ECB Press conference: Introductory statement
Willem F. Duisenberg, President of the European Central Bank,Thursday, 4 November 1999
With the transcript of the questions and answers
Ladies and gentlemen,
the Vice-President and I are here to report on today's meeting of the Governing Council of the ECB.
The outcome of today's meeting was that the Governing Council has decided to increase the ECB interest rates. The forthcoming main refinancing operations of the Eurosystem will be conducted as fixed rate tenders at an interest rate of 3.0%, starting with the operation to be settled on 10 November 1999. This increase implies an upward adjustment of 50 basis points from the rate of 2.5% applied to previous such operations. In addition, the interest rate on the marginal lending facility will be increased from 3.5% to 4.0% and that on the deposit facility from 1.5% to 2.0%, both with effect from 5 November 1999.
Overall, on the basis of prospective developments, the Governing Council considers that today's decision will counter the upward trend of the balance of risks to price stability. This decision will therefore contribute to sustaining non-inflationary economic growth in the euro area over the medium term.
The main argument for raising the interest rates was the fact that since around the beginning of the summer the balance of risks to future price stability has gradually been moving towards the upside. In fact, the economic situation in spring 1999 had given rise to concern about downward risks and had led to a precautionary interest rate reduction by 50 basis points on 8 April 1999. However, the current economic environment is far more favourable. Moreover, several indicators, including monetary growth, suggest that there is ample liquidity in the euro area. Inflation rates are expected to increase gradually in the months ahead, mainly as a result of the increase in energy prices earlier this year working its way through to consumer prices. The latest data on industrial producer prices confirm this pattern. Over the medium term, however, it is important to prevent the availability of ample liquidity from translating into upward pressure on prices. In particular, an increase in interest rates now should help to counteract further liquidity growth over the medium term and contribute to maintaining inflation expectations safely below 2%.
With regard to the perception that an increase in interest rates now would endanger the resumption of economic growth, the Governing Council is of the opposite opinion. A timely rise in interest rates will avoid the need for a larger increase in interest rates later and, hence, will contribute to stronger growth over an extended period of time.
Concerning the size of an increase in interest rates, against the background of a fundamentally changed situation, the precautionary interest rate reduction made in April 1999 is no longer justified. Furthermore, today's move by 50 basis points appeared to be the best way in which to avoid uncertainties regarding the future course of monetary policy. In addition, such a move is expected to contribute to reducing any uncertainty premia potentially prevalent in financial markets and also to help to contain a possible increase in volatility in money markets towards the end of the year. Under these circumstances, the alternative of moving by less than 50 basis points now and examining the need for an additional step later on could potentially introduce unwarranted uncertainty for the period ahead.
Let me now provide you with more detailed information on monetary, financial and other economic developments, and thereby further explain the decisions taken today.
With regard to monetary developments in the euro area, the monetary data up to September 1999 reinforced the view that M3 growth is on a rising trend. The three-month average of the annual growth rates of M3, covering the period from July to September 1999, was 5.9%, which is almost 1½ percentage points above the reference value of 4½%. This deviation from the reference value has steadily increased during 1999. The strong growth of the most liquid components of M3 is particularly noteworthy, suggesting that the very low level of interest rates favoured the strong growth of monetary aggregates. The pick-up in economic activity is likely to have further stimulated M3 growth. Credit to the private sector also continued to expand rapidly in September 1999, at a rate in excess of 10%. The demand for loans remained strong throughout the first three quarters of 1999, supported in particular by the low level of bank lending rates and the ongoing economic recovery. Overall, these developments indicate a generous liquidity situation in the euro area.
Euro area financial market developments over the past few months confirm the general change in economic conditions and perspectives for the euro area by also anticipating an acceleration of economic growth. This is reflected in the rise in government bond yields and the associated pronounced steepening of the yield curve since spring 1999. Today's decision should contribute to firming financial market expectations of stronger growth without increasing inflationary pressures.
With regard to economic activity itself, current information indeed continues to support the view that there is an ongoing strengthening in the euro area. The outlook for the world economy remains positive; this mainly relates to the sustained growth of the US economy, but also to the apparent strengthening of the recoveries in South-East Asia and Japan. Most recent data releases for the euro area suggest an acceleration of real GDP growth rates in the second half of this year. This is indicated by confidence and survey data, as well as by production data for the industrial sector extending into the third quarter of the year. Therefore, the prospects for a continued improvement in output growth remain good.
