Willem F. Duisenberg, President of the European Central Bank, Christian Noyer, Vice-President of the European Central Bank, Frankfurt am Main, 8 November 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 a comprehensive and in-depth examination of monetary and economic developments. Against the background of the available evidence, it analysed the implications for the maintenance of price stability in the euro area, taking a forward-looking and medium-term perspective. As a result, the Governing Council decided to lower the key ECB interest rates by 50 basis points. At this new level, the key ECB interest rates continue to be appropriate to ensure a favourable outlook for price stability over the medium term.
In assessing the information which has accumulated over the past few weeks we concluded that inflationary pressures have further diminished. This was particularly apparent from the information under the second pillar of the ECB's monetary policy strategy, while information relating to the first pillar was also judged consistent with today's decision. The Governing Council considered today's assessment to be in line with available forecasts and its view of economic developments in the period ahead. It is expecting these views to be broadly confirmed by further incoming information on the economic situation. The ECB will publish its own projections in the December issue of the Monthly Bulletin.
Let me elaborate somewhat on the assessment provided under the two pillars of the monetary policy strategy of the ECB.
With regard to the first pillar, after having grown at a strong pace over the previous few months, M3 growth increased further in September. However, the recent evolution needs to be seen as a reflection of an increased liquidity preference of investors in an environment of a relatively flat yield curve until August, developments in global stock markets and a surge in financial market uncertainty following the terrorist attacks of 11 September. In addition, the growth of credit to the private sector has continued to decline over recent months. Overall, despite the acceleration in M3 growth, current monetary developments do not signal risks to price stability in the medium term. We will continue to closely examine the underlying dynamics of monetary growth.
Regarding the second pillar, much clearer signals of a further reduction of inflationary pressures from the demand side have accumulated over recent weeks. Euro area real GDP growth will be weak in the second half of 2001. This is to be seen against the background of the ongoing weakness of the world economy, which depresses the demand for euro area exports. As a consequence, and also taking into account the high degree of uncertainty following the terrorist attacks of 11 September, the current environment is likely to lead to delays in investment activity and, to some extent, also to negatively affect private consumption growth in the euro area. Real GDP growth in the euro area is expected to remain below potential growth also for part of next year.
Further ahead, however, the conditions exist for a recovery to take place in the course of 2002 and economic growth to return to a more satisfactory path. The uncertainty currently overshadowing the world economy should diminish, and there are no major imbalances in the euro area which would require longer-term adjustment. Economic policies in the euro area as a whole remain geared towards price stability, the objectives of the Stability and Growth Pact, wage moderation and structural reform. Further positive effects on economic growth should stem from the impact of tax reductions in several member countries and from the fact that financing conditions are favourable.
As regards the outlook for prices in the euro area, recent developments confirm our earlier expectation of a gradual decline in inflation rates, resulting from the unwinding of the previous increase in energy prices and the absence of further shocks to food prices. In addition, and crucial for the medium term, two factors support the view that wage developments are less of a risk than was previously the case. First, the slowdown in economic activity should contribute to containing inflationary pressure stemming from the labour market. Second, there is now sufficient evidence that the increase in consumer price inflation was temporary, and this will help to keep inflation expectations low. Looking forward, inflation rates over the next few months will probably show some volatility, on account of base effects resulting from previous price movements. However, such short-term fluctuations should not distract from the medium-term trend. We can now expect that price stability will be safely restored in 2002. This view is confirmed by bond yield developments, which are consistent with financial markets expecting inflation rates in the euro area to be clearly below 2% over the medium term.
Overall, as our assessment now points to a further abatement of inflationary pressures, this allowed us to reduce the key ECB interest rates by 50 basis points. This follows three previous interest rate reductions this year, bringing the total decrease to 150 basis points. The new level of interest rates is appropriate to maintain price stability over the medium term. This, in turn, will favour an environment conducive to restoring higher economic growth in the euro area. Interest rates across the entire yield curve are now very low by all measures and liquidity conditions are supportive to economic growth.
At this juncture, I should like to recall our position as regards the impact of slower economic growth on the euro area countries' fiscal positions. While it is natural for an economic slowdown to have adverse effects on Member States' budgets, it is important that especially those countries with a budget position still not close to balance or in surplus and/or with high public debt-to-GDP ratios adhere to their medium-term consolidation plans. The current slowdown should not substantially change the scope for reaching the medium-term commitments they made under the Stability and Growth Pact and in the context of their stability programmes. Let me again emphasise that a medium-term perspective and continuous consolidation are essential for the conduct of fiscal policy in all euro area countries. This would give a firm signal to investors and consumers, thereby supporting confidence and contributing to a recovery.
