Introductory statement Willem F. Duisenberg, President of the European Central Bank, Christian Noyer, Vice-President of the European Central Bank, Frankfurt am Main, 11 April 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, which was also attended by the President of the Eurogroup, Mr. Reynders.
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 keep the key ECB interest rates unchanged. 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 monetary policy strategy of the ECB.
As regards the first pillar, M3 growth has been on a gradual downward trend since spring 2000. The three-month average of the annual growth rates of M3 reached 4.8% in the period from December 2000 to February 2001. Growth in credit aggregates has also been less buoyant over the past few months. All in all, the information from the first pillar is signalling that upward risks to price stability have diminished over the past few months.
As regards the second pillar, upward risks to price stability have also diminished somewhat over the past few months, but they have not disappeared. Starting with the external environment for the euro area, forecasts for world growth have been revised downwards, and the uncertainty surrounding these forecasts has increased. In particular, this applies to the extent and duration of the slowdown in the United States and Japan, but also to associated spillovers to the rest of the world. While this indicates that the external environment is less favourable than it was up to autumn 2000 and is marked by high uncertainty, there are no indications of a risk of a global recession.
Turning to the euro area, it is of utmost importance that current developments in the Harmonised Index of Consumer Prices (HICP) be judged appropriately. Short-term price developments are indeed subject to volatility, owing to energy and unprocessed food prices, in particular. Over recent months, the energy component has again been affected by fluctuations in oil prices and the exchange rate of the euro. Unprocessed food prices have been influenced by health concerns related to meat consumption and the consequences of the outbreak of foot-and-mouth disease. Also if these most volatile components are excluded, there has been a broad upward movement in HICP inflation since the summer of 1999. In part, this reflects the pass-through of the indirect effects of past rises in oil prices and the past depreciation of the euro. This impact is likely to continue for some more months to come, but should gradually diminish over time. This should be taken into consideration by the general public and by wage negotiators as consumer price inflation above 2% for some more months will be temporary. Beyond the short term, the abatement of domestic upward pressure on HICP inflation remains conditional on the continuation of wage moderation, and wage developments remain an upward risk to price stability which needs to be closely monitored.
The deterioration of the external environment will imply a fall from last year's high rate of economic growthin the euro area this year; this reduction will be stronger than that envisaged some months ago. At the same time, however, available forecasts suggest that actual growth will be in line with, or above, trend potential growth. Hence, the moderation in growth should not be a source of pessimism as regards the economic strength of the euro area itself. This is all the more true as the euro area has not accumulated any fundamental macroeconomic imbalances over recent years, and domestic demand can therefore be expected to continue to sustain real GDP growth.
Industrial confidence has been deteriorating, reflecting the weakening of world demand. However, consumer confidence has remained high in recent months. Growth in private consumption is expected to remain sound, underpinned by increases in real disposable income which, in turn, reflect ongoing employment growth, reductions in direct taxes and lower oil prices. Economic growth in the euro area is expected to remain solid.
Monetary policy has to focus on the outlook for price stability in the medium term. With this commitment to price stability and the policy decisions since the start of Monetary Union, monetary policy has supported economic growth and employment and will continue to do so. Nominal and real short-term as well as long-term interest rates are not high by historical standards.
Monetary policy cannot lift the euro area's production potential, which is largely determined by structural factors. The improvement of the structural conditions for raising potential growth is undoubtedly of utmost priority. The responsibility for this lies with governments, as well as with the key national economic agents on the side of labour and industry. To increase potential output growth, comprehensive structural reform policies aimed at an increased labour market participation rate and improved investment incentives are required. While acknowledging that significant progress has been made, a more ambitious implementation of market-oriented reforms is needed in many areas. The still high level of unemployment calls for ongoing policy efforts to remove structural rigidities from the labour markets and to diminish adverse incentives provided by tax, benefit and pension systems. It is crucial to increase investment incentives in the euro area through structural policy measures such as deregulation, privatisation and tax reforms. The continuous contribution of social partners will be essential to prevent temporary inflationary pressures from possibly translating into longer-lasting effects. Finally, fiscal policy will have to make its contribution towards enhancing the growth potential of the economy. This requires both the continuation of the fiscal consolidation process in line with the Stability and Growth Pact and qualitative improvements on the income and expenditure sides of the budget.