Concerning consumer prices, in September 1999 the annual rate of change in the Harmonised Index of Consumer Prices (HICP) was 1.2%, that is to say unchanged from August 1999. On the one hand, upward pressures related to the surge in oil prices in recent months and to the rate of change in prices for seasonal food. On the other hand, in September the increases in both services prices and prices for non-energy industrial goods were more moderate than in August. Countervailing price movements of such a kind may possibly continue in the coming months, while expectations remain that there will be some overall upward movement in the HICP rate in the short term, which will mainly be linked to energy prices.
In conclusion, the downside risks to price stability have disappeared. Instead, monetary developments, together with the accumulating evidence of improved economic prospects, confirmed the view expressed earlier by the Governing Council that the balance of risks to future price stability has gradually moved towards the upside. This assessment argued in favour of adjusting the interest rates within the context of a monetary policy stance which is conducive to maintaining price stability over the medium term.
Containing inflationary expectations in a forward-looking manner is decisive for ensuring sustainable growth in GDP and employment. This would be greatly facilitated if individual member countries were to make convincing progress in the structural reform of the labour and product markets, which, over the medium term, would enhance the euro area's production potential and thereby curb upward pressure on prices as the recovery proceeds. Together with fiscal consolidation in the context of the Stability and Growth Pact and the necessary moderate wage developments, such reforms could make a crucial contribution towards transforming the current cyclical upswing into a process of longer-term non-inflationary growth.
In a press release dated 1 July 1999, the ECB indicated that an announcement would be made in November with regard to the decision on the public relations agency selected to prepare and execute a Europe-wide information campaign for the introduction of the euro banknotes and coins on 1 January 2002. In this regard, I am now pleased to announce that the Governing Council has decided to negotiate the contract with Publicis. Further information on this matter can be found in a separate press release which will be issued this afternoon.
Finally, I should like to draw your attention to the fact that the second meeting of the Governing Council to be held in December has been rescheduled. As announced yesterday, the meeting has been brought forward from Thursday, 16 December 1999, to Wednesday, 15 December 1999, in order to enable several Governing Council members to attend a first gathering of a new forum consisting of ministers of finance and central bank governors (the so-called "G20"), which is to be held in Berlin on 16 December 1999.
We are now at your disposal, should you have any 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, in April, on lowering the rates you said: " This is it." Do you say: "This is it" today?
Duisenberg: Yes and no. No, I can't say that.
Question: Do you - after the 50 basis point rise - do you see this level as neutral on interest rates?
Duisenberg: We don't precisely know what level would be the neutral rate. That is a well-known topic. We don't precisely know what it is. What we were sure of is that, whatever the so-called neutral or balanced rate might be, the level of 2.5% prevailing until today was below it. So we can say that this move of today is a move in the direction of the so-called neutral rate, even though we do not know where the neutral rate precisely finds itself.
Question: Mr. President, two questions. Number one: at the last press conference you said that there was still some evidence missing before you could hike rates. What was the final piece of evidence which made you do today's decision?
Duisenberg: There was not a single final piece of evidence. We have received a lot of new evidence in the course of this month and not only, as some think, on M3 growth, but also on producer prices across the euro area which are an indication of future price developments in the consumer sphere. We have received evidence - as I have mentioned - on confidence surveys of both consumers and investors and of course a lot of anecdotal evidence coming from the various countries. So it was a host of evidence, but evidence all pointing in the same direction.
Question: Second question: the ECB, in the last few days, seems to have gone the extra mile to prepare the market for today's move. Can we - in contrast to what you did in April, for instance, where markets were very much surprised by the move - can we expect the ECB to do that extensive lobbying in the future as well?
Duisenberg: I don't know. The surprise in April was a surprise not so much about the fact of moving, but about the size. The fact that we were moving in April was already widely discounted in the markets. The size may have been a surprise. And I would like to repeat that it is not our policy to catch markets by surprise. We do want to be predictable. We do want to be credible which doesn't rule out that, on some occasion in the future, we may be forced to surprise markets. That can then even be a part of policy. On the other hand, it is not our policy to do so. So what you can expect, that was your question, will there be a continued policy of going the other mile, as you put it, I would say: No, but then I don't know.
Question: Mr. President, how do expectations on wages fit in your assessment? I don't remember that you told us something about that.
Duisenberg: I didn't mention it specifically, but, in assessing all the indicators we had, we paid due attention to the fact that in various regions of euro area there seems to be an acceleration in wage demands which, by itself, is adding to our conviction that it is about time to raise interest rates.
