Willem F. Duisenberg, President of the European Central Bank, Lucas Papademos, Vice-President of the European Central Bank, Frankfurt, 5 June 2003.
With a transcript of the questions and answers
Ladies and gentlemen, the Vice-President and I will now report on the outcome of today's meeting of the Governing Council of the ECB.
Following a comprehensive economic and monetary analysis, we have concluded that the outlook for price stability over the medium term has improved significantly since our last decision to lower interest rates in March. As a result, we have decided to reduce our key interest rates by 50 basis points. This decision is in line with our monetary policy strategy, including the aim of maintaining inflation rates below but close to 2% over the medium term. At the same time, this interest rate reduction takes into account the downside risks to economic growth. The Governing Council will continue to monitor carefully all factors which are relevant to its assessment.
Let me explain our assessment in detail.
In the context of our economic analysis, the latest data releases on real GDP growth have confirmed that economic activity in the euro area remained subdued in the first quarter of this year. This outcome also reflects the negative impact of the Iraq crisis on both the global economy and the euro area. However, the survey evidence for April and May does not suggest an immediate improvement after the resolution of this conflict and is at best mixed. Accordingly, economic growth in the first half of 2003 is likely to be very weak, and expectations for annual average economic growth for this year and for 2004 have had to be scaled down.
Nevertheless, we still expect a gradual strengthening of real GDP growth in the course of 2003, which should gather more pace next year. All available forecasts as well as recent financial market reactions seem to reflect a similar assessment. The main factors supporting this outlook are both external and domestic in nature.
On the external side, the expected upturn in extra-euro area demand should compensate for the dampening effect of the appreciation of the euro. Evidently, the significant and rapid appreciation of the euro over recent months will dampen external price competitiveness. However, the current level of the euro's real effective exchange rate, and thereby the competitive position of euro area exporters, is very close to longer-term averages. Thus, when put into perspective, current euro exchange rate levels are in line with economic fundamentals and with our interest in a strong and stable euro.
On the domestic side, private consumption growth should recover further from the second half of 2003 onwards. This would reflect the growth in real disposable income supported by positive terms of trade effects and lower inflation rates. Moreover, there are no significant imbalances in the household sector as a whole that would hinder such a recovery. At the same time, the contribution of investment to growth is likely to remain more modest, although an improvement in the global economic environment and the historically low level of interest rates should contribute to an upswing.
The Governing Council is conscious of the continuing downside risks to economic growth. Notably, risks stem from the past accumulation of macroeconomic imbalances outside the euro area, and there are ongoing concerns with regard to the SARS virus. In addition, some uncertainty remains as to the extent of the adjustment still needed in the euro area corporate sector to enhance productivity and profitability. This could also have an impact on employment growth and thus private consumption.
Given this environment, the outlook for price developments has become more favourable. Following Eurostat's flash estimate of the inflation rate for May of 1.9%, annual inflation rates are expected to hover broadly around this level for the remainder of this year and to fall significantly in 2004. This assessment is based on the assumption of favourable import prices, reflecting both generally stable oil price developments and the higher exchange rate, as well as lower domestic price pressure in the context of a moderate economic recovery. In particular, wage growth is expected to remain broadly stable. Coupled with productivity gains, this should therefore result in a moderation of unit labour costs.
In the context of our monetary analysis, we saw persistent strong growth in the broad monetary aggregate M3. Consequently, the euro area economy has continued to accumulate liquidity significantly above the amount needed to sustain non-inflationary growth.
There are, however, several considerations which counterbalance concerns that this ample liquidity will lead to inflationary pressures over the medium term. In particular, monetary developments continue to be fostered by portfolio shifts, reflecting a sustained preference on the part of investors for liquid and secure assets. This is confirmed by evidence from both the components and counterparts of M3. Indeed, loans to the private sector increased at a much more moderate pace than M3. Moreover, higher monetary growth was accompanied by a much lower net acquisition of foreign equity by non-MFI euro area residents, also implying portfolio reallocations away from riskier assets. Consequently, the portfolio shifts that have affected M3 growth over the past two years should unwind over time. Finally, the perspective that economic activity will remain moderate reduces the likelihood of excess liquidity giving rise to increased spending. Nevertheless, one has to bear in mind that monetary growth is also supported by the low level of interest rates. Therefore, monetary developments need to be closely monitored with respect to their implications for price stability over the medium to long term.
