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 meetings of the General Council and the Governing Council of the ECB.
The Governing Council conducted its regular examination of the outlook for price developments in the euro area. After reviewing the evidence available from both the first and the second pillar of the monetary policy strategy of the Eurosystem, the Governing Council decided to maintain the interest rate on the main refinancing operations of the Eurosystem at 3.25% and the interest rate on the marginal lending facility and that on the deposit facility at 4.25% and 2.25% respectively, i.e. at the levels determined a month ago. The Governing Council also concluded that the balance of risks to price stability in the medium term remains on the upside. These upside risks will need to be monitored and assessed continuously in order to ensure that timely action can be taken, if and when required.
The main elements of our assessment of the latest information on monetary, financial market and other economic developments are as follows.
Starting with the monetary indicators covered under the first pillar of the monetary policy strategy, the three-month average of the annual growth rates of M3 for the period from November 1999 to January 2000 was 5.7%, compared with 6.0% in the last quarter of 1999. The reduction was determined by a base effect, since the monthly increase in M3 in January 1999 was exceptionally strong, reflecting the special environment at the start of Stage Three of Economic and Monetary Union. At the same time, the annual growth rate of credit to the private sector remained high, at 9.5% in January 2000. Overall, the prolonged deviation of M3 growth from the reference value of 4½%, especially when seen in conjunction with the dynamic growth of credit, indicates that liquidity conditions in the euro area remain generous.
With regard to the second pillar, as usual, the Governing Council examined a broad range of indicators. Starting with long-term nominal interest rates, there was little change in the course of February. The yield curve remained relatively steep, thus indicating expectations of strong economic growth in the period ahead.
Such expectations are partly based on the favourable outlook for the world economy. A key element underlying this positive outlook is the fact that the US economy is continuing to grow at a high rate, but the strong recovery and the acceleration of growth in other areas also support this view. The strongest level of performance is currently being recorded in emerging market economies in South-East Asia, while the broad outlook in Japan remains uncertain.
There is also further evidence that economic activity in the euro area continued to expand strongly after the third quarter of last year. While euro area estimates for the fourth quarter of 1999 are not yet available, data for individual Member States point to continued robust output growth. In addition, area-wide industrial confidence increased further around the turn of the year and consumer confidence remained at the high level reached in the last two months of 1999. The cyclical upswing should extend well into 2000 and continue thereafter. This is also confirmed by available forecasts, which point to real GDP growth of slightly over 3% in 2000. As for 2001, the economic expansion in the euro area is generally expected to continue at a similar pace.
Developments in the exchange rate of the euro, which do not reflect the underlying strength of the euro area economy, remain a cause for concern. Their upward impact on import prices is having a negative effect on the price climate and is thereby increasing the risks to price stability in the medium term.
With regard to most recent developments in consumer price inflation, as measured by annual increases in the Harmonised Index of Consumer Prices (HICP), the upward movement has continued. In January 2000 the annual rate of HICP inflation was 2.0%, up from 1.7% in December 1999. As in earlier months, the latest upward movement is the result of the increase in energy prices, which, on an annual basis, reached 12.0% in January. Excluding the more volatile components, namely energy and seasonal food, HICP inflation in January increased slightly to 1.1% on account of somewhat higher price increases for non-energy industrial goods.
While it is likely that annual inflation rates will fall again in the course of 2000, owing to base effects related to the price of oil, monetary policy-makers need to look beyond developments over the next few months, i.e. policy will need to focus on the risks to price stability in the medium term. Indeed, whereas most forecasts still point to average inflation of below 2% in 2000 and 2001, they are based on rather favourable assumptions and generally seem to imply a pattern which is characterised first by decreasing rates of inflation in the course of this year and then by more fundamental upward tendencies later on. Against this background, the Governing Council concluded that vigilance is required and pointed to several factors. First, developments in monetary and credit aggregates will need to be analysed continuously in order to assess upward risks to price stability. Second, in view of the improving economic conditions, the potential spillover of large and protracted increases in import and producer prices into consumer prices will need to be assessed carefully. In this context, developments in the exchange rate and in oil prices will play a major role.
It will be essential, both for maintaining price stability and for reducing the high level of unemployment, that wage settlements remain moderate and do not themselves contribute to inflation expectations, which would also endanger the sustainability of the current upswing. Fiscal policies can make a substantive contribution to maintaining favourable economic conditions by using the current upswing as an excellent opportunity to proceed swiftly towards fulfilling the objectives of the Stability and Growth Pact. Economic conditions and perspectives in the euro area appear to be better at present than at any time in the past decade. Growth is strong, employment is expected to increase further and the still very high level of unemployment should continue to fall. Remaining vigilant to counter upside risks to price stability and pursuing structural reform is the foundation for a sustained period of strong economic growth and a lasting process of job creation.