In addition, I should like to inform you that the visual appearance of the euro banknotes and their security features will be unveiled to the public at a press conference to be held on 30 August 2001, shortly before the euro banknotes are frontloaded to banks on 1 September 2001. It will take place immediately after a press conference we shall now hold to report to you on the Governing Council meeting on that day. Therefore, we have decided to bring the press conference originally scheduled for 13 September forward to 30 August 2001. Moreover, the press conference planned for 2 August 2001 has been cancelled.
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 (translation): I have difficulties in understanding your statement, because if I listen to your presentation I have the impression that interest rates will be decreased because inflation risks have gone down and external risk has increased. So, logically, you should reduce your interest rates, although you were saying "no, we should keep them as they are". Maybe this was not clear enough in your statement, because exactly two years ago in April you reduced interest rates to fight against risks that seemed to be smaller than the risk that exists today. So why did you maintain interest rates as they are? Why did you not want to change them today?
Duisenberg: Well, two years ago we did as you said we did. At that time, the two pillars were pointing in different directions, which meant that the decision was not an easy one. Today, as I indicated, the information from the first pillar indicates that upward risks to price stability have diminished over the past few months. I did not say that they have disappeared. In addition, as I said, the second pillar signals that upward risks to price stability have also diminished somewhat over the past few months, but they have not disappeared. And so you might also say that as far as monetary developments are concerned, with our policy of gradually increasing interest rates, which began in November 1999 and the last move of which was made in October 2000, we have achieved what we wanted to achieve, namely moderation in monetary growth and hence the disappearance of inflationary risks over the medium term. But having achieved that does not mean that you then have to reverse the course of your policy.
Question: Mr. President, the ECB Governing Council has sounded like a chorus with many voices over the last three or four weeks when assessing the current economic situation. Do you think it has been a problem and, if it has, what should be done? And my second question is did you vote today or did you find a consensus again?
Duisenberg: First, on the communication of the last two weeks, I agree that all members of the ECB Council have sounded like a chorus, although it was a harmonious chorus. Maybe this time it was more like a "canon" than "in unison", but the sound was the same. On today's decision, from the discussions, which involved all members of the Governing Council, it became clear that taking a vote was not necessary.
Question: President Duisenberg, do you reiterate your "wait and see" stance and, if so, what does "wait and see" mean? The second question I have is how convinced are you that inflation will go below 2% in the next 18 to 24 months?
Duisenberg: Going back to my statement, the "wait and see" attitude was not in the previous statement; it was in the agreed language we all used in the canon we have used over the past few weeks. There has basically been no change in that attitude. In other words, you may say that we have kept interest rates on hold based on the considerations I have outlined to you. And to your second question ...
Question: ... how convinced are you that inflation is going to go below 2% in the next 18 to 24 months?
Duisenberg: Very convinced. Over that long period...
Question: If you are so convinced, though, that inflation will be below 2% in the medium term why can't you cut rates now?
Duisenberg: Because that depends not only on the likelihood that it will be under 2% but also to what extent it will be under 2%. In other words, in my perception it will be a close call.
Question: Mr. President, three brief points: Yesterday, the six leading German economic institutes indicated that they had underestimated the magnitude of the slowdown in the US economy - did you underestimate it as well? About the 2% inflation - they also said that there would be 2.3% inflation this year. You said some weeks ago - if I remember rightly - that the ECB will fulfil its mission of keeping inflation within this target of 2%. Will you fail to do that this year? And the last point: You referred to privatisation policy - what do you think about the Franco-German agreement at the Stockholm Summit to postpone the liberalisation of the energy markets? Thank you.
