Willem F. Duisenberg, President of the European Central Bank, Lucas Papademos, Vice-President of the European Central Bank, Frankfurt, 6 March 2003
With a transcript of the questions and answers
Ladies and gentlemen, the Vice-President and I will report on the outcome of today's meeting of the Governing Council of the ECB.
We have comprehensively reviewed monetary, financial and economic developments today. We concluded that the outlook for price stability over the medium term has improved in recent months, owing in particular to the subdued pace of economic growth and the appreciation of the exchange rate of the euro. As a result, the Governing Council has decided to lower the key ECB interest rates by 25 basis points.
Let me explain our assessment of recent economic developments in more detail.
As regards the analysis under the first pillar of our monetary policy strategy, the three-month average of the annual growth rates of M3 was 7.1% in the period from November 2002 to January 2003, compared with 6.9% in the period from October to December 2002. The continued strong monetary growth reflects an ongoing pronounced preference for liquidity in an environment of high financial, economic and geopolitical uncertainty. Although liquidity remains ample, it is not expected at this stage to give rise to inflationary pressures, given the current economic context and the expectation that some of the portfolio shifts will be reversed once the financial market uncertainty diminishes. Recent data on loans to the private sector, notably the weak growth in loans to non-financial corporations in late 2002, confirm this assessment.
Turning to the analysis under the second pillar, available data and surveys indicate that economic activity in the euro area remained sluggish in late 2002 and in the first months of 2003. In light of recent developments, the outlook for economic growth in the euro area in 2003 has weakened compared with previous expectations, owing especially to the geopolitical tensions and the associated rise in oil prices. Accordingly, only a very modest rate of economic growth should now be expected this year.
Considering price developments, according to Eurostat, annual HICP inflation is estimated to have been 2.3% in February 2003, slightly up from 2.2% in January. The main factor behind this change seems to be the rise in oil prices. In addition, some base effects related to food prices may have contributed to the renewed increase in annual inflation in February.
The ongoing volatility in oil markets makes it difficult to forecast short-term inflation developments. However, once some normalisation in these markets has occurred, more fundamental factors should dominate price developments. First, the significant appreciation of the nominal effective exchange rate of the euro over the past year is expected to continue to feed through the economy into consumer prices, via import and producer prices. Second, the moderate pace of economic growth should also reduce inflationary pressures, influencing price and cost-setting behaviours. If oil prices moderate in the future, as currently expected by markets, the most likely outcome will be that inflation rates will fall below 2% in the course of 2003 and remain clearly at levels in line with price stability thereafter.
This baseline scenario relies on the assumption that, especially in an environment of subdued economic growth, wage moderation will prevail. In fact, some recent indications suggest more modest wage developments towards the end of last year, but this picture would need to be confirmed in the future.
Overall, ECB key interest rates have reached levels which are very low. On the basis of the currently available information, this policy stance, while contributing to the preservation of price stability over the medium term, provides some counterbalance to the various factors which are currently having an adverse effect on economic activity.
Looking ahead, the most likely scenario is that economic growth will gradually recover once the factors contributing to the high economic uncertainty have diminished. While the expected weak economic activity at the beginning of this year will imply low average economic growth in 2003, a rise in quarterly growth rates should materialise in the course of the year. Over time, the euro area economy should benefit from a global economic recovery and the prevailing low levels of interest rates, as well as from falling inflation supporting real disposable income and underpinning private consumption growth.
However, any judgement on future developments is overshadowed at present by the geopolitical tensions and their potential resolution. Monetary policy cannot address this kind of uncertainty. Depending on further developments, the Governing Council stands ready to act decisively and in a timely manner.
The prospects for the euro area economy will depend very much on measures taken in other policy areas. As for fiscal policy, adherence of all countries to the framework laid down in the Treaty and the Stability and Growth Pact will support stable and sustainable public finances, and will thereby contribute significantly both to confidence and to favourable financing conditions for the private sector. In most cases, the fiscal policy stance implicit in the updated stability programmes strikes a reasonable balance between letting automatic stabilisers operate and seeking further consolidation where needed. In some cases, current consolidation ambitions are weak. In order to further boost confidence in the fiscal framework and the economic environment, it is essential that appropriate consolidation plans are implemented in all countries with remaining imbalances. Hence, the commitments made in the stability programmes and the requests to further improve fiscal positions, as subsequently agreed in the ECOFIN Council, must be implemented in full. In this respect, the measures should be part of a comprehensive and growth-oriented strategy, which for most countries means putting the focus on both restraining the volume, and reforming the structure, of public expenditure.