Finally, I should like to draw your attention to two items not directly linked to today's meeting of the Governing Council.
First, I should like to inform you that on 30 March 2000 the Governing Council will meet for the first time outside Frankfurt, namely in Madrid. The meeting will be followed by a press conference. It is our intention that Governing Council meetings will be held in other euro area Member States twice a year. In the second half of this year it is envisaged that the Governing Council will meet in Paris.
Second, on 2 and 3 November 2000 the ECB will hold its first Central Banking Conference. The topic of the conference will be "Why price stability?" and it will take place in Frankfurt. The ECB's Central Banking Conference, which will be organised biennially, will bring together invited participants from central banks, international and European institutions, academia and the press. As of today, regularly updated information, including a preliminary programme, will be provided on the ECB's Web site. The final programme for the conference and all the papers, comments and a summary of the discussions will be made available on the ECB's Web site in due course.
We are now at your disposal, should you have any questions.
Question: Mr. Duisenberg, when you last moved up interest rates in early February, you said - or you explained in newspaper interviews afterwards - that you moved and did the move earlier than you would have otherwise due to the weakness of the euro against the dollar. Now you explained all these dangers to price stability once again. You mentioned the exchange rate again. Why do the same reasons that applied in early February not apply now?
Duisenberg: Well, let me say this: on the basis of the statement I have just made, there can be no doubt in anyone's mind as to the direction in which monetary policy will be moving in the near future. On the precise timing of the move, I have as little information as you have.
Question (translation): First of all, Mr. President, how do you explain the continuing weakness of the euro on the exchange markets. Do you have an explanation for that? And then a question for Mr. Noyer, if I may? The Anglo-Saxon press, Mr. Noyer, accused you of weakening the euro last week because of an interview. What do you have to say to those accusations?
Duisenberg: I have a partial explanation. And it is mainly, of course, the differential between the economic performance in the United States and that in Europe. In the United States there are a surprisingly and fantastically high continued rate of growth and very low unemployment, but no signs of any inflationary pressures. In Europe we have an economy that is picking up strongly due to the oil prices and the exchange rate itself, with some indications that the risks for inflation are on the upside. Those differences are the main explanations for the development of the exchange rate. But, of course, you can explain anything with the benefit of hindsight. I would like to repeat, as I explicitly did in my statement, that we are of the conviction, given the prospects for both the European and the US economy, that the euro has the potential to strengthen in the future. But do not ask me when, ask me why. The "why" I have answered, the "when" I cannot answer.
Noyer: What I said I can repeat today. It is extremely simple. We have already said it 100 times, namely that the Monthly Bulletin, which is issued approximately one week after the Statement of the President, i.e. a statement of the kind the President has just made, is not sending and will never send messages differing from that in the Introductory Statement. It elaborates on the same message. And, actually, there is one single message coming from the Governing Council, the message that you have just heard from the President. And all the members may elaborate on that, give explanations in their own words, but the message is the same. I never understood why, here and there, attempts are made to set off what was said by one against that said by another. There is one single message coming from the Governing Council. And you have just heard it.
Question: Mr. Duisenberg, I have never really heard you as hawkish as I have today. And I have to wonder why the ECB did not, perhaps, move today. And if, perhaps, there is a feeling that the ECB was afraid of being perceived as acting on a weaker exchange rate. And the other question I have is: there are some signs that the oil supply is going to increase. What does that mean for your outlook?
Duisenberg: On the last question: I have not seen those signs yet. But it may well be that, if the supply increases, the upward movement in oil prices could be reversed. That would be a very welcome signal and indicator for us. As to your argument that you have never heard me so hawkish: well, the signs are increasing that risks to price stability are growing. This also applies to our forecasts and to those of others which stated that price developments will settle just below the 2% level. The risks to these forecasts are increasing. And then, you have to remember that we raised rates by 50 basis points only four months ago and by another 1/4 percentage point only one month ago. So, altogether, this increase of 3/4 of a percentage point in rates still has to work its way through into the economy and we are not under the illusion that we can fine-tune either inflation developments or real economic developments by pursuing an activist policy. But I would just like to give the warning that the risks seem to be increasing. That is why I say that there cannot be any doubt in anybody's mind as to the direction of future monetary policy.
