With the transcript of the questions and answers
Ladies and gentlemen, the Vice-President and I are here today to report on the outcome of today's meeting of the Governing Council of the ECB, which was attended by the EU Council President, Mr. Niinistö, and by Mr. de Silguy, European Commissioner.
The Governing Council reviewed the main monetary, financial and other economic indicators in line with its monetary policy strategy. As a result of its examination it decided not to change the ECB interest rates. The interest rate on the main refinancing operations of the Eurosystem will thus remain 2.5%. In addition, the interest rate on the marginal lending facility will continue to be 3.5% and that on the deposit facility has been kept at 1.5%.
Let me give you some details about our latest assessment of the monetary policy stance and thereby explain the decisions taken today.
With regard to monetary developments in the euro area, the three-month moving average of M3 growth, covering the period from March to May 1999, increased slightly to 5.2%, from 5.1% in the three months up to April. Consequently, M3 growth remained above the reference value of 4½%. The major contribution to the rise in M3 growth in May came from overnight deposits. With the exception of repurchase agreements, marketable securities included in M3 also experienced higher growth.
The annual growth rate of total credit to euro area residents rose in May, from 7.3% in April, to 7.9%. The pick-up in credit growth was visible both in loans and in securitised lending and occurred in respect of credit to both the private sector and the general government. The growth of loans to the private sector rose to 10% in May, stimulated by the further decline in bank lending rates. Taken together with the high pace of growth of the most liquid components of M3, this evidence supports the view that households and firms in the euro area do not currently face liquidity constraints. In the view of the Governing Council, this situation is not seen as threatening price stability at present. However, a reassessment may be appropriate if money and credit growth increase further.
Turning to financial market indicators, we have seen a significant upturn in long-term interest rates in the euro area since the end of May. This development was certainly affected by the continued increase in bond yields in the United States over the same period. More recently, however, domestic factors have probably played a more important role in the determination of domestic bond yields than was previously the case. These factors include financial market perceptions of more evidence pointing to a further strengthening in economic activity in the euro area during the year, accompanied by a modest pick-up in inflation expectations from the low levels seen in recent months. The more positive market sentiment regarding the prospects for euro area output growth has also been reflected in a narrowing over recent weeks of the relatively wide differentials between US and euro area bond yields. Exchange rate developments do not yet reflect these very same factors.
As we have said on earlier occasions, the Governing Council believes that the euro is firmly based on internal price stability and therefore, has the clear potential to achieve a stronger external value. The Governing Council reaffirmed its view at today's meeting that the monetary policy of the Eurosystem will safeguard the euro's internal purchasing power and will thereby support its international value.
The prospects for a more broadly based and sustained recovery in the world economy have become stronger. The outlook has improved further, in particular in relation to expectations of continuously strong growth in the US economy and some tentative indications that the prolonged decline in activity in Japan may have come to a halt. In addition, recent developments in economic and financial indicators for the emerging market economies suggest that a recovery is under way in South-East Asia. Moreover, to the extent that the Kosovo conflict may have had a negative impact on economic sentiment in a number of countries, its end has eliminated a risk to the outlook for economic developments in the euro area. As recent developments in Latin America indicate the outlook has improved only moderately.
With reference to developments in economic activity in the euro area, some important data have been released since our last meeting. Most notably, Eurostat has now started to publish euro area national accounts data which are based more closely on data compiled in accordance with the new ESA 95 methodology. According to these estimates, the quarter-on-quarter rate of real GDP growth increased to 0.5% in the first quarter of this year, compared with 0.3% in the previous quarter. At present there is insufficient experience with regard to the properties of the new ESA 95 data, in particular their susceptibility to revision, and some caution should therefore be exercised when interpreting the most recent developments in real GDP growth. However, further evidence supporting the view that growth will recover in the course of this year is also provided by the recent development of other indicators of economic activity. Following successive declines, the level of industrial production appears to have stabilised in the months up to April. Given the developments in industrial confidence up to June, it would appear that the trough was reached at the end of the first quarter. This points to a turning-point in activity in the industrial sector. At the same time, household sector demand patterns appear to be broadly unchanged, as indicated by a still high level of consumer confidence. Therefore, while the signs of recovery are still modest and are not yet reflected in labour market developments, recent data appear to confirm the outlook for a continued improvement in the course of this year. The Governing Council considers it necessary that other policy areas make a decisive contribution to bolstering confidence in the euro area's growth potential, particularly by means of firm structural reform measures to enhance the sustainability of public finances and the efficiency of labour and product markets.