In their efforts to further expand the production potential of the euro area, governments should also give greater impetus to the implementation of structural reforms. Fiscal reforms, including those related to pension systems as well as to the level and composition of public revenue and expenditure, would provide the correct incentives. Labour and product market reforms will be beneficial to employment growth in the euro area and will improve the resilience of the euro area economy to adverse shocks in the future. While it may be perceived as more difficult to advance in these areas in an environment of weaker economic activity, the need to properly address rigidities should be much more obvious now than at times of buoyant growth. The current weakness should therefore be taken as a challenge to be met by stepping up reforms rather than allowing efforts to abate.
Finally, I would like to inform you that the Governing Council has decided that, as from today, it will – as a rule – assess the stance of the ECB's monetary policy only at its first meeting of the month. Accordingly, interest rate decisions will normally be taken during that meeting.
At the second meeting of the month, the Governing Council will deal for the most part with issues related to other tasks and responsibilities of the ECB and the Eurosystem. After the second meeting of the month, a press release on the ECB's monetary policy decisions will no longer be issued. Obviously, if warranted by the circumstances, the Governing Council can still decide to change the key ECB interest rates at any time, regardless of previously scheduled meetings (as was recently demonstrated by the decision to lower interest rates on 17 September 2001).
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, in spring 1999 the ECB cut the main rate to 2.5% because deflation seemed to be just around the corner. How do you compare that situation with this one?
Duisenberg: Now, deflation does not seem to be just around the corner, but HICP will be safely under the 2% limit we have set as the maximum which is compatible with price stability.
Question: You said in Vienna that it would be an unwise decision to change the leadership of the ECB in the next twelve months. What did you mean by that?
Duisenberg: I meant every word I said and I have nothing to add to it.
Question: Mr. Duisenberg, last week Mr. Welteke was raising concerns that too large rate cuts could fuel inflationary expectations and, a little later, Mr. Trichet, along similar lines, asked central banks in general to remain moderate. That does not seem to conform too well with the decision you have taken today. How did the Governing Council deal with these concerns? Was it a contentious issue?
Duisenberg: Not at all. The Governing Council conducted an in-depth review and made an assessment of all the information that had become available until very recently, and indeed in very recent weeks, including the information we have so far from evaluations and assessments which will be finalised in the course of December. And these evaluations led, let me say, to an easy decision in taking this important step.
Question: Some market participants felt rather confused by Mr. Welteke's remarks. And if these concerns have, in a way, not been raised, or they have only been raised in public, is this not some kind of signal that markets have to expect misleading signals – maybe intentionally misleading?
Duisenberg: No, it could be a signal that markets have to listen more to me than to others.
Question: Mr. Duisenberg, both the Fed and the Bank of England have recently cut interest rates by a similar amount. I have to ask: was this part of a co-ordinated move between these three central banks? And, secondly, the Chairman of the Eurogroup often talks about there being a margin for manoeuvre on monetary policy. Has that margin now been fully exhausted?
Duisenberg: It was not a co-ordinated action, although we keep each other fully informed all the time. And the fact that, on this occasion, the moves came so close together in time is a pure coincidence of the timing of the meetings of the Governing Council, the FOMC and the Bank of England's Monetary Policy Committee respectively. But it was not co-ordinated. As regards your second question, today's move fully reflects our assessment, over the medium term, of the inflationary tendencies, and it can be seen, as we believe, that we have with this move reached a level of interest rates which is appropriate as a monetary policy stance in the light of that assessment.
Question: President Duisenberg, you are cutting interest rates even though M3 growth is rising. Does this mean you are expecting M3 growth to fall in the months ahead or, if not, are you thinking of actually "scrapping" its prominent role in your strategy?
Duisenberg: No, but we always have to interpret the various moves. We expect it to grow less buoyantly over time. As I indicated in my introductory remarks, there are temporary factors which are very much playing a role. One factor is the high uncertainty prevailing all over the world on account of the events in Washington, New York and Afghanistan. The other one is the uncertainty about the economic prospects and the low level of confidence among consumers and investors. With our move today we want to help to restore confidence. If that high level of uncertainty diminishes over time, which is what we expect, then we can also anticipate that M3 growth will come down to more natural figures.
Question: Mr. Duisenberg, can we expect you to review the reference value soon, in the next month or so?
