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.
Let me first say that, as expected, the transition of the euro area financial markets to the year 2000 went smoothly. This positive outcome reflects the careful preparation of the banking and financial community as well as the comprehensive and flexible operational framework of the Eurosystem.
As you will be aware, the ECB took some precautionary measures to ensure against any problem in the transition to the year 2000, including the provision of sufficient liquidity in the money market during the period around the century date change. After the successful transition to the year 2000 there is no longer any need to extend the current situation of abundant liquidity. Therefore, the Eurosystem this morning conducted a liquidity-absorbing operation amounting to EUR 14.4 billion. The operation contributed to restoring more normal liquidity conditions.
The Governing Council today conducted its regular examination of the current outlook for price developments and the risks to price stability in the euro area. The interest rate on the main refinancing operations of the Eurosystem was left at 3.0% and the interest rates on the marginal lending facility and the deposit facility were maintained at 4.0% and 2.0% respectively.
Allow me to give you an overview of the main elements of our assessment of the latest information on monetary, financial market and other economic developments.
Let me start with the latest monetary developments in the euro area. The three-month average of the annual growth rates of M3, covering the period from September to November 1999, was 6.0%, that is to say slightly higher than the figure of 5.9% recorded for the three-month period from August to October 1999. Accordingly, it remained around 1½ percentage points above the reference value of 4½%. Overall, current liquidity conditions in the euro area continue to be generous. This is also confirmed by the continued strong growth of loans to the private sector (10.1% in November, compared with 9.9% in October 1999).
Moving to the euro area financial markets, as we have already noted, it is clear that they were able to weather the century date change without encountering any major problems. The associated risk premium in short-term interest rates had already declined in the last week of December 1999 and had completely disappeared by the time the markets opened on 3 January 2000. Long-term government bond yields have climbed by around 30 basis points since end-November, partly in tandem with bond yields in the United States, but also in response to a more optimistic outlook for the euro area economy.
At today's meeting the Governing Council also focused on the economic outlook. In particular, note was taken of the fact that activity in the world economy is continuing to gain momentum as projections for world output growth have been revised upwards recently. This mainly reflects the sustained and high level of growth of the US economy, but also the broad upturn in growth in other industrialised countries and the strong recovery in Asian emerging market economies.
The latest developments relating to economic activity in the euro area have contributed to the improved outlook for the global economy and are consistent with the expectation that growth differentials between the main economic regions will narrow. A recent estimate for euro area real GDP growth in the third quarter of 1999 clearly confirmed the widely expected upturn in growth. Survey data for the industrial sector point to continued solid output growth in the final quarter of last year. In addition, private consumption growth should benefit further from continued employment growth and a high level of consumer confidence.
As regards consumer price developments, the Harmonised Index of Consumer Prices (HICP) increased further in November 1999. To a large extent the upward movement in November reflects higher price increases for energy and unprocessed food, which is similar to the situation observed in previous months. The annual rate of change in the overall HICP was 1.6%, following an increase of 1.4% in October.
When discussing the risks to price stability, the Governing Council recognised that, in the short term, consumer price developments are expected to remain subject to further upward pressure. This is mainly due to higher oil prices, but also to developments in the effective exchange rate of the euro and to a gradual unwinding of the earlier downward movements in food prices. The combined effect of these factors is expected to lead to a peak in the overall HICP increase in early 2000 and to lessen thereafter. Therefore, taken by itself, the upward movement in the rate of increase in the HICP expected for early 2000 should not give undue cause for concern. However, in terms of the outlook for price stability in the medium term, it is essential that the immediate upward movement does not translate into general inflationary pressures and, in particular, that it does not trigger second round effects such as excessive wage claims. Indeed, stability-oriented behaviour is urgently required.
In conclusion, the available indicators confirm our previous analysis and assessment on the overall situation as regards the risks to price stability. Against this background, we remain both confident and vigilant.
Let me now give the floor to the Vice-President to introduce some of the additional topics.
I should like to draw your attention to two items not directly linked to today's meeting of the Governing Council.
The first one deals with one aspect of the ECB's monetary policy competence. Pursuant to the Treaty (Article 106 (2)) the ECB has the exclusive right to approve the volume of coins issued by the euro area Member States. To this end, the Governing Council adopted, in late December, a Decision on the volume of coin issuance in 2000. This Decision will be published in the Official Journal of the European Communities shortly.