Looking at the latest developments in consumer prices, the annual rate of increase in the Harmonised Index of Consumer Prices (HICP) fell to 1.0% in May, down from 1.1% in April. While energy prices, which had caused the rise in the overall HICP rate in the previous two months, continued to exert some upward pressure, this was more than offset by movements in other components. A lower rate of increase was recorded in May for both processed and unprocessed food prices and for services prices. Hence the decline in the overall HICP rate was also reflected in the HICP rate excluding the two more volatile components - energy and seasonal food. These developments have to be seen partly in the context of a one-off base effect resulting from country-specific increases in indirect taxes which occurred last year. Against this background, the expectation remains that over the next few months the rate of price increases will tend to edge upwards, mainly reflecting the increase in energy prices.
In conclusion, the outlook for the maintenance of price stability in the euro area remains favourable and in line with the Eurosystem's definition of price stability. The Governing Council therefore decided to maintain the prevailing levels of the ECB interest rates. At the same time it noted that the sustained growth of monetary and credit aggregates, the slight improvement in output growth in early 1999, the expectation of a strengthening in economic activity in the course of 1999 and a further acceleration next year all indicate that any upward pressures on prices will have to be monitored very carefully.
Let me now give the floor to the Vice-President to introduce two additional topics we discussed during the Governing Council meeting:
In addition to reviewing the main monetary, financial and other economic indicators, the Governing Council also considered the days on which the TARGET system would be closed in the year 2000.
With regard to the calendar of TARGET operating days for 1999, the ECB announced on 31 March 1999 that the TARGET system would close on 31 December 1999, in addition to Saturdays and Sundays, Christmas Day and New Year's Day.
However, considering the financial and social cost of keeping the TARGET system open on days which are traditionally public holidays (or bank holidays) in most of the euro area, and in view of the indication given by the European banking industry that it would welcome the closing of TARGET on such days, the Governing Council today decided in principle that next year - in addition to Saturdays and Sundays - TARGET will be closed on New Year's Day, Good Friday, Easter Monday, 1 May (Labour Day), Christmas Day and 26 December. In countries where one of these days is not a public holiday, the national central bank will endeavour to close the national RTGS system on the day in question or, when this is not possible, will seek to limit domestic payment activity as much as possible.
You will find further information relating to this decision in the separate press release to be issued today.
Last and certainly not least, it is my great pleasure to announce a very important milestone along the road to the introduction of the euro banknotes. The production of the euro banknotes has begun and, by the end of this month, euro banknote production will be under way in printing works in several euro area countries.
As you will remember, we presented the draft euro banknote designs in December 1996. The designs were subsequently adjusted and refined in order to meet the technical specifications in full. Intensive work then began to convert the detailed designs into the origination material, in other words the final dies, films and plates which enable printing plates to be made.
Production of the pilot series started in September 1998 and was completed a few months ago. The printing of this pilot series involved the production of several million banknotes under normal operating conditions. This was a success and we therefore agreed that the participating national central banks could release their printing orders.
The number of euro banknotes to be printed for the 11 participating Member States before the launch - which will take place exactly 900 days from today - is estimated at 13 billion. To give you an idea of the size of the production process, if the 13 billion euro banknotes were placed end to end, they would stretch to the moon and back twice.
As you may remember, the Governing Council has already decided that the euro banknotes will not bear any national symbols and, therefore, will be totally identical irrespective of where they are produced. The euro banknotes are being produced in accordance with specifications of the very highest standard and they will include a wide range of sophisticated security features.