Duisenberg: I quoted, in my introductory statement, a range of forecasts - effectively - and not the German ones in particular, which, if I look at the forecasts as we know them - they have not all been published yet - of the IMF, of the OECD and of other international organisations, they all revise the expected growth in the euro area and will, and they will also revise the euro area downwards. But as I said all those revisions still leave the growth to be expected at or above the potential growth rate or the trend rate of growth of the euro area. That is the basic reason why I used the sentence that all in all we expect euro area growth to remain solid. We expect the rate of HICP inflation to fall below the 2% figure we have set for ourselves in the course of the second half of this year. And on the Franco-German plans to postpone certain privatisations I refrain from commenting.
Question: Mr. Duisenberg, there have been so many people calling for rate cuts in the last week, does it matter to you that people ask for it?
Duisenberg: Of course I am polite so... It does matter. You might say I hear but I do not listen.
Question: Mr. Duisenberg, in your statement you say that it is crucial to increase investment incentives in the euro area. The United States defends its strong dollar policy by claiming it helps investment in the United States - by the same logic the euro's weakness might also explain why investment is pouring out of the euro area. Do you think that this is the case and, if so, does it not mean that the ECB should look at the euro more than just in terms of its impact on price stability?
Duisenberg: Now, on the last question, we do not have an exchange rate target. I cannot say that too often, I believe. When you talked about attracting investors you talked about the investment climate and investment incentives, that is not something that is relevant for monetary policy. You specifically - I noted - did not mention the difference in interest rate levels.
Question: Could I ask you two questions. First of all, if I read you correctly, the way you talk about both inflation and growth for the next few months we can't expect any change in the monetary policy, because you seem to suggest that they are both - for various reasons - pointing to the current "wait and see" stance. Is that correct, that reading, from the way you phrase things? And second, are you concerned about the way the euro is playing into all this, because obviously it has fallen again today after the news of no cut. Is the continuing weakness of the euro playing into your inflation calculations?
Duisenberg: To answer that question either in a positive or in a negative way would be to introduce a bias in our thinking, and I don't want to introduce a bias in our public utterances or statements. So you keep on waiting and we keep on seeing. Does the euro exchange rate play a role? Of course the persistent - let me call it - "hesitating" performance of the euro, which is keeping it more or less stable at a level which is lower than the level which we assumed, on which we based our forecasts, in itself increases the chances of it working its way through to inflation. So, to that extent, it is one of the factors under the second pillar which we take into account.
Question: Looking at euro foreign exchange markets again, the euro is again as low as it was when the ECB worried about it and took action last autumn. Just let me ask again: In layman's terms, what is the difference between now and then?
Duisenberg: Well, the difference is that at the moment it is fairly stable, and in September last year, that was a moment in time when we had had a long period of a persistent decline - and that is a major difference. And as I said, the exchange rate itself is not a target for our monetary policy so if you want to know what the difference is, I believe I have very quickly explained that.
Question: President Duisenberg, you always explain economically why you act or do not act, but you are an old fox, and Mr. Noyer is a young fox, so give us other reasons. Is it that you cannot reduce rates before the US central bank reduces rates again? Is that because you would then be asked whether you would be reducing again? Is that an important factor? Another thing is, is it important to consider what we would do if the recession in the United States deepened - or in the strong economies? What would we do in Europe then, would we then be able to reduce interest rates again? Those are two questions to the old central bank fox. Another question: If interest rates are reduced, how would you explain to your countrymen, the Dutch, who have an inflation rate of more than 4%, that inflation can be fought with cheap money? That is a new problem in Europe as well, because the Netherlands, Portugal and Ireland have higher inflation rates.
Duisenberg: Yes, they have, and they are part of the euro area inflation rate which at the moment stands at 2.6%, well ahead of, well in excess of, our stated limit of 2%, and we do hope that the countries you mentioned will also contribute in the future to getting the euro area figure down under the 2% ceiling. As far as the psychological considerations are concerned, let me first say that these are all hypothetical questions for which this old fox prefers to have no answer. I do not know about the young fox.
