards your first question: "Is there more to come?", I would like to quote again from my introductory statement. That is, on the basis of the information available, this is the appropriate level of interest rates to ensure that the euro area economy will be able to maintain price stability and thereby to contribute to sound economic growth over the coming years. Now, with regard to your second question: I have seen Mr. Greenspan in the G7 meetings and also last weekend in Basle. We are continuously in touch, you might say. We exchange information, but one monetary authority would never exert pressure on the other to do this or that. And that holds true for either direction.
Question: I do not mean in terms of pressure, but are you less convinced today of the strength of the US economy and more convinced that downside risks exist internationally? And is that what caused the ECB to act today?
Duisenberg: No, we are, may I say, as uncertain about the precise future development of the US economy, which is of crucial importance to the world, as maybe the US authorities are themselves, and with that in mind, we have revised our expectations downwards in line with all forecasts available on the outlook for growth for the euro area.
Question: I asked you whether the US slowdown is still a weak wind for Europe or if that's changing?
Duisenberg: No, we remain convinced that the US slowdown and the subsequent slowdown across the world which this entails has an impact, but only a limited impact on the euro area prospects for growth, and we remain of that conviction.
Question: I have three questions. The first is based on something you have just said, namely that you revised your growth forecast for the euro area downwards. Was that a recent revision by the European Central Bank? And can you reveal what it was? The second one is: was there a formal vote today by the Governors that met? And the third question is about something that was said yesterday by a "Bundesbanker" named Kühbacher in Berlin about the 2% target. He suggested that a debate should be held on whether or not you want to keep it as it is, at 2%, or maybe, as he even suggested, you would want to change it to around 2% to give you more leeway. Is such a thing open for reconsideration within the ECB, I would be eager to know?
Duisenberg: As I said in my statement, all forecasts available are forecasts by the IMF, the OECD, the European Commission, or consensus forecasts by private institutions. They all point in the direction of growth performance of the euro area at or slightly above the trend potential output growth rate of around 2 1/2%. This is what we took into account. We do not yet have a new internal ECB forecast. As soon as we have, we will let you know. Second question: there was no vote. Third question: I was very interested to see that Mr. Kühbacher managed to reach the front page of your newspaper. And as far as the Governing Council is concerned, I believe it is true to say that they were not yet aware of that. So we did not discuss it.
Question: Inflation seems to have been edging higher recently in Germany, Italy and Belgium. How convinced are you that this is just a temporary phenomenon? That it will not continue? And my second question: when will the ECB publish the next economic forecast, and what will it look like? Will it follow the format of the December forecast?
Duisenberg: The last question first. We will publish our second forecast, I believe, in the June Monthly Bulletin. What it will look like? I have some intuition, but that is all I can say about this. I do not think it will look very different from the content of my Introductory Statement today. On the last question on inflation. As I have also said on earlier occasions, we have a sequence of temporary factors affecting the inflation rate. First, we had the oil price high in the course of last year and the depreciating trend of the euro in the course of last year. The effects of this are still working their way through, but at a gradually moderating pace. And then, in addition, we have now had, in particular, the outbreak of foot-and-mouth disease, which has led to a hike in unprocessed food prices, which will also take some time to peter out again. But then, these are all temporary factors. But they do lead us to conclude that, whereas we thought earlier that we would already be under the 2% limit in August/September of this year, for example, it may take us somewhat longer. However, we derive distinct comfort from all the available forecasts - and we have no reason to disagree with them - which indicate that over the medium term - by which I mean within a time span of one and a half to two years - inflation will be under 2% again. We rely on and trust in that.
Question: Mr. President. If the money inflow from foreigners was large enough to distort M3 figures upward by 0.5 percentage point as you said, should that not have pushed the euro exchange rate a lot higher? Or, put the other way round, has the euro been more or less stable recently at its present rate of 88-89 cents because of the inflow of money from outside?
Duisenberg: Now, there must be a misunderstanding here. I talked about the distortions which occurred, and which we have already known for months that they were there, but we were not certain of their amount or of their dynamic development, let me call it that. It concerns the holdings of money market funds, issued by euro area MFIs, by non-euro area residents. In the past we were not able to distinguish them from resident holdings of the euro area. We now are. So, it is a refinement of our statistical apparatus. It has taken us a fairly long time. But we are now - and it is only a matter of a few days I am talking about - able to identify them. You will find a full description of the technical details I am talking about in next week's Monthly Bulletin, in which a special box will be devoted to this topic, which I hope will remove your misunderstanding. From now on we will publish the amount of this distortion every month. At the same time we are working - i.e. our statisticians are working - on other distortions, namely the holdings of securities with e.g. an initial maturity of no longer than two years in the hands of non-residents of the euro area. We are still working on this and it will take some more months. As soon as we have an indication of what this involves we will, of course, also publish it. However, there is one significant thing, which is included in my Introductory Statement. We also had the impression when we finally got the results a few days ago - and to be quite honest this was also new for me - that the magnitude of this first distortion I mentioned, which on average is about 0.5 percentage point, has been, and is gradually, increasing over time. So, not only speaking in mathematical terms, it seems that we have to - if you look at the curve - both bring down the line of the curve and reduce the angle. So the dynamics are less than we thought earlier. And that is a very significant element of this revision. In mathematical terms it seems that the first derivative of the distortion is positive.