Question: We get the impression that you've taken more account of the risks of overheating in the "peripheral" euro area member countries than of the real situation in the core euro area economies: France, Germany and Italy. Especially the last two. Aren't you worried that this interest rate rise, which reverses the April cut, will have negative consequences for the resumption of growth in Germany and Italy?
Duisenberg: By no means. We think that creating an environment of stable prices - and that is what this interest rate move is contributing to - is the best support that monetary policy can give to economic growth and growth of employment - wherever, in Germany, Italy, the Netherlands or Ireland. The level of interest rates at which we are means - to restate what I said previously - interest rates at a historically low level and certainly below a level which can be regarded as more or less neutral in an environment of sustained economic growth. We certainly think that, rather than inhibiting growth, this will help growth. The stability-oriented environment in itself is a great support for a gradual real recovery in all areas of the euro area.
Question: Mr. President, given that you feel unable to say: "This is it" which seemed the last time you changed interest rates to emphasise or to stress the durability of the interest rate. Can one understand that you feel less emphatic about this rate so that we can't expect it to endure as long as the last one?
Duisenberg: You can't understand anything because - let me phrase it this way - in our deliberations we were very sure that, had we moved by 25 basis points, we would immediately have created the expectation and speculation in the markets that there would be another step to follow. That is precisely a phenomenon which we did not want. We want to calm down markets and market expectations without saying anything about whether and when a next step might be necessary.
Question: Coming back to the famous words: "That is it" which gives much room for interpretation, could one interpret today's decision as the end of the trend or the change of the trend from interest rates coming down to interest rates going up?
Duisenberg: Looking at the facts, you certainly can interpret it that way and I mean - in April we had lowered interest rates, in December, already last year, we had, in a co-ordinated way, lowered interest rates - now we are raising them. So there is a reversal of measures because there is a reversal in economic conditions and indicators which we perceived.
Question: And secondly I'd like to ask you whether you could give us an estimate for a foreseeable future for dollar/euro exchange rate.
Duisenberg: No, I cannot.
Question: Mr. President, I want to make sure that we leave this room being very sure. We understand exactly what you're saying about the future. You have said that you were trying to remove the stimulus that you put in April.
Question: Do you now consider yourself the risks after this move evenly balanced?
Duisenberg: What I said is that we have come to the conclusion that there is ample liquidity, I could add, very ample liquidity available in the euro area economy. What we want to do is to prevent the liquidity situation from becoming so ample that over time - and the lags are very long, as you know, in monetary policy and monetary analysis - that over time this ample availability of liquidity would by itself exert an upward pressure on prices. And that is all I have said and that is what I must insist on continuing to say.
Question: Could you tell us whether the Council was entirely in agreement on doing 50 basis points or whether there was some disagreement?
Duisenberg: Today's decision was a decision taken by consensus. Is that enough?
Question: And does that mean that no one objected?
Duisenberg: It does.
Question: In the United States you have seen a quite high growth rate which doesn't create growing inflation. Do you think we are going to see the same tendency in Europe, that we can have a higher growth rate than we recently expected without increasing inflation?
Duisenberg: Not by copying the United States. If we were able to quickly enforce the so badly needed structural changes, as I said, in labour markets, in goods markets, in all kinds of activity in the economic sphere, then we could come to a higher potential growth rate than we are actually seeing now. But that is the first thing that is necessary. In other words, what is so much talked about, namely whether or not the United States has entered into a so-called new economy, I don't think that that moment has yet arrived at all in Europe. We first have to get our own house, and that is our labour house, our product market house, in order before we can start thinking about phenomena which are so benevolent in the United States.
Question: Mr. President, I wanted to check that you still hold the view that consumer price inflation will stay below 2%. I think you said not long ago that by the end of the year 2000 the level would still be below 2%. If you still hold this view and given that core inflation remains very subdued, it is hard for anyone to see quite where the threats to price stability are really coming from. So I wanted it to be spelt out exactly where they are.
Duisenberg: The forecasts by all institutions that we have available, including our own internal forecasts, in as far as we have them, point to an inflation rate which, on average, in the year 2000 - on average, I say - will remain safely below 2%. However, all indicators, as we assessed them today, - and I am talking about wage demands, I am talking about producer prices, and I am talking about the liquidity situation - point in a direction that the risks on the upside are increasing and have already increased, i.e. the risk of that figure of 1½% to 1½% being threatened. And it is precisely for that reason - since we want to keep inflation over the medium term well below the 2% figure that we have set for ourselves as being compatible with price stability - it is precisely for that reason that we have taken the decision of today.