Question: I have two questions. One concerns M3. What is your estimate of the M3 overhang from last year? Could you give us a percentage in relation to the whole aggregate? And the second question concerns financial supervision in the Union. Is there any intention on the part of the ECB to play a more active role in financial supervision and would you think it necessary to create a unified authority for a comprehensive supervision of securities, banking and insurance companies?
Duisenberg: Christian, do you have any idea about the first question?
Noyer: I would not dare to give a precise figure, but you cannot simply base assumptions on the difference between the actual outcome of M3 at the end of 1999 and the reference value, because there were special factors at the beginning of the year. So, in order to answer your question properly, we should base our reasoning on special calculations, which I do not have with me now. So, I am sorry for not being able to answer, but what is important is that it is not as simple as it may look.
Duisenberg: As far as supervision is concerned, you know that the Treaty gives the ECB only a rather limited role, namely that of promoting sound supervisory practices in the individual Member States. But supervision itself explicitly falls under the principle of subsidiarity and will be executed at a national level. The ECB has no aspirations to change that situation. We are actively involved in the further development of supervision, but in a co-ordinating role and in the interests of financial stability at large. So, I do not see any tendency towards creating a supranational supervisory body, nor a body encompassing all the financial activities you mentioned in the sphere of security settlement, banking and insurance. As to how that should be organised, I have my personal views on that. But we follow developments in the various countries with great interest. What we do feel is that it would be wise for national central banks to remain closely involved, in whatever way, in the entire process of supervision.
Question: I would like to follow up on the issue of comments from the central bank. There has been major confusion in the markets when members of the central bank comment on your policy - whether you are looking backwards to explain or whether you are looking forwards to prepare the market. And I think there is some confusion even today. Are you explaining what you have been doing or are you trying to prepare the market? Is there not a need to clarify the direction on which the central bank is commenting?
Duisenberg: Well, I do not think that my statement of today - as I have said before - can leave any doubt about what we have been doing. I gave you a report on what we have been doing in a forward-looking manner, explaining what we think the future will have in store for us and what our policy reactions to that future development are going to be.
Question (translation): Mr. Duisenberg, are you at all interested in a stronger euro and, if you are interested in a stronger euro, why? And if so, what exactly would you mean by a stronger euro? How much more does it have to rise? Second question: is there anything else that we journalists from the economic press should know today that was said in the Council, but that we do not have in your Statement?
Duisenberg: As to a percentage - I cannot give you one. What we are strongly interested in, what we do believe is that - may I paraphrase my American colleague - a strong euro is in the interests of Europe. So we are interested in a strong euro. We are concerned about the recent development of the euro for two reasons. First, because of the potential impact it can have on domestic, i.e. European, inflation and the psychological impact it can have on the credibility of and the confidence in our currency. We are, therefore, interested mostly in a stable euro. Whether you call it strong or weak, I do not really care all that much. But stability is what we care for most and then a strong euro - I repeat myself - is in the interests of Europe. The second question: "Are there any other matters which would interest you?" I do not think so.
Question: To the extent that not much has really changed between the two meetings in terms of economic fundamentals. To what extent were you able to focus on other issues today? I am thinking more about communications policy.
Duisenberg: Our communications policy has not changed. We did notice that we were widely reported - as reflected in the last but one question - as seeming to create diverging views and confusion in markets. We are concerned about that. And there was strong urging from all sides in the Governing Council that we should see to it that - if we could not speak with one mouth, preferably with one mouth, we should at least let only one voice be heard.
Question: The two Reuters correspondents are teaming up, so I have got three questions, if you allow - two people though? First of all you said earlier in a response to a question that the 0.75 percentage point rate hike you conducted in the last few months still needed to work its way through into the economy. Do you have any idea how long that takes? Second question: the euro fell to a historic low on Monday in Asia, then recovered sharply after that. Markets speculated that, maybe, the ECB was intervening in the markets. Can you give us an indication whether the ECB actually was in the markets as far as the euro is concerned? And the third question is whether you see - relating to asset prices, to equity prices, in particular - whether you see a bubble there that is about to burst, possibly?
Duisenberg: The first question as to how long the lags are with which monetary policy measures work their way through into the economy: it is generally estimated that the lags are in the order of six to eight quarters. So, let us say, around one and a half years. Those are the lags we reckon with in formulating our monetary policy. I cannot give you any specific information on Monday. The ECB was not in the market, in the hectic developments last Monday. We know that one party in Tokyo was in the market, precisely at lunchtime, and that caused some turbulence, but it was not a central bank, I can assure you. And your third question...