The ECB has today issued a press release on this matter. A press folder containing, inter alia, TV footage and a brochure on the euro banknotes and coins has also been made available to the media. The brochure is available in all 11 official languages of the European Union.
Question (translation): President Duisenberg, for months and weeks there has repeatedly been great excitement; the value of the euro vis-à-vis the US dollar has been dropping constantly. What do you think of this? Do you think that this is not a problem? Do you think it is slowly becoming a problem? Do you perhaps also believe that 1:1 is easier to remember? Does it simplify calculations?
Duisenberg: The last time I expressed myself publicly on the exchange rate, it was precisely before this group, at the press conference on 2 June this year. Now, six weeks later, I can for the first time say something about the exchange rate again and I will not say anything more than that. I am prepared to repeat what I said. We believe that the euro is firmly based on internal price stability and, therefore, has the excellent potential to achieve a stronger, external value. That view was confirmed again by the Governing Council today. The view is that the monetary policy of the Eurosystem will safeguard the euro's internal purchasing power and will thereby support its external value. That is what I had to say, what I have to say about the exchange rate. It is all that I am going to say about it.
Question: How do you evaluate the situation in the Member States when it concerns the structural reforms that you are demanding in every press conference and every situation. Are they going as you have expected?
Duisenberg:Well they have differed in various Member States. In some Member States, measures have been taken to increase the flexibility of the economy in certain respects. But, looking at the euro area as a whole, it is certainly far from sufficient. Many, many more structural measures have to be taken in most, if not all, of the euro area Member States.
Question: I have two questions. With your comments on inflation, and in the Monthly Bulletin as well, about the importance of monitoring inflation. Would you say that the ECB is moving to a tightening bias for interest rates? That is the first question. And the second question is: Did the Council today discuss investor confidence in the euro and what conclusions did you reach in your discussion?
Duisenberg: What I have said is that we do not see price stability as being threatened at present. But, if money and credit growth increases further, a re-assessment may be appropriate. You could interpret that, not as a bias, but as a bias gradually creeping into our considerations. We did not explicitly discuss investors' confidence in the euro, but we did, very explicitly, discuss the development of the euro, which includes, of course, an assessment of investors' confidence. As our answer, we expressed our strong belief that the success of our policy to maintain price stability would, over time, underline and underscore the inherent strength of the euro.
Question: In the Monthly Report, which came out two days ago, you were saying that a re-assessment of the fact that monetary growth is currently not threatening price stability might be in order if growth should pick up further. Now you are saying that it might be in order if M3 growth might pick up further. Is that the same or is there a difference in these two statements?
Duisenberg: It is the same.
Question: So more growth means more M3 growth. Is there not a problem that .
Duisenberg: . and I added "morecredit growth".
Question: Yes, is there not a problem that you have often said that the relation between real growth and credit growth might have shifted and might not be so stable anymore?
Duisenberg: No, that is not a problem. But it requires a careful assessment and judgement about what is actually happening and going on - also in the monetary world. And that is, under the new circumstances, somewhat more difficult than it used to be in the past before the euro was created.
Question (translation): Two questions. The first, on the confidence of the markets in the euro. If the Monthly Bulletin is read carefully, one gains the impression that the Governing Council, or economists at the ECB, are taking a somewhat new look at the interest rate cut of April, because the econometric models had already indicated an economic recovery in the first quarter. Is the difficulty in understanding your interest rate cut perhaps also a reason for the euro not having gained the confidence in the markets that it should have had in terms of its internal stability? The second question concerns fiscal policy in the euro area. On Monday you submitted a financial report to the ECOFIN Council concerning the fulfilment of the Stability and Growth Pact, which is now being discussed. How do you regard the statements on the Stability Pact, for instance those of the Planning Council in Paris, that are placing this Pact in question, because it might curb the growth momentum. What results did the discussion of this matter by the Governing Council have?