Duisenberg: That will be done next month anyway, as has already been announced. We do that every year in December. So far we have decided every year to leave it unchanged.
Question: Mr. President, do you exclude the possibility of two consecutive quarters of negative GDP growth in the euro zone?
Duisenberg: We do not regard it as likely. But it will be very low indeed. That is to say, we do not yet regard a negative growth figure as likely, but figures in the order of 0.1 are not very far from this.
Question: Could we look at today's move as going beyond just the first priority of the ECB, i.e. maintaining price stability, and furthering the second objective of supporting growth?
Duisenberg: There is no trade-off between the first and the second priority. The maintenance of price stability remains our first priority. You can almost literally quote the Treaty in this respect, since today's move could be taken "without prejudice to price stability", and it thereby supported the other goals of Economic and Monetary Union, such as economic growth.
Question: Mr. Duisenberg, you have previously said that you expect inflation to dip below the ECB's 2% ceiling early next year. Do you now have the impression that inflation is falling faster than you previously thought? As part of that question, I would also put to you that a number of analysts have predicted that the headline consumer price inflation rate next year could go to or even fall below 1%. Would you be concerned about deflationary possibilities if that were the case? Do you agree with their forecasts in other words?
Duisenberg: The Governing Council has not analysed these analysts' analyses in depth, and therefore I also have no judgement on that. We still expect, as I said in my introduction, that inflation will fall to below 2% early next year, which is, in a way, earlier than we anticipated. But I also added the warning that for the next few months base effects will make it look as if inflation is hardly falling any longer, so we cannot expect big movements in inflation over the next few months. This implies that, after a few months, we expect much faster falling rates, but that is purely technical, taking out one month of the twelve every time.
Question: Mr. President, two questions. First, do you see any danger that the Fed has already done too much and that the inflationary pressures together with the stimulus package on which the US is about to decide could have some back effects on the euro economy next year, once the economy starts growing again? And the second question: could you explain a little more why you took this decision to assess the stance of the monetary policy only at the first meeting of the month. What is behind that decision?
Duisenberg: On the first question, if I saw any danger in the Fed's actions I would not make this public. And on the second question: we have the impression that the bi-monthly meetings of the Governing Council also lead, every two weeks, to speculation in the markets and higher volatility in exchange rates and market interest rates than would be the case if we had a calmer rhythm of meetings. Now we are still an institution which is very much in the building process. We need two weeks per month for our work to be performed properly, but we thought that it might inspire some calm in the markets if we made it known that a discussion in the media and the markets on the monetary policy stance will only take place once a month. An added advantage which is felt very strongly by many members of the Governing Council is that the monetary policy discussions we have very often crowd out other important tasks and responsibilities, such as payment systems or supervision, etc. Having a meeting without discussion on monetary policy stance would create more time to pay more and deeper attention to the other items.
Question: Mr. President, you mentioned that Member States should stick to the commitments of the Stability and Growth Pact. Germany, for example, but it is not the only country, will not reach these commitments for the budget deficit this year and next year. Do you think that they will not reach these medium-term commitments or do you see medium-term commitments more in what Mr. Eichel, for example, said about 2006, about the balanced federal budget?
Duisenberg: I still believe, and Mr. Eichel has confirmed this in public and in the Eurogroup meetings, that the governments are firmly committed, and remain committed, to reaching their goals as stated in the Stability and Growth Pact and in the stability programmes which they have presented, taking into account and to the extent that, for cyclical reasons, and because of the weak economic performance of the various economies in the Union, the actual nominal figures which are intended to be met are not being met. That is simply the way in which the automatic stabilisers are doing their work. But as you know, countries which have not yet advanced very far in their consolidation programmes obviously have less room to let the automatic stabilisers fully function than countries that have in the meantime achieved a more satisfactory budgetary position.
Question (translation): Mr. President, Germany is one of the biggest economies within the euro zone and it is last in the league table of economic development. You were mentioning the reforms, the rigidity of structures. How do you see the situation here in Germany, where economists say that even next year we will not get away from this position of last league player in the table? What do you think politics, the Federal Chancellor, should do as far as this lack of reforms is concerned?
Duisenberg: I refer to what I said in my Introductory Statement. If the shoe fits, wear it.
Question: Would you say that the situation is particularly difficult in Germany because of the structure?
Duisenberg: I do not comment on individual countries, not even Germany.
Question: Even before the penultimate Council meeting there were politicians who wanted a further reduction in interest rates which you did not follow. Now, President Duisenberg, would you say that these political requests that are put to you may have a negative impact on your decision-making process? Do you think that you maybe get a little bit nervous when you are trying to protect the ECB's independence?