The second item relates to the Executive Board's decision to adjust the ECB's organisational structure according to the needs of a still growing institution on the one hand and to better accommodate the challenges ahead on the other. Among the changes you will find an upgrading of the Directorate Statistics to a Directorate General, in order to enhance its role as provider of monetary and financial statistics to the general public, as well as a restructuring of the Directorate General Economics. An updated organisational chart is available in the room this afternoon.
We are now at your disposal, should you have any questions.
Question: Financial markets all over the world have been very volatile recently, shooting up in December and correcting now. Do you think that might have anything to do with the extra liquidity that all the major central banks have been pumping into the market, and with the withdrawal that is happening now?
Duisenberg: I do not think that it has anything to do with liquidity operations, both before and after the century date change. The phenomenon we are seeing - as you correctly phrase it, a strong boom in a short period and a quick correction some time later - is by itself not at all abnormal.
Question: Your report seems to suggest that everything in your garden is rosy, with the exception - perhaps - of the fact that the euro continues to slide along the floor round about parity with the dollar. Throughout last year you were telling us that things were going to get better and that the potential of the euro would soon become manifest in a high exchange rate. Do you expect that that will happen, that this confidence will become manifest during this year?
Duisenberg:I did not mention a high exchange rate, but - for the rest - I expect it to happen. Yes, and, well, so far so good, I would like to say, it has happened.
Question: You mentioned that - when you were talking about consumer price inflation - that it is essential that it does not translate into upward pressure. How serious do you think that risk is and how long do you think before it is apparent how big the risk is?
Duisenberg: Well, I cannot quantify how serious the risk is. But what we are vigilant about is that the steady increase in the rate of inflation, which we have witnessed over the past and which we are still witnessing, does not translate itself into second-round effects in the form of higher wage demands and secondary price rounds. But then, as I said, for the coming months, we do expect the effects of the higher energy prices, of the higher prices of unprocessed food and of last year's effective depreciation of the euro to work their way through slowly into the price level, so that we - let me put it this way - we will not be surprised if inflation still creeps up a little bit in the coming months, but we are also confident that it will then, after a while, taper off and level off to, we hope, a rate which we forecast for the year 2000, an average rate of inflation of 1½%.
Question: Mr. Duisenberg, the London financial community has just celebrated a year without the euro and they pronounce record incomes and everything. Are you afraid that the London financial community could pressure Mr. Blair not to go any further in his movement towards the euro, i.e. are you afraid that Great Britain could stay out of the euro for a long time to come?
Duisenberg: I am not afraid of it, but I do not hope for it.
Question: Just again on the first year of the euro. I wonder if, after a year with the ECB at the helm of monetary policy, you could give us your general feeling about how it has gone so far and if you can pinpoint any areas, any challenges ahead for the coming year, anything that you think the ECB should be working on to build credibility in the currency?
Duisenberg: About how it has gone so far, I can only repeat myself. We were extremely pleased with the start of the euro, with the transition to the euro, the smooth changeover. We were extremely pleased with the quick adjustment of markets to the new environment, the fact that a Europe-wide money market emerged in a matter of days and that it has functioned very well ever since. We were extremely pleased that - with the exception of a few mishaps in the first few weeks - that our trans-European payment system has functioned so well and so rapidly and that it had - after a few weeks - already become the largest in terms of daily turnover, the largest payment system in the world, which is functioning very smoothly. I think we have reason to be satisfied, that we have demonstrated that this new body, the Governing Council of the European Central Bank, could take decisions in time, in an effective way and in anticipation of future developments. So I must say I am pleased with the way - it sounds a little bit like bragging - with the way we actually conducted monetary policy and took major monetary policy decisions. We were, to say the least, not surprised that the exchange rate of the euro in the first few months of 1999 came down from the high level it started at. I was somewhat surprised, although it is explicable, that the exchange rate then went down further - let's say - through the level which had persisted throughout 1997 and 1998 and came close to so-called parity with the dollar. I am pleased that in recent weeks, and especially in recent days, the euro has moved away from that level again. And then, when I say we were somewhat surprised - with the benefit of hindsight, of course, one can explain everything - it is not really surprising that the very different cyclical situations prevailing in Europe and the United States did cause the exchange rate to move in the direction it did. Moreover, now that we see that cyclical developments in the United States and Europe are converging - that, as I said in my introductory statement, the differentials are likely to narrow, if not to disappear altogether - we will not be surprised that our expectation, which we have expressed time and again, that the euro has a strong upward potential will become reality. And the question was: "For the future, what is our task?" I think our task is to remain vigilant, to closely monitor economic developments and especially economic prospects and to take the monetary policy decisions in time and at an early stage, if and when the need arises. But that is not today.