Summing up our economic analysis, it currently appears that inflation rates should decline to below 2% over the medium term, following recent movements in the exchange rate of the euro and given the sluggish growth performance of the euro area. Our monetary analysis indicates that the strong expansion of M3 should not for the time being adversely affect this outlook. Hence, cross-checking the information from the two pillars leads us to conclude that the outlook for price stability over the medium term has become more favourable.
Let me at this point comment on the debate about the hypothetical risk of deflation. As far as the euro area is concerned, it should be recalled that inflation has been hovering around 2% for quite some time and that there are currently no forecasts indicating any deflationary risks. The ECB's monetary policy aims at inflation of below but close to 2% over the medium term. In this respect, inflation expectations should remain well anchored at this level, irrespective of shorter-term developments in prices. At the regional level, a period of relatively low price increases or even price level declines will improve a region's competitiveness within the currency area. Within a monetary union, deflation is not a meaningful concept when applied to individual regions.
At this juncture, it may be particularly warranted to stress that monetary policy cannot by itself generate lasting and sustainable growth and employment in the euro area. This can only be achieved by appropriate structural measures that address fundamental weaknesses and tackle urgent adjustment requirements. In this respect, fiscal policies have a great potential for fostering confidence and thereby supporting activity, even in the short run. Establishing a well designed medium-term consolidation strategy in those countries currently struggling with increasing fiscal imbalances would make a major contribution in this direction. This would imply comprehensive and growth-friendly measures including, in particular, a courageous reform of the structure and level of public expenditure. Curbing spending growth would eventually also create further room for manoeuvre to address future pressure arising from pension systems and scope for future tax cuts. Procedurally, it is crucial to underpin the fiscal policy framework with a decisive and consistent implementation of the rules of the Treaty and of the Stability and Growth Pact, and rigorous monitoring and peer pressure amongst Member States.
By the same measure, bold structural reforms in the labour and product markets would not only increase the euro area's growth potential and enhance its ability to better withstand external shocks, but it would also eliminate a great deal of the uncertainty currently overshadowing long-term planning and perspectives. This, in turn, would also have positive effects over the shorter term. In particular, renewed momentum in the process of structural reform would foster consumer and investor confidence and thereby greatly facilitate spending and investment decisions in the euro area.
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: Mr. Duisenberg, a question about the ECB's internal economic growth and inflation forecasts for 2003 and 2004. Was the Governing Council confronted with new staff projections at today's meeting and, if so, can you tell us what the ECB's forecasts for economic growth and inflation are currently?
Duisenberg: On the first question, I can say "yes". The new projections were available and will be made public in next week's Monthly Bulletin. We are not inclined to give individual figures for some orders of magnitude or variants when you cannot see them in the broader context of the all-encompassing projections as they will be in public. But it is true what I said: the outlook for inflation has improved significantly, and the outlook for economic growth is one of a very sluggish performance this year and a moderate recovery in the course of next year. With regard to whether we have had to scale down both figures, I would not say that we have done so to a large, but to a significant extent.
Question: Mr. President, could you elaborate a little bit on why you have not cut rates before today? And, if you could be a little bit more precise on the GDP forecast for this year, is it now closer to 0.5% than to 1%, on average?
Duisenberg: As you know, we will publish our projections next week and we publish them in the form of a certain range. So, I would not give you point figures, anyway, like you have just done now. On your first question, if you read my statement of four weeks ago, of 8 May 2003, very carefully, you will see that I said that we have to monitor developments further and that we had to be sure of what we already saw at that time, namely that prices would develop in a favourable way. We are sure of that now. So, last time, we were not as sure yet. But then, on the other hand, as you may well recall, I did push the door halfway open for a decision to be made at a later stage. And the direction was very clear, as was clearly picked up by the markets. So, the markets have – to a large extent – already discounted the move we made today, whereas they would have been very surprised if it had been done last time.