Question (translation): Mr. President, can you say whether today's decision was taken primarily with a view backwards or forwards? Have you found that the rate cut of April was too marked, so that monetary expansion was encouraged, or - if we look forwards and say that the rate of inflation will remain below 2% in the year 2000 - that the decision was, so to speak, the return to a monetary policy strategy? Only in that case can the interest rate decision be understood both in principle and in economic terms.
Duisenberg:We remain forward-looking. That is our duty. That is also the basis for the decisions taken today. And we have considered this decision in the light of the two broad pillars in our monetary policy strategy, i.e. both from the angle of monetary developments and from the assessment of a very wide range of indicators for the future, in as far as we had them available. So, it is by no means a change in strategy, nor a change in tactics that underlies our decision.
Question: Two questions. Number one: Y2K, the famous word, did it in any way affect your decision, hurry up your decision today, or was it not an issue at all?
Duisenberg: It was not an issue, but it was one of the factors taken into consideration - co-determining, if I may put it that way, the size of the rate increase.
Question: And the second question: the current level of euro/dollar - did that in any way influence today's decision or was that not an issue at all?
Duisenberg: It was no issue at all.
Question: To what extent has the decision been influenced by inflation overshooting over 2% on the periphery in euroland?
Duisenberg: In some countries, I believe four, current inflation rates are over 2%. That is in Ireland, Portugal, the Netherlands, and Spain. However, current inflation rates are not a determinant of our decisions on interest rates at any time. We have a forward-looking strategy and we stick to that. I would also like to repeat, once again, that the inflation differentials, as they exist today in the euro area, are by no means exceptional, or anything special. For that, I would like to refer to the article in our last Monthly Bulletin which explicitly analysed this phenomenon and which also came to the conclusion that the regional differentials in inflation rates in Europe, as they are today, are even smaller than they are - also today - in that other big monetary area, the United States.
Question: You have said that you want the ECB to be predictable, but you think there is a danger that the decision-making process was too transparent, in this case giving the impression that the rate decision was effectively taken in advance of today's meeting. Could such an impression undermine the setting of monetary policy - even if it was just an impression?
Duisenberg: Even if it was just an impression, I do not think it will undermine the setting of monetary policy. It is very difficult to prevent market expectations from developing in the way as they have done over the past two or three weeks. That is admittedly true. But we deliberately changed the tone of our assessment and of its presentation, starting on 15 July in a press conference, with all of you present. We did that deliberately on 15 July and we have continued to stick to those indications throughout the period up to the present. It sometimes happens in practice that in the repetition it may seem as if there is an acceleration, which was not our intention, but you cannot do anything about that. But then I want to repeat - we do want to be predictable, to the maximum extent possible, because only in this way can we also succeed in being credible on the markets.
Question: Mr. Duisenberg, it is related, but not exactly the same topic. The ECB is meeting next week with the 12 central banks of eastern Europe. Can you tell us something about what you are going to tell them? You also have an internal report, I guess, produced on this, obviously in advance of that meeting. Will you be releasing it to the public? And the third aspect: what will you tell, perhaps, candidate countries for accession to the EU who might want to unilaterally adopt the euro, for instance in order to improve their inflation prospects and their changes of coming into the EU?
Duisenberg: Next week Friday we have a seminar for the accession countries in Helsinki, organised by the ECB in co-operation with the central banks of Finland and Austria. And all governors of the accession countries - with the exception of one, I believe - will come to that seminar and we will discuss a wide range of issues which have to do with legal aspects, statistical aspects, monetary policy aspects of entry to or becoming a member of the EU. And, in this case, because the negotiations that are going on with these countries will not result in any country having the so-called opt-out clause, as the United Kingdom and Denmark had when they were already members, accession to the EU inevitably means that over time there will also have to be accession to the European Exchange Rate Mechanism. And, maybe later, it also means that it will end in the adoption of the euro as a currency for these countries. But, for all these aspects, we will have this seminar to exchange information and to increase our visibility and transparency vis-à-vis our colleagues at the central banks in those countries. By the way, there will be a press conference after the seminar in Helsinki. Your hypothetical question relating to countries which want unilaterally to adopt the euro as their currency, be it in the form of a currency board or "euro-isation" of the country: we will watch closely whether that would have any monetary policy complications or implications for the euro area. If so, we would certainly get in touch with the countries concerned to consider whether and how they should take such a move. But, so far, the countries that have indicated that they are thinking of moving in that direction seem not to be an overwhelmingly disturbing factor for the euro area as a whole, let me put it this way.