Noyer: I can go along with the old one.
Question: But the question is whether those are also reasons not to act even once you have the economic data which you keep mentioning?
Duisenberg: What the actions of other monetary authorities are - of course - we also take that into consideration, but mainly with regard to their to-be-expected monetary effects having an impact on economic developments, and that then forms part of our assessment of the medium-term outlook for the euro area economy. So when that - now in sailing terms - when that bridge opens again, we will decide whether to steer our ship through it or to wait a little while.
Question: Mr. Duisenberg, almost every day there are stories about the unforeseeable future of your presidency. I do not want to bother you with the question "when will you leave?" because I know what your answer has been until now. But still, may I have your opinion about all those stories? Does it do any harm to the image of the ECB and maybe you personally?
Duisenberg: I promised on 31 December 1998 that I would no longer comment on that issue. All I can do is point to the public statements I made before that date. That is, first of all the public statement I made vis-à-vis the European Council, that I was appointed for eight years and that I did not expect or regard it as likely that I would serve the full term. In a subsequent statement in an interview with the French daily "Le Monde" I was asked the question: "Will you resign half way through your term?" I gave the simple answer: "No". And the following statement I made - and that was the last I made and will be the last that I make - was that I would not comment on this issue again. Also, I will not evaluate what the impact is of statements that are fluctuating on either the euro or myself personally. On the euro I must say, I have seen no impact whatsoever.
Question: Mr. Duisenberg, two questions. First, two weeks ago Mr. Trichet published a statement in Rouen after the last meeting of the Governing Council. Was that an initiative by Mr. Trichet or was there a consultation with you? And why was that statement published? Second, the OECD suggests a reduction in the number of meetings of the Governing Council to reduce market uncertainty. What is your comment on that suggestion?
Duisenberg: First of all, two weeks ago, the situation in the markets was such that we thought it advisable to explicitly co-ordinate our thoughts and statements about the monetary policy situation and monetary policy decisions so that we had an agreed statement which all of us, and I mean all the members of the Governing Council, could use so that we would indeed speak with one voice. Now, one Governor used it in this way, the other in another way, and I myself used it three days later. You all heard only one voice and that was the purpose of that agreement, and it was a deliberate effort to do what you all ask us to do: to speak with one voice - but not all at the same moment because that would be cacophony. Your second question was on the frequency of our meetings. We have considered this. For the time being, we have come to the conclusion that it is neither advisable with regard to the operational part of our work, nor for the monetary policy implications it could have, to change the schedule of our meetings at this time. We think we still have so much to do. Also, we are still in the transitory period and it is so necessary that we see each other in the Governing Council so frequently to form and act and perform as a team that the time is not yet ripe to change the schedule for our meetings.
Question (translation): Mr. Duisenberg, just a question on the basis of today's decision concerning the policy mix. You had a dialogue with the President of the Eurogroup, Minister Reynders. You are always criticising the fact that fiscal discipline in Member States has been relaxed somewhat. Is there a consensus maybe? Are you saying that, because fiscal policy in the Member States is becoming more expansive, we want to remain neutral and financial policy and fiscal policy have to be more expansive because of the cycle and the position at which we are in it. Is that the deal?
Duisenberg: We consistently engage in a dialogue, with the Ministers of Finance especially, both in the context of the Eurogroup meetings and at meetings of the Governing Council at which the President of the Eurogroup is present. We cannot and will not co-ordinate our respective policy areas ex ante.
Question: Mr. Duisenberg, did you discuss refinancing operations today, as you know there have been problems because banks have made low bids, and are you planning any changes in these operations?
Duisenberg: We are not planning any changes in these operations. The developments at the last refinancing operation may induce us to do more intensive fine-tuning whenever that may be necessary again in the future.
Question: I have a similar question for the Vice-President: Mr. Noyer, I remember last year when you announced and explained the changeover from a fixed rate tender to a variable rate tender with a minimum bid rate, you said that other central banks have used this format and have had good experiences with it. I wonder, which were those central banks and what did they do in phases like this when it was expected that the next move would be down? Did they not encounter this problem of underbidding?