Finally, the outlook for the euro area economy could be significantly improved if governments strengthen their efforts to implement structural reforms in labour and product markets. Such reforms are important to ultimately raise the euro area's production potential, improve the flexibility of the economy, and make the euro area more resilient to external shocks. In particular at the current juncture, when economic activity is subdued, taking measures to make the euro area a more attractive place to invest in can contribute substantially to fostering confidence.
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, Dr. Lucas Papademos, Vice-President of the ECB
Question: Why did you not cut interest rates by 50 basis points and how many of you wanted to?
Duisenberg: The last question I will not answer, as you know. The reason "why" is that we thought that this cut by 25 basis points was, in the current uncertain circumstances we live in, the most appropriate.
Question: Mr. President, just four weeks ago you said that because of the great uncertainty a rate cut would have drowned in a sea of uncertainty. Why do you believe that now a small monetary stimulus will have an influence?
Duisenberg: Four weeks ago I said that a drop then would be a drop in a sea of uncertainty and go by unnoticed. In the meantime, we have made a new assessment of the prospects for the euro area, both for output and inflation. So, the uncertainty in our assessment has somewhat diminished but at the same time we thought that one drop would be better than two drops.
Question: Did you also think that it is better to save some ammunition?
Duisenberg: We are not in a position to precisely ascertain what the future will bring. Especially the geopolitical uncertainties are such and so large that it is simply impossible to make a precise judgement about what monetary policy would do and will do. I said just now that the Governing Council remains alert and stands ready to act decisively and in a timely manner, but the consequences of a war can go in many directions. So can the decisions of the Governing Council.
Question: Mr. President, I am rather curious about the strategy review that is currently going on. It must be a rather delicate affair judging from the fact that it is being conducted entirely behind closed doors. We have not heard about the criteria yet and there has not been any invitation for scientific papers or comments. And, correct me if I am wrong, but I think the annual ECB watchers' conference is scheduled for July. It will discuss it, but that is after the process is finished. Now, that would strike me as a little odd if this was really a quest for objective information. It would not be so odd if it was more an internal power struggle. So the question is why are you conducting this secretly?
Duisenberg: Well, we are conducting the review. And, as I said before, it is an unprejudiced evaluation of the strategy after five years of experience. It is now with our staff and the staff of all national central banks, who are discussing it and studying it. We expect, as a Governing Council, to devote a first discussion to it towards the end of April. Our intention is to have it completed in the course of May. And then you will know more. So, this will be well in time for the conference of ECB watchers.
Question: Mr. Duisenberg, the markets have reacted somewhat badly to this rate decision and there seems to be some suspicion that it was a rather unhealthy compromise, possibly between those that wanted to cut by 50 basis points and those who maybe wanted to cut by 25 basis points or leave rates unchanged. Can you put their minds at rest on this, or was there a genuine argument between those that wanted to stay put and those who wanted to cut by a bigger amount?
Duisenberg: Well, I think I do not need to. Because when I watched the screen carefully at 1.45 p.m., the exchange rate, if that is what you mean by the markets, stood at USD 1.0960; one minute later – after the press release was published – it stood at USD 1.0920, and 30 seconds later it stood at USD 1.0970. So, it rebounded. And when I came into this meeting it stood at USD 1.0965. So I do not share your judgement that there has been a bad reaction so far.
Question: Leaving aside market reactions, was this decision a compromise?
Duisenberg: In the Governing Council you mean? The Governing Council, again, acted as a collegial decision-making body, and it was not difficult, was it Lucas?
Question (translation): Mr. Duisenberg, a question on today's decision and the strategy: is the impression correct that this is a step-by-step move towards inflation-targeting and that the prominent role of the money supply is now no longer as important as it was or is being merged with inflation?
Duisenberg: That impression is wrong. And as I said, we are in the process, without any prejudice, of reviewing our monetary policy strategy. And we are doing that in a, may I say, calm and unprejudiced manner. So any conclusion you might want to draw already today is certainly premature.
Question (translation): Second question: the ECB's rotation model. The Ministers have until 21 March to have the concept ready. What is your position concerning your rotation proposal for EU enlargement, do you think your proposal will be agreed?