Question: Mr. Duisenberg, the statement does not say that rates are appropriate, so that there will be a lot of speculation that the door is still open for future rate cuts. Is that the right interpretation?
Duisenberg: No, that is not the right interpretation. That it does not say that they are appropriate is not unusual. But, if you ask your usual question "is there a bias?" then the answer is "no".
Question: Mr. President, were you somehow encouraged this morning by your decision to lower the interest rates by the fact that the Swedish Riksbank – before this morning – lowered its interest rates? And, one more general question perhaps: when you lower interest rates against the backdrop of a slow economy, is it not a failure of the currency union in general, and also of the ECB, that economic growth is low and unemployment is high, especially compared with outside countries such as Sweden and Great Britain?
Duisenberg: Interest rates are lower here than in Sweden and the United Kingdom. Was I surprised or was I encouraged? No, we take our decisions on the basis of an analysis for the euro area only, and in the interests of price stability in the euro area. That is what we now have achieved, price stability, and that is what we will continue to achieve in the period ahead. And, in judging the economic performance of the euro area vis-à-vis other countries such as Sweden or the United Kingdom, one should never forget that these economies are going through entirely different economic circumstances. I am referring, for example to the huge shock that has been dealt to the euro area economy as a whole by the re-unification of Germany, which – after all – makes up more than one-third of the euro area economy. And that, to a great extent, explains the differences in the performance of the economy. Another factor that should not be forgotten is that the structural reforms we have constantly been pleading for in the euro area, in all euro area countries, have in fact already been applied in both the United Kingdom and Sweden ten years earlier. And that, in itself, has nothing to do with being "in" or "out" of the currency union.
Question: Could you tell us what was the level of agreement on the timing and the extent of this cut? And secondly ...
Duisenberg: ... of a high level.
Question: ... and secondly, is this it?
Duisenberg: You did not hear me say that. And when you ask it, I cannot answer that. It is the same answer that I just gave to Mr. Sims. We will continue to monitor developments closely. And then, I do not have to remind you that we said – with some emphasis – that we have now reached levels of interest rates that we have never seen in any Member State of the euro area before. They are historically very low, indeed.
Question: Mr. Duisenberg, a question about the prospects. Some months ago in Rome you said that it is much more difficult to win the peace than to win the war. What do you think now? How long is the road to win this peace and does today's decision mean that you now see the situation much more positively than then?
Duisenberg: Which war are you talking about?
Question: The last war.
Duisenberg: That is not the field of my competence.
Question: Yes, but I am referring to the economic prospects of Europe after this war.
Duisenberg: Well, as I said in my introduction, certainly the end of the war – or the actual military activity in Iraq – has, to a great extent, removed the uncertainties that prevailed at the time, but as yet not totally. Its effect still has to work its way through and reinstate, so to speak, the confidence of the people – and that is crucial.
Question: Many governments think that they have to win the confidence of the people and also not to strain the Stability Pact. What is your opinion?
Duisenberg: The confidence of the people would be enhanced if governments delivered what they promised to deliver.
Question: President Duisenberg, just to rephrase the two earlier questions: have you now totally exhausted your room for manoeuvre, and second, how extensive a discussion was there on the size of this rate cut? Did that hold up the decision until today and what was the clinching argument in favour of cutting by half a point?
Duisenberg: There was not much discussion about the size of the rate cut, I can assure you. There was a quick and general consensus on the fact that the rate cut was necessary and about its size. Moreover, we had been talking to each other for a long time already. Room for manoeuvre? Well, if the United States has room for manoeuvre with an even lower interest rate level than we have, then you can imagine we have not exhausted our room for manoeuvre.
Question: Mr. Duisenberg, I was wondering if you could tell us how likely you see it, personally, that this will have been your last interest rate decision as President of the ECB, and whether the likelihood that there will be an imminent change in the leadership at the ECB had any impact on the size of the cut today – in other words that you might have wanted to clear the air for a while ahead of a leadership change?
Duisenberg: I beg you to believe me that I have no idea how long I will be here. So those considerations have not entered my mind, nor that of any other member of the Governing Council.