Duisenberg: That was a very long question, I will ask Mr. Noyer to answer the second part. But, as far as the first part is concerned, the key word was "confidence" and another key expression was "our interest rate decision of 8 April". All I can say is that circumstances may change and I have already answered the question about the bias, using the word "creeping in". We do not in any way regret our decision of 8 April. We believe that this was an appropriate decision at the appropriate moment and, of course, the effects of monetary policy decisions will become evident only with a very long time lag. In the meantime, what we do want is to maintain the climate of stability, of stability-oriented policies, as perceived by the public - and as it must be perceived by the public.
Noyer: On the second question. I suppose that you make reference to a report that was issued by a working group of an economic institute, a kind of a think-tank, even if it has an official name - Commission General de Plan. In fact, today it works like any economic institute undertaking research. That report did contain the remark you are referring to and this has been firmly denied by the French Government, very officially, and several times by the Finance Minister and the Prime Minister of France. For us, there is no such indication at all, as you have said.
Question: I believe Mr. Hutter was also referring to something else. This morning, news agencies reported on a financial report of the ECB to the ECOFIN Council, in which the ECB complained that the fiscal criteria were being endangered by the Member States. Well, it has already been confirmed to me that this report exists. I would like to know - in its Monthly Bulletins the ECB does not ever name the countries that are running counter to the Stability Pact. Are the culprits named in this report? Have you actually complained about Germany, France or whomsoever? That was the first question. The second question: Has the procedure for the transfer of the second reserve instalment of 50 billion from the national central banks to the ECB been closed, has it been approved? And my third question concerns one of your press releases today. It states that it can be noted that the designs which have meanwhile been published differ from the actual appearance of the euro banknotes. What does this mean? Will we be getting other banknotes than those you are showing us pictures of here, or . would you please elaborate?
Duisenberg: Christian, you went to the ECOFIN. Can you give a report on individual criteria?
Noyer: No, unfortunately, I cannot give any report. I think reference is made to a report that had traditionally been made by the European Monetary Institute during the time of the preparation of all the decisions on which countries would join the euro area from the beginning. That report was taking care of all criteria. The ECB has simply continued this practice. Not because there is any possible consequence, but because we have the technical knowledge and habit of doing this with the help of all the national central banks of the Eurosystem. It might be helpful for governments to have a number of technical analyses in looking at their own fiscal stances. It does not look at all at the short term, of course. It looks more at the medium term and at the risks that may arise if a number of improvements are not pursued and if there are adverse developments in the medium or long term in, for instance, the real economy. But, to take the most obvious example: if the governments were all sticking to exactly 3% and then, in the case of a future recession, it would obviously be extremely difficult for governments to not breach the 3%. So, we say in that case there is a strong reason why sticking to the Stability and Growth Pact will give you the room for manoeuvre. That is the global assessment. But it does not point to any risk of such a development in the short term. First, because progress has been made, and second, because economic developments are going to look better, as the President has explained. So it cannot be concluded from this that there is a risk in the foreseeable future. In the analysis that we have done many times, and that has been very clear to all of you, either from the Monthly Bulletins or from other publications, we have repeatedly said that an actual implementation of the Stability and Growth Pact, and of the programmes that all countries have designed for themselves, are very important as a safeguard against any kind of downward trend in the future. It does not mean that we foresee that there will be any slowdown of economic growth in the foreseeable future. So there is no immediate implication for one country or another.
Question: What about the individual countries?
Noyer: Well, there is an analysis of all countries - yes. But it is not pointing at a specific risk of a breach in specific countries. For all countries, it analyses the strengths and weaknesses in the fiscal consolidation process which, of course, are different - the balance is different from one country to the other. But it is not pointing at certain countries in saying that there is a special risk of breaching the 3%. This is not the objective of the analysis. It is more to give analytical help to countries to better shape their process of fiscal consolidation.