Question (translation): Mr. Duisenberg, you will be travelling to the G7 meeting in Tokyo on 22 January. The Japanese Ministry of Finance is already spreading the word that the exchange rates between the dollar, the yen and the euro will specifically be discussed there. What principles will you establish at this conference in respect of exchange rate policy and your role in the global economy this year?
Duisenberg: The Japanese have not yet been in touch with me, nor with others, about what they want to discuss in Tokyo on exchange rates. So I have not given them a reaction and I am not giving you a reaction either. I think that the attitude of the monetary authorities of Europe and the United States will remain - that we will closely watch the exchange rate developments between the three major economic areas, but that, for us, these developments do not give rise to a change in our attitude or policies.
Question (translation): Mr. President, you have constantly warned against excessive wage settlements, in view of the inflation risk. Could you give us a rough indication of the mark at which a wage settlement might be excessive. Thank you. The teething problems that you mentioned for TARGET, can you describe what the main problems have been, even if they are teething problems, exactly what form they have taken?
Duisenberg: No, it is different for the various areas and industries in the euro area. Generally speaking, we would hope that any wage settlement going in excess of the rate of productivity increase could be avoided.
Question: Before the switchover to the year 2000, it was said that uncertainty over the liquidity situation during the switchover somewhat limited the room for manoeuvre for monetary policy. Do you now feel that the switchover went smoothly, do you now feel that monetary policy has gained room for manoeuvre again?
Noyer:We have never said that. Some of you, maybe, or other commentators have said so. But, I think, all central banks were concerned about the liquidity situation. We have focussed on that and have avoided making big changes in the last days of the year, so that is obvious. But all I have explained in our assessment is that we were concerned that sufficient liquidity would be available over the turn of theyear. We have ensured that this has been the case. This transition has gone smoothly. Now we have to return to a normal liquidity situation. That means not a tight liquidity situation. It means a more or less neutral liquidity situation. And this is how you have to interpret the fact that we have given a ceiling of 3% to interest rates in our fine-tuning operation to indicate that this was consistent with more or less neutrality, that it is a normal liquidity situation in which the interest rates in the market can hover around the 3% benchmark that we are giving.
Question: Can I have a follow-up on that? Are you disappointed about the relatively small interest in that fine-tuning operation? You aimed to drain EUR 33 billion from the market and achieved a drain of EUR 14 billion from the market. Is that too little in your view? What are the reasons?
Noyer: We are not disappointed. What we had proposed to the market in a very transparent way was the size that, for us, seemed to be consistent with the immediate return to what I call a 'neutral liquidity situation'. Now, the fact is that the market participants have been more cautious and asked for less. That is their judgement, and we do respect this. It means simply that the return to a neutral liquidity situation will take a little longer. It will have to be achieved through our regular refinancing operations, starting next week. But this will come naturally and we will see how the market behaves. But, of course, we can only respect the wish of the market participants.
Question: Mr. President. In November, when you raised interest rates, you called it a "precautionary move" and, it seemed, because of the rising trend in inflation. It seems so far that your estimate at that time, your forecast, has not changed and is developing as you expected. Can we infer from that that if it really will develop like that in the coming months, that it will stay below 2% and then decline a bit, that this is taken care of by your precautionary move and would not give you a reason to raise interest rates again?
Duisenberg: Well, you can infer from that anything you want. What we have tried to make clear, also in my introductory remarks, is precisely that this is our expectation of today regarding inflation. If I were to answer your question, I would introduce a bias into the discussion, which is something I do not want to do.
Question: Mr. President. Are you concerned, or pleased, or whichever, by the fact that some formal fiscal competition might develop between different euro countries in the sense of lowering taxes also with the purpose of attracting investment?Herr
Duisenberg: That is not a concern I have. An observation which I want to make is that in Europe you will see a tendency toward a greater harmonisation of fiscal structures, in all areas of 'fiscality', let me call it that. But that is a process that has nothing to do with the euro. It probably has to do with the phenomenon of the completely free single market in goods, services, people and capital. And it is a process which will take if not decades, well, then maybe even longer.
Question: Mr. Duisenberg. Last year you said that the ECB would study the possibility to use a variable interest rate tender for its main refinancing operations. Did you study if there is a possibility to use it this year?
Duisenberg: I would not exclude using it. We have studied it. We are ready to use it. But - as you can see from today's decision - for today, we have decided not to use it. But I will never exclude that sometime this year, or next year, we will use it.
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