Question: Mr. President, did you even discuss cutting rates by more than 50 basis points today?
Duisenberg: Not really "discussed" – it was mentioned. All kinds of figures were mentioned, but as I said, there was a very broad if not overall agreement on the decision that we reached today.
Question: As people are saying, a 50 basis point cut is quite bold by ECB standards. To what extent did, perhaps, political pressure play a part in your decision, after all, we have had leaders like Berlusconi and Chirac calling for lower interest rates?
Duisenberg: To no extent, and that is the short answer I can give you. I even saw ministers pleading for an interest rate cut after we had already taken the decision.
Question: Finally one other question: the UK is due to announce its decision on whether it will join the euro on Monday. We believe that the answer from Gordon Brown will actually be "not yet". What is your message to the UK about why it should sign up to the euro?
Duisenberg: I do not have a message for the UK. It is up to the UK to decide when and why. The "why" is clear to me, the "when" I do not know.
Question: Can you tell me why?
Duisenberg: Because it would be advantageous for the development of the United Kingdom and for the euro area if we joined forces again.
Question: How much do you estimate the "contractive impulse" from the euro appreciation on growth and inflation?
Duisenberg: I cannot quantify that, but you will be able to judge for yourself when next week you see our revised projections, or I should say the revised projections by the staff of the ECB and all NCBs.
Question: Mr. Duisenberg, this is the first time you have not mentioned the annual growth rate of M3, which is about 8%. What is the new role of M3 in your evaluated strategy, since it will no longer be prominent? How can you be sure that it will be in line with price stability? Is it also a risk for financial stability?
President: No, there is no new role: the role for M3 is the same as it always has been. As you noted in my presentation of the evaluation and clarification of the monetary policy strategy last month, and as you noted in my statement of today, we reversed the order in which we discussed the two pillars. Why did we do that? In the old days –- if I may call them "old days" now – we always talked about the first and second pillar, as if there was a ranking. Now we want to emphasise that we use both types of analysis, the broad economic analysis and the narrower monetary analysis, only as a means to better order our discussion and as a means to cross-check the information we receive from both analyses in order to underpin our interest rate decisions. The decision we took today is totally in line with the strategy outlined a month ago. Since, as you know, the strategy has not changed but merely been clarified, this decision would also have been taken had we not made this clarification public. But then, as I did in my Introductory Statement, I paid considerable attention to monetary developments and I extensively explained why we do not consider the very dynamic monetary developments – as we see them – as a threat that inflation might again be on its way up. So you might say I explained that danger away with well-reasoned arguments.
Question: You were speaking about the discussion you had and about the fact that you also had a discussion on your rate cut. What do you expect from this rate cut? Do you want to dampen the euro as well?
President: No. It is true that we have now made the interest rate differential between the dollar and the euro smaller. And that in itself subtracts, one could say, one impulse for the exchange rate movement we have witnessed in the last couple of months. But that is not the only factor. The main factor is that we think that this rate cut is compatible with our aim to preserve price stability over the medium term in a forward-looking way, and that is the main impulse for making this cut.
Question: What if Mr. Greenspan also decides to cut rates at the end of June? You will have the differential again.
President: I do not answer "what if?" questions.
Question: Mr. Duisenberg, you said confidence would be enhanced if governments delivered what they promised to deliver. Now governments turn out to be rather helpless in implementing reforms. There is a lot of pressure in many countries. So, in the meantime, growth is declining and the ECB keeps lowering interest rates, always saying "we want to enhance confidence". Where does this process end? With the governments not doing anything, interest rates going down to zero and the whole euro area going bankrupt? I think you must be helpless too when you see what monetary policy is expected to do under these circumstances. Do you feel left alone?
President: Monetary policy is expected to be conducted in such a way that it primarily achieves price stability to prevail over the euro area as a whole. And that is what we promised the people that we will deliver. People can see that we do deliver. You might say that we have achieved price stability by now. And we promise to maintain it. I think that we are credible enough for people to believe that we will deliver what we promise to deliver. And now it is the turn of the governments to do the same thing. That is what I said. But it is not true that nothing is happening. That is a little too pessimistic a view, in my mind. Lots of things are happening in almost all countries of the euro area, but admittedly this is too little and often too late in some countries, particularly the larger ones. But then I always add that the aim of the Stability and Growth Pact is for one's budget to be in balance or even with a small surplus over the medium term. What you should not forget is that eight out of the twelve countries have already achieved that aim. And they will not let the other ones loose, even though they are bigger.