Duisenberg: That I assume. We have made our proposal. It is now out of our hands and the Ministers of Finance have to make up their mind, which they have already virtually done. The European Commission has made up its mind, the European Parliament has made up its mind, and then it is up to the EU Council to take the final decision. It is out of my hands and out of my sphere of influence.
Question: You said, Mr. President, that growth will gradually recover. Which elements, which variable, should this recovery come from? Where do you see it, do you already see some possibility of a recovery? Then, I do not think – I have been here for such a long time – I have never seen a colleague central banker tell another central bank, i.e. the ECB – this was Eddie George – that it must be more growth-oriented in its policy-making. What do you think of this criticism? Because the Fed cannot do much – I mean, economists say that if you do not cut more thoroughly, growth will have difficulties.
Duisenberg: Well as you say, you have never seen one central banker telling the other one what to do. You have now seen an exception. But that will remain the exception. On growth: the main driving force of course has to come from the restoration of confidence, and that relates primarily, for economic growth, to private consumption. People have to become confident of their future for private consumption to become the main driving force for the resumption of economic growth. Next to that, we also expect a global economic recovery and, with that, some help will also come from our export performance. Because we still think that the exchange rate developments have not fundamentally undermined the competitive position of the euro area vis-à-vis the rest of the world.
Question: You say that you now expect a modest rate of economic growth this year. Was the Council today presented with new forecasts for economic growth this year and if so, what were they?
Duisenberg: We had new forecasts, we have them four times a year, and actually I had them the evening before I attended the G7 meeting – at which you were present, I believe, and heard me make my statement. That statement was strongly inspired by those new assessments. The forecasts we have available now do not, basically, differ from those which were published by the IMF. But as I said, both the growth figures and the inflation figures had, sorry to say it, to be revised downward and not insignificantly.
Question: Mr. Duisenberg, banks have been reluctant to follow the ECB with rate cuts. At the same time we have seen that interest rates on bonds have reached a historic low. Would you suggest that consumers should use an alternative to bank loans, for instance by refinancing and increasing their loans in private property?
Duisenberg: I would not make suggestions at this table to undermine the competitive position of the banks, so I will make no suggestions in whatever direction. In addition, we have authority over the official interest rates, and it is up to the banks to follow them wholly or partly or whatever they want to do. That is not in our competence.
Question: Mr. Duisenberg, in nearly every press conference you ask the governments for structural reforms. Are you optimistic that you will get an echo or do you have the impression that you are talking to a brick wall?
Duisenberg: I am realistic enough not be too optimistic. But I have to say what has to be said, time and time again. I could also say, ceterum censeo, carthaginem delendam esse.
Question: Mr. Duisenberg, a lot of analysts have suggested that, if it comes to a war in Iraq, Iraq would be defeated quickly and decisively by the Allies or the United States. In that case, if it came to a quick end to any war, how quickly you would expect the euro zone economy to rebound? And did that prospect of a rebound play a role in today's quarter point cut?
Duisenberg: First of all, it did not play a role in our considerations. And then I – and I should say we – cannot and did not want to speculate on how the events will evolve once a war breaks out. So, we did not take into consideration the various scenarios: whether it will be short and quick, or long and drawn out. But then I would like to point out, once everything is over – after a short or a long period – the geopolitical tensions, as we euphemistically call them, are the overwhelming factor, but not the only one, influencing the confidence of the people. So there are more factors at work. For example, the performance of economic growth, the performance of unemployment, which also – contrary to our earlier expectations – does not yet show clear signs of coming down. On the contrary, in our expectations, there is little likelihood that it will come down in the course of this year, and for next year, we are also very uncertain about it.
Question: Mr. Duisenberg, on the growth element, you said that your new forecasts are close to the IMF. Could you just say what they are, so that we do not have to quote the IMF in our story, and say what the ECB expects?
Duisenberg: I will say this much. For this year, the first quarter started very sluggishly and the second quarter does not indicate very many signs of improvement. We expect growth, on average, to be in the order of 1%.
Question: So, higher than last year? Has the effective or mere threat of war already had some sort of impact on the euro zone economy that you could determine?
Duisenberg: It is our impression that the by now rather prolonged threat of war has already undermined confidence to such an extent that it has already had, or at least is having, a dampening effect on consumer demand.
Question: And my second question is, you said in your statement that the ECB is alert and ready and I wonder whether if that is the reason why you don't have the word "appropriate" in your statement?