Question: Why is it a distortion?
Duisenberg: Because it gives it a distorted image of what the M3 figures really are. It is not a distortion in the sense that it was wrong. But we are now in a position to identify elements which should not belong in the definition of M3, which so far we were not able to identify, even though the quality of our statistics is very high indeed. Now we are able to identify them. And also because, as I said, it is not only the absolute magnitude, but also the change in size of this phenomenon - if I may call it that instead of a distortion - that has monetary policy implications. The dynamics of M3 corrected seem to be less that we thought earlier.
Question (translation): President Duisenberg, how do you value or assess the euro vis-à-vis the dollar? Is it greatly undervalued, slightly undervalued or moderately undervalued? That is my first question. Second question: despite the fact the American key rates were below European ones, why do you think that there is still not enough capital remaining in Europe and that capital is flowing into the US, thereby further strengthening the dollar. And a further question: is there any scientific way of explaining why two or four weeks ago, despite the fact that nothing much has changed since then, you seemed to assess things differently. I mean, four weeks ago we had the same situation as today, the same two weeks ago and the same today. Why did you change your assessment? I think it is very difficult to follow your argumentation. I could put the question the other way round. Let me ask you instead: was it a surprise that you reduced interest rates today?
Duisenberg. That is for you to answer. Whether you were surprised or not? It is not true that there is nothing new. There is. We make an assessment every two weeks. Under the first pillar, we have this new phenomenon of correcting the, may I call it again, dynamics of the M3 developments. That is new. This makes us believes that, although before we thought we were approaching the reference value, now we know that, in fact, we have already been under the reference value of 4 1/2% for quite some time and increasingly so. So that, for example, is in itself new. Under the second pillar there are new indications available. We have new forecasts from other institutions. They confirm more or less what we already intuitively felt was going to happen. We have new figures for industrial confidence, however difficult they are to quantify and to put into our assessment. So from both pillars we concluded that the risk to price stability had, if not disappeared totally, as the first pillar indicates, then at least, looking at the second pillar, diminished. The slowdown in euro area output growths certainly helps to contain inflationary pressures. So that is new information which helps us in giving our fortnightly assessment. To qualify: I prefer to refrain from commenting on the euro/dollar exchange rate. Neither hard nor soft nor tough, so I just take note of what the exchange rate does and if there are any particular developments then we would take it into account for our assessments under the second pillar. But I do not see any particular developments here.
Question: Sorry, Mr. Duisenberg, I have to ask again. The ECB claims to be the most transparent central bank in the world, but even in the last few days, most central bankers said that this is not the right time for interest rate cuts. What happened in those few days to make most or all of the ECB members change their opinions? Maybe you can tell us again. Was it pressure from some ECB members or from the outside or what?
Duisenberg. Well I don't count myself among those central bankers who in the last few days have made new statements. When we meet we, of course, come to a consensus view, and we keep on repeating this view until we meet again. And that is what we have been doing.
Question: I would like to ask a question regarding the data from Germany on industrial production which we have received this week - you already mentioned that - and the clamouring voices. In which regard has the ECB taken those voices and these data into account. And the second question would be ...
Duisenberg. The first question is easy to answer. We take and keep on taking a euro area perspective. And for us new data on industrial production in Germany or Italy are, until they are translated into euro area-wide indicators, no more than anecdotal evidence.
Question: And the second question. Do you think all the signs given of today's decision were pointing towards the ECB putting rates on hold? Do you think that does anything to the image of the ECB in the public or the markets?
Duisenberg. Well, I hope to have made it crystal clear in my introductory statement, and I repeat now for the second time: we do believe that with our move today we have reached a level of interest rates which is appropriate for the given situation. I cannot say anything about the length of time we will maintain this judgement.
Question: ... if you take into account your new correction of M3, does it mean that actual M3 is only slightly over 4%? And my second question is: four weeks ago, you warned of second-round effects, especially in the area of wages. Today you gave an appraisal of wage moderation. So what changed your assessment?
Duisenberg: If you take the precise correction: for the last figure we have, for example, the March figure for M3 - although that is only a one-month figure - as published was 5.0%. The correction for March can be put at 0.6. So that means that effectively we would be at 4.4. On average for the last three months, e.g. the figure for the period from January to March was 4.8 and the figure for the correction was 0.5. So that would take us to an average figure as related to the reference value of 4.3.