Duisenberg: And to add one sentence, as I told you, the meeting today was attended by the President of the ECOFIN Council, Mr. Niinistö, and - I must say to our great satisfaction - he reported that the ECOFIN Council had at its last meeting unanimously endorsed its commitment to the Stability and Growth Pact, and we were very pleased with that. As far as the 50 billion euro in foreign reserves are concerned, I do not think that they have already been turned over. And it is not that important either, because all foreign exchange reserves already come under the management of the ECB, whether they are in the hand of or still in the coffers of the national central banks. The third question on the appearance of the banknotes: don't read to much in that. Essentially, nothing has changed. To give you one example why the banknotes - when they are issued - will look slightly different from those that were published as illustrations some time ago: in those that have been published, there was a fake signature. Ultimately, there will be my signature - that is the difference! And another difference, to mention another example, is that the banknotes also bear the word "EURO" in Greek letters. In the ultimate series the word "EURO" will still be there in Greek letters, but it will be somewhat shadier than in those published earlier.
Question: Mr. Duisenberg, two questions concerning your monetary bias. The first one: given the current situation on the money market, a change to a variable rate may have some positive effects. Was such a change to variable rate tender discussed today or on any other occasion lately?
Duisenberg: It was not discussed today. It will be discussed in the coming months. Whether the system will change is still open.
Question: The second question about the creeping bias. Do you intend to keep the public informed about the changes in the bias of the ECB - just like the Fed did lately - or is it up to the Fed-watchers to decipher the statements that come in the form of the Monthly Bulletins? What exactly is your monetary stance at the moment?
Duisenberg: Yes, we do intend to be as open and transparent as we possibly can. And, as your colleague had already concluded from the Monthly Bulletin, there might have been some slight change in tone that was confirmed today in my statement, and we will monitor the developments in the months to come very carefully.
Question: I would like to know whether the euro notes which were stolen near Paris - the printing plates - whether you have got them back and are you going to be able to use them? And is it a problem for you that there are 10 printing works which are going to produce the euro notes? They do not always have the same printing machines, so that there may be quality differences. Are you worried about that?
Noyer: The first question: actually, the material was not stolen near Paris, as far as I know, but nobody knows where it disappeared. Somewhere in the air probably. It was a cross-border transfer. But the real answer is that it has not been found, but it could not have been used, because it was not final. The stolen material is of no use at all. We have changed the features to have something that is absolutely safe.
Duisenberg: I can take the second question. Is it a problem: no. When there are 10 printing works producing these banknotes, it is monitored very, very carefully that they are identical across the 10 printing works involved. I might add that the start of production yesterday was a total success in all printing works.
Question: So you are saying that today's reportin the Frankfurter Allgemeine Zeitung is wrong?
Duisenberg: That is correct.
Question: Could you just very briefly tell us a little bit more about the safety features of the new euro banknotes?
Duisenberg: The answer is "no". We will not reveal at this time specifics of the extensive safety features which have been incorporated into the new banknotes, but we will start an extensive information campaign well before the actual issuance of the banknotes to make the public and the experts, the cashiers at banks and in the retail sector, very familiar with the safety features, as they have been incorporated.
Question: President Duisenberg, the ECB is lending money to banks at lower rates, but bonds are being issued at higher rates. Now, is this something you are having misgivings about? Do you not think that your accommodating monetary policy is not being taken seriously?
Duisenberg: The short-term interest rates have hardly moved over the past six weeks. The three-month interest rates were at 2.6% and, in the last few days, they have moved up to 2.7%. So, that is not a cause for concern. At the long end of the yield curve there has been a significant move to an average yield for government paper of now 4.9%, which is one of the factors I have discussed in my introductory statement. It is not a cause of concern which would, in our opinion, threaten price stability. But this has to be monitored very closely.
Question: When looking at the upcoming situation regarding price stability, has your assessment been influenced by the possibility of the degree - however small - of imported inflation from the lower exchange rate of the euro against the dollar.
Duisenberg: We continuously assess that and we then come to the same conclusions that you had formulated so adequately in the article you published yesterday.
Question: There have been many calls on European policy makers to improve their co-ordination of comments on the euro. Do you think the politicians' comments on the euro are, on balance, helpful or would you prefer that the ECB, or you as President, had sole responsibility for commenting on the development of the currency?
Duisenberg: Well, that is an unrealistic prospect. We do agree - both politicians and the ECB - that it is important to speak with one voice, even if we do it through many mouths.
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