Duisenberg: Well, if we use the word "appropriate" we expect it to remain valid for a considerable period of time. By now the uncertainties are so great and the developments may come so fast. And we are not even certain of what direction the actual development will take. So that is the reason why we deliberately avoided the word "appropriate" because that would give a sort of consolidation idea which we simply don't have.
Question (translation): Mr. President, is today's decision mainly psychological, one which you took for mainly psychological reasons? Second question: did you and your colleagues make assessments or get assessments as to how the last decision on interest rates was handed on by banks? Because you said that today's decision was also supposed to be slightly in favour of growth. Third question: can you explain why the euro is relatively strong despite the fact that in Europe there is no political progress, no progress as far as the economic cycle is concerned, and in the United States, compared with Europe, there is nothing problematic that one can see either? Might this be due to the fact that the American government and American policy generally would rather like the dollar to be a little bit weaker or not as strong as it used to be?
Duisenberg: There is certainly an element of psychology in our move. We have tried to analyse to what extent the previous interest rate move on 5 December 2002 has worked its way through into the bank lending rates. The conclusion was that the reaction of the banks can be described as having been normal, similar to other rate reductions which have taken place in the past. And your third question was can I explain the exchange rate. The answer is "no", but I can only speak for the euro area. I do believe that the exchange rate development brings the mutual relationship more in line with the fundamentals as they develop and have developed over time between these two great economic areas. So they do better reflect the fundamentals than in the past. And that must certainly also have played a role in the actual movements.
Question: I want to return to the question of market reforms and liberalisation on which you say you are an optimist. You must be one of the greatest optimists of all time because you said this four years ago...
Duisenberg: ...I also said I was a realist
Question: ...a realist? Well, can I have a realist's view? You said this four years ago to the governments of the euro area. Nothing has been done that is worthy of the name. We have a chancellor in Germany who thinks the problem is so important he can talk about it next week, not this week. How realistic can one be that anything will actually be done, and how much damage has the lack of movement already caused the European economy?
Duisenberg: I would not say that nothing has been done. In various countries various things have indeed been done. But I am with you in concluding that by far not enough has been done. That is why we keep urging governments to tackle this problem of structural reform. And if the same governments in Lisbon declared that within ten years the European economy will be the most dynamic economy in the world, then I am inclined to say that they have little time to lose.
Question: Why was it particularly important for you to act today instead of waiting a little more, one month more, in order to cut the rates by 50 basis points? Was it particularly to act before the coming war and why?
Duisenberg: It had nothing to do with the war, but if you come to an assessment – and we make an assessment every month – if you come to an assessment of the prospects in a forward-looking manner for the euro area economy over a time span of 1.5 to 2 years that is significantly different from the previous assessment, then you should not wait. And I believe the markets did not expect us to wait.
Question: In Sweden there is now a proposal to withdraw 10 billion kronor from the Swedish central bank if Sweden joins the euro. Since you have earlier criticised such measures by the Swedish Government, what do you think about this proposal?
Duisenberg: I do not know this proposal.
Question: ...the proposal is to withdraw 10 billion kronor in order to meet asymmetric shocks...
Duisenberg: Under the Treaty the central banks are forbidden to finance governments, to give credit to governments. When money is seized my reaction would be similar to my reaction if this were forbidden.
Question: Mr. President, there have been ideas voiced by the Bank of England that the ECB should raise its self-set target rate from 2.0 to 2.5%. Would you please give us the opinion of the Governing Council on this?
Duisenberg: I recently had talks with both the outgoing Governor and the incoming Governor of the Bank of England and the subject was not mentioned.
Question: I have a question for Mr. Papademos. Mr. Papademos, there are some interesting interpretations going around about your smile. [laughter] So, could you clarify this? What do you think about the projections of the ECB? Do they still suffer from a lack of statistical material, do they suffer from a lack of co-operation between the national central banks, or are they as good as the IMF projections?
Papademos: Well, you can see I am still smiling. Do not make any inferences from this fact. I think that our projections are as good as any in the profession. And the implication that I think was derived from this reference to the smile is that there may exist some tensions between Mr. Issing and myself. I would like to say that there are no tensions whatsoever. Occasionally, we do disagree: I think that sometimes he tends to prefer Bordeaux and I prefer Burgundy. This may complicate sometimes the decisions in the Council on which wine to choose for the lunch. But that's it.