Question (translation): My question is addressed to Christian Noyer: Since we have just had Halloween, do you have the impression that public opinion will think that central bankers have seen a ghost - a ghost which only they can see - which is the return - still a long way off, if I have understood properly, of course - of inflation? How can you convey a clear message to the public without using the dread term "M3"?
Noyer: Sorry to disappoint you, but I'm only going to repeat what the President has already said. First, we've been trying - since 15 July actually - to explain to the public in advance that our assessments of past or current developments in all the indicators available to us - or which we said right from the start were the reference points of our strategy - be they monetary indicators for the first pillar or indicators both of the real economy and the financial economy for the second pillar - were showing a very clear development. We have tried to explain in advance to the public that it would not be our desire to put a stop to growth at the very moment it was beginning to pick up, but to make sure that this growth could remain non-inflationary and hence would have the best chance of lasting a long time. And that's our aim: that growth should pick up in Europe - growth is at different stages in different regions, but almost everywhere it is picking up - and at a favourable pace which does not generate inflationary tensions, because if that were to happen we should be obliged to take measures to curb it later on. We want instead that growth should be sound, without inflationary tensions so that it will last as long as possible and be as strong as possible. In other words, today's movement in interest rates is the ECB's contribution to the maintenance and the development of growth which is strong and lasting because it is non-inflationary. This being said, this is not the only condition for growth to remain strong over the long term and to have a powerful employment creation effect. Just as a last word: if I may repeat our leitmotiv, because in our view it is absolutely crucial: provided a number of structural reforms are carried out or pursued in Europe, inter alia in terms of goods, services and labour markets, Europe's growth potential will be maximised and the employment benefits of growth will also be maximised. So that if we want to see unemployment continue to fall - even fall faster - in Europe, we believe we are contributing to this end by our decision today, which supports long-term strong growth which avoids the danger of inflationary developments - although this is not a substitute for the carrying-out or pursuit of structural reforms.
Question: Mr. Duisenberg, you are expressing the consistency of your communication by saying that in July already you had changed your tone. Which is true. M3 growth rate was a little above 5% at the time and you had said that this is not so worrying yet, but you might change your assessment if it would grow further. But at the next press conference in September, the last available value had indeed risen further and you said at that time that you had not changed your assessment since. You said that M3 growth was not so reliable at this point because of the changeover and special effects and all that. And only at the October press conference you had changed the tone again. And this is not the only inconsistency. You lowered interest rates when M3 was above 5% in April and it has been above 5% almost all of the time and you had very different tones. So, we are left with the impression that it does not matter so much where it is at the moment, but what matters is what you want to say and what conclusion you come to by other indicators and by your considerations and you just use your assessment of M3 as a channel to communicate. But that it is not coming from M3, but you just pack it onto M3 and that makes you a little unpredictable and it requires you in advance to say what you are going to do because otherwise we would not know.
Duisenberg: Well, that last conclusion I would not share with you. What I simply said in the past and what I said today is that we needed more evidence and we now can conclude that month after month after month the monetary aggregates have been moving further away from what we have called our reference value. That can vary from one month to another, of course. But you need an adequately long period in which you can come to that conclusion. Then, at the same time, we are not looking only at the monetary aggregates. No, we have deliberately adopted a two-pillar strategy in which we look at a broad range of other indicators - and I have mentioned quite a few to you today - which also determines our attitude, together with the assessment of monetary developments. To my mind, we were and we are very predictable. The major difference between, let us say, the underlying situation in April and that of today was that in April we had two pillars, so to speak, pointing in different directions, which made the situation more difficult to both interpret and to act upon. Today, we have both pillars suddenly pointing in the same direction, namely in the direction of an increased risk towards price stability as we perceive it.
Question:I am very curious on how you come to your final conclusion. I mean, after having analysed all the facts and figures of pillar one and pillar two, I imagine that you must resort to a kind of quantitative feeling or use intuition in some way to come to this decision, if I am correct. How do you do that?
Duisenberg: That is very difficult to describe. It is a process. It is not just one decision, or at one moment, that you come to such a conclusion - certainly not, as we did today, collectively. But every individual member of the Council has over the past few weeks, some even over the past few months, been busy with himself and others thinking about how do we interpret the current developments. And then, finally, we come together on a day like this. But it has been prepared very well in small circles. Of course, we in the Executive Board have also discussed it earlier this week and we all came to our individual assessments. And then, finally, you come together on a morning like today and you confront each other with your thoughts and the outcome of your thinking over the past period and then it finally comes out that this is the decision we want to take on the proposal one of us had made.