Duisenberg: There is, of course, always a danger, but we are very aware of this. If we get advice from all sides, especially political sides, to take certain measures, then one might be tempted to become stubborn. However, we have to be wise enough not to listen at all so that we can take our decisions independently of whatever statements are being made.
Question: Mr. Duisenberg, I have two questions. One on the timing: it has already been clear for several weeks that inflationary pressures and economic growth are slowing down. Why did the ECB wait until today to diminish interest rates? And a second question: was there a vote and, if so, was there a consensus on today's decision?
Duisenberg: Why did we wait? Because this development has become much clearer, unlike what you seem to indicate in your first question, precisely over the past few weeks as many new forecasts have become available from various international institutions and private forecasting groups and as new actual data have become available. Our assessment of the economic developments, especially after the events of 11 September, has led us to believe that confidence has been hit harder than we thought only a few weeks ago. And it also means that it will take longer than previously assessed for the economy to recover. On voting I do not take questions.
Question (translation): Two questions, Mr. Duisenberg. First of all, with M3 having more than 7% as an average growth rate, is M3 no indicator anymore? We are hearing every month that there is an overshoot. For how long can you overshoot? Does that not mean that this overhang of liquidity might, one day, lead to inflation? Second question: you were saying that economic development in the euro area will be below its potential path as far as growth is concerned, i.e. below 2% or 2.5%, both for the rest of this year and for next year. What is the trend, when will this change, at what point will it change and how do you define recession? Is the United States in recession? Is the world economy in recession? Is the EU in recession if economic growth is under 2% and falls further?
Duisenberg: I refer to the answers I gave you to the same question you asked earlier. M3 is, for us, an indicator which we use for the actual figures against a reference value, which implies that you yourself have to judge why M3 has moved in the way it has done. As I explained today, we strongly believe that the strong M3 growth over the last few months has everything to do with factors which are really temporary. When will the turnabout come? Later than we previously anticipated. We still think that it will be in the course of the first half of next year but recovery will be slow and moderate. How do I define a recession? I know the definition that many economists and analysts use, which is two consecutive quarters of negative economic growth. We do not have a precise definition of a recession but we will have very moderate growth. That is true.
Question: Mr. President, as you mentioned that this global economic slowdown has occurred as a result of the confidence crisis and over-capacity, at this juncture monetary policy, monetary easing would be a weak tool with which to pump up the economy. Do you think it is necessary to co-ordinate monetary policy and fiscal policy?
Duisenberg: For the euro area we have a clearly defined goal for monetary policy. And that is that monetary policy should be executed in such a way by the European Central Bank that price stability over the medium term is maintained. And that priority goal with which we have been mandated by the Treaty forbids ex ante co-ordination of monetary and fiscal policy.
Question (translation): A question of principle, President Duisenberg. If, in the United States of America, there is a lot of cheap money around, does that mean that the European Central Bank can completely disassociate itself from this? There has been a lot of cheap money around for months. Second question: can you say whether in Europe the reduction of your key interest rates will have any impact on the economy, because in Europe there is not that huge an amount of consumer credit around as there is in the United States. And the third question: do you think and do you hope that your reduction of interest rates will be handed on to the markets by banks as well?
Duisenberg: I expect that in the markets this move will be reflected for short-term rates, certainly. For longer term rates, this remains to be seen, as we already have very low long-term rates and a rather flat yield curve, although it has, in recent weeks, become a little steeper. As for the first two questions, in a global environment in which we live, of course, interest rate developments, money supply developments and economic developments in general are interrelated. So, what happens elsewhere in major economies of course has an impact, albeit a limited one, on the European economy, and vice versa.
Question: How effective do you think monetary policy can be in the sort of situation we are in now where, at least to a high degree, at the heart of all the problems, we have no economic reasons but political reasons? Furthermore, it is not at all certain whether these political reasons can be overcome during the coming months. Is there a possibility that all the good, well-meant monetary policy actions just have no effect at all?
Duisenberg: I would not call them so much political reasons as psychological ones. That is the low level, or even the lack of confidence, which has to do with political developments. That is the main driving factor behind the very weak economic performance of many regions in the world. And it is true that the role monetary policy can play to restore confidence is a limited one. I wish that the role monetary policy would play to restore confidence were larger – indeed, I hope it is large. Effectively our move today has also to be interpreted as an effort to help restore confidence among the public.