Noyer: If at a certain point in time you have very strong expectations in the market and fixed interest rate tenders, you may have the same kind of problems on the day of the auction. So the choice of a variable rate tender, at least the variable rate tender as we perceive it, which has the very strong signalling effect of the minimum bid rate, does not help. But fundamentally the answer to your implicit question as to how to deal with the risk of underbidding lies with the whole framework that we have designed: we have this corridor with the deposit facility on one side and, in this case more importantly, the overdraft facility on the other side, so that there is no risk that the banking sector will be short of cash. If, as the President just said, conditions seem to warrant at a certain point in time special fine-tuning operations, we can always conduct them, but in most cases the framework we have is enough.
Question: I was aiming with my question not so much at the comparison between fixed and variable rate tenders, but at variable rate tenders with or without a minimum bid rate. The Bundesbank did not have a minimum bid rate. That is what we know here. I am not aware of which other central banks have had a variable rate tender with a minimum bid rate and I wonder how they dealt with that problem if the rates were going down?
Noyer: The answer to your question is - which is not the only case - Spain.
Question (translation): President Duisenberg, since you mentioned two statements in connection with the term of your office in this interview, could I just ask again: Just after the spectacular summit in Brussels you said, on the sidelines of the International Banking Day a couple of kilometres away from here, in the evening, when asked whether you could stay for the whole term of office if you wanted to, that you could. Is this still the case, so that further misunderstanding can be avoided?
Duisenberg: That was also a statement made before I made it known on 31 December of that year that I would comment no further. All the statements I made before that date still stand.
Question: M3 growth, Mr. Duisenberg, is on a gradual downward trend. Are there some special effects on M3? Do you see some special effects or do you expect the M3 downward trend to continue? Also, what do you think about the opinions of some analysts that monetary policy is rather tight, because you have 4.8% M3 growth, you have 2.5% inflation and you have only 2.3% left for growth and for a change of what we call in German "Umlaufgeschwindigkeit".
Duisenberg: Could you take that one Christian?
Noyer: The trend of M3 is, of course, clear, but it has been rather steady and it has been slowing. We are coming from a situation where M3 developments were sizeably above the reference value and we have not shown any sign of panic on seeing the development of this kind of overshoot. We acknowledge that it has been partly absorbed by higher growth during last year and the "trend potential" growth rates, as well as something which is less positive - higher prices mainly due to the recent imported price pressures - but still there is no reason to panic now that we are approaching or are around the level of the reference value. We are not talking about a monetary base which is rapidly disappearing or shrinking to an extremely low value. So this development is clear and we will see how it continues. It is also in the context of growth of credit, which is relatively high at 9.6%, when we talk about the credit to the private sector. So the liquidity conditions and the financing conditions for private agents do not seem to be tight or to have any consequences for economic developments. That is our clear assessment.
Now, of course, this development in M3 is also to be regarded with some caution. When we look at the precise figure, I think we have signalled three times in the Monthly Bulletin that we were working on the limited, but still possible, revisions of money figures because of one or two factors, mainly the importance of money market instruments owned by non-EMU residents, which should not appear in M3. There are some statistical projects under way to evaluate this more precisely. It is likely that the figures will have to be revised slightly towards the end of this year. But that will not change the overall trend, let me put it that way.
Finally, as regards the reference value, I think we have explained clearly what was behind that. We have always emphasised that if actual growth was developing at a higher rate than what we call the "trend potential" growth, then we could of course accept the development of M3 being higher than the reference value. And that indeed is something that has happened and, as I said, did not create any panic at the European Central Bank. Of course, we said if there can be growth 1% higher than the trend potential growth, and that leads to 1% more in M3 development than the reference value, then that is fine, it is no problem. If that creates price pressures then we have to take them into account and prevent them from developing into a threat, in the medium term, to price stability. This is also what we have done.