And on wage moderation, I owe you an answer to that question. We do assess that for the euro area as a whole wage moderation has gratifyingly prevailed. We do not underestimate - as I said - that in certain pockets or regions there is more pressure than in others, but we remain vigilant. We have to remain vigilant that the - in principle - temporary transgressions of the inflation figure - as we have noticed over time - do not become entrenched in such a way that they would lead to higher wage agreements than would be consistent with our "guarantee" that we will see to it that price stability will be maintained over the medium term.
Question (translation): Distortion and image. My question is: what about the first pillar of the monetary policy strategy of the ECB? Now that you have corrected the figures, has it improved or "disimproved", because this question must be analysed. You were talking about these distortions, these money market funds held by non-residents: are these ongoing, permanent distortions or do they also have to be seen in the context of the very flat interest rate curve, because there have been more distortions over the past couple of months while this curve was very flat. If it were to steepen again, maybe these distortions would disappear.
Duisenberg: The statistical corrections are themselves a normal phenomenon. It is almost a fact of everyday life in statistical series that there will be revisions and refinements from time to time. These corrections in no way affect either the formulation of our two-pillar strategy or the application of our two-pillar strategy. This changes nothing in that, but of course we have to take into account the results of those revisions. Most of all if they lead to - as I say - a change in the dynamics of the developments rather than just in the level.
Question: I have a question on the transparency and preparation of markets for your actions. You have been saying for a long time that you want to prepare the markets for your actions in monetary policy. The markets did not expect your cut at all. In fact, yesterday the euro fell again because all operators or dealers were convinced that you would not cut the rates. But you did. So, are you still misunderstood? Or did you give in to pressure from the markets? This is the first question. And the second question is: I am a bit surprised that in just one week you seem to have changed the idea of the risks coming from inflation, which were on the upper side one week ago and are now slowing down. And here again some economic observers are saying that you were cutting rates because you were worried about economic developments and you wanted to give a push to the economy and to confidence. That is the most important thing.
Duisenberg: It is not our policy to surprise the markets. Sometimes this is unavoidable. That is a fact of life. But it is certainly not something we strive for. It has nothing to do with pressures. It has to do with analysis and assessment. And if you quote me about one week ago, I think you should quote me about two weeks ago - or at the last press conference we had - when we gave statement, or in the G7 context when we gave similar statements; new facts lead to new assessments and they sometimes lead to new conclusions, and that is what has happened. It has nothing to do with pressures from either the inside or the outside or the media or politics. The most difficult thing for policy-makers is to take actions when they are necessary, irrespective of whether there are pressures or not.
Question: Is it fair to say that by your action today and in contrast to your lack of rate cuts over the previous months overt political pressure is counterproductive?
Duisenberg: I could repeat the answer I gave to the previous question that, psychologically, the most difficult thing is not to resist pressure, but to take action when action is needed on the basis of your own assessment of the situation and developments, despite any pressure in whatever direction.
Question: You said that it is not in your policy to surprise the market, but it is sometimes unavoidable. Why was it unavoidable this time to surprise the market? Because you could have waited a little more just in order to make the decision expected.
Duisenberg: Well, if we had waited ... Let us assume we had waited four weeks and we had moved then, and in the meantime we had made public the information as we are making it available today, and more extensively in the Monthly Bulletin of next week, then I am sure that in two weeks time your question would have been "what is new? Why did you not do four weeks ago what you are doing today?"
Question: Mr. Duisenberg, my question, again, relates to M3. This correction, it sounds from what you are saying, was very decisive in today's decision.
Duisenberg: It was one of the factors - but one of the factors - that triggered our decision. Quite explicitly I want to say - and I realise I am being repetitive - that our decision was today again based on an assessment of the two pillars of our monetary policy strategy. This involves both the monetary developments, and there we are talking primarily about the corrections, and the second pillar, the assessment of the medium-term outlook for prices and price stability based on a very broad range of indicators.
Question: My question was that early on in the history of the ECB there were some doubts expressed about the reliability of the M3 data and concerns about the first pillar, and that is why you have a second pillar. Would you say that there are any residual doubts now about the information that you get from M3? And if not, do you need a second pillar at all?
Duisenberg: Yes, we certainly need a second pillar in the complex world we live in. First, in response to your first question, I did say, and I repeat, our monetary data and series are of a high quality. They are continuously being refined and we have found two areas in which a revision was called for. That is a lot of work. One area we have now resolved is that we finally have a quantitative idea of what a more correct picture of the M3 developments would be. The second revision will follow, but we need some more months to work on it; we will publish it as soon as we have it, but we do not expect it to show the same dynamics, although it will go in the same direction. That is the revision that has to do with non-euro area residents' holdings of securities, which has to be taken out of the M3 figures. We have the impression that that will be more stable than this first correction but, all in all, I expect it to take another three to four months before we have a precise idea about it, but we will publish it as soon as we know it, and then towards the end of this year we will bring all this together and come up with an entirely new, clean series of M3 figures.