Question: Mr. President, could you help me understand your new strategy a little bit better? What does it mean, in the light of the new strategy, that you expect that inflation rates will fall significantly below 2% in the course of next year?
Duisenberg: That, of course, is the statement I made on the basis of unchanged interest rates. "Significantly below" is something more than "close to" 2%. So you can draw your own conclusions.
Question: Do we have to expect more rate cuts to come?
Duisenberg: That question I have already answered, I believe. I have no expectations. I have no bias. I am simply saying "We will monitor the situation and act". If you want to hear the word "appropriately", then when the time is ripe.
Question: Mr. Duisenberg, could you perhaps give us the outlook on Germany? I heard that this morning the IMF has cut its forecast, its GDP forecast, from 0.5% to just zero growth. Does the ECB agree with this figure?
Duisenberg: I cannot comment on individual countries. But I am not agreeing with that figure, if that is what you want to hear. We are slightly less pessimistic apparently than the IMF.
Question: And my second question is related again to the IMF, which seems to be responsible for spreading a lot of pessimism. Of course, we keep hearing about this so-called deflationary threat. But today you have, out of hand, completely dismissed it – that there is a deflationary threat, that nobody has anything to worry about. Again, what does the IMF know that you don't know? Can you comment on this please?
Duisenberg: I was already very clear when I said that I was almost astonished at what the IMF has done, that is, publish a staff paper on inflation differentials and deflation in the euro area. I have never seen the IMF publish a paper on inflation differentials between California and New Hampshire or between Texas and Ohio. Whereas there we are talking about one currency area which is even much smaller than the euro area. And so, that there are inflation differentials is nothing more than normal. There always will be between the various regions of a currency area. But if I may quote myself, I said, "within a monetary union" – which the euro area is and which the United States is – "deflation is not a meaningful concept when applied to individual regions", like New Hampshire or Germany.
Question: Mr. President, during your last meeting with Chairman Greenspan and other central bankers on Tuesday, Mr. Greenspan said – as far as I remember – that inflation in his view is not the biggest risk in the next months, if not in the next years. But he said that central bankers are quite ill prepared for deflation. Do you think that the ECB is well prepared for dealing with deflation and, if not, what should you do to be better prepared?
Duisenberg: We are convinced that we don't have to prepare ourselves for deflation because we don't see deflation coming. And that's what I have said, I think, loud and clear. Then, is the ECB prepared to deal with the "if" situation if it were to come? The answer is "yes". Many of us have experience with periods of deflation and we know what to do in that case.
Question: Mr. Duisenberg, I respect your experience with deflation. But we are in a different world. We are in a globalised world now. Do you think that you can apply the experience of the 1930s with a completely different institutional framework to the situation we have today?
Duisenberg: I'm not talking about the 30s. I'm talking about the 90s. I was ...
Question: ... where did you have serious deflation in the 90s?
Duisenberg: In the Netherlands I had two consecutive years of deflation...
Question: ...can a small country like the Netherlands have deflation?
Duisenberg: Well, we are always quoted as being an example for the rest of the world. So, ...
Question: You said that the figure of three-quarters of a percentage point for the rate cut has been mentioned. Could you explain to us what the arguments of those who advocated these figures were...
Duisenberg: ... no, I did not say that another figure than the 50 basis points was advocated. I said, of course, we discuss other figures, both higher and lower. But no-one advocated a figure that was different from the one of the decision we took today.
Question: And maybe about deflation, once again. Can you assure us that there is nothing in this rate cut today linked to the problem of deflation?
Duisenberg: I can assure you of that. There is nothing linked to the notion of deflation. It is only linked to, what in itself is, a very favourable outlook for price developments. It's so favourable that we can afford to lower interest rates without endangering our projection and goal of price stability, which is close to but below 2%.