Question: Asset price bubble...
Duisenberg: Yes, asset price bubble. I did not forget this question, I did not want to answer that question.
Question: Mr Duisenberg, earlier this week the OECD published reports on the first year of Monetary Union and it made the point that, in its view, one of the main reasons for the dissonance in voices was that some national central bank governors had been making public statements based on the interests of their own particular country, rather than the interests of the 11-nation area as a whole. Is that a criticism that you regard as fair?
Duisenberg: I do not regard it as fair. I must confess that it did strike me, from the conclusions that one newspaper close to your heart drew from the same OECD report you referred to, that the OECD was very critical of the ECB's first year, while another newspaper, namely "Le Monde", concluded from that very same OECD report that the OECD had been extremely gracious, that the OECD had been very positive about the ECB. So, there you see once again, it is the same message, which may be interpreted differently in practice.
Noyer: If I may add, much the same to what you have just mentioned for "Le Monde" also appeared, if I remember correctly, in the "Handelsblatt", "Les Echos" and probably in other sources.
Question: Since last December, I believe you have been sending warning signals about the wage deals that were and are under way and so did Mr. Noyer and practically all of your colleagues. Now that some agreements have been finalised, have been closed this season, do you have any comments to make? Do you think they took notice of your warning signals?
Duisenberg: So far, actual wage settlements, as concluded, do not give rise to concern. The major contracts still have to be concluded. And there are signals, at least in the demands, that the contracts could be excessive. But then I want to emphasise, wage demands are not wage contracts yet. But it would be fine to say, so far so good.
Question: The Swedish ruling party is deciding to join EMU this coming weekend and there has been discussion as to whether this ERM rule, i.e. two-year ERM membership, will apply or whether it will be enough that there has been a stable exchange rate, or will be it held against Sweden that the Kroner has been stronger than the euro?
Duisenberg: Well, the ERM rules or the criteria prescribe that a currency should - apart from membership in the ERM - have been stable and should certainly not have depreciated in the two years preceding actual entry into Monetary Union. So that could not be held against Sweden in any way. When a country applies for membership of the European Union, the European Central Bank will have to draw up a Convergence Report and make an assessment of the extent to which that particular country fulfils the entrance criteria, as have been formulated in the Maastricht Treaty. And, certainly for the European Central Bank, membership in ERM II, which is clearly prescribed as one of the criteria to be fulfilled, will be used in the Convergence Report of the ECB as one of the yardsticks for our advice. But I want to point out, in addition, that it is not the ECB that will take the ultimate decision, but the European Council on the advice of the European Central Bank and of the European Commission.
Questions: But there have been exceptions to the two-year rule earlier...
Duisenberg: Yes, but that was a political decision. They were only tiny exceptions, only a matter of months. You are talking about Italy, I assume. That is the only exception I can remember. It was only a matter of months and the political decision was based on the duration of membership and the period of stability preceding actual membership in the ERM. So I hope, for this weekend, that it is enough.
Question: Mr. President, coming back to financial supervision. In the OECD report of this week you are quoted as having said - in the time before you became President of the ECB, when you were President of the Dutch central bank - that financial supervision, banking supervision, should be centralised in the Monetary Union. Now, have you changed your mind or might it just ...
Duisenberg: ...if I was quoted that way, I was wrongly quoted. What my personal opinion was and what it has always been is that banking supervision should be in the hands of, or closely associated with, the national central banks. And I am still of that opinion.
Question (translation): Mr. Duisenberg, does the ECB support Mr. Koch-Weser's candidacy for the IMF? And there is rumour that Mr. Tietmeyer may be put forward. What do you think of that?
Duisenberg: The European Central Bank is not a member of the IMF, so we have nothing to do with the issue. As to the moves Mr. Tietmeyer may or will make, passively or actively, I will certainly not comment on this.
Question (translation): But you surely have an opinion on that?
Question (translation): I had the same question. I would nevertheless like to ask it again, in another way: if the euro exchange rate has an upward potential, would you not agree that global factors are what is impeding a "come back" of the euro, as is, for instance, the confrontation between the United States and Europe on this issue and on other fundamental issues of global policy?
Duisenberg: Well, whenever there are uncertainties and risks for a certain currency area - in this case Europe - that have the tendency to weaken a currency - and this goes for the United States and for Europe - there could certainly be a political impact. But when the image presented is one of disunity, of uncertainty, of a lack of strong and unified will, that is never good for a currency.
Question: Monday, again, there was someone intervening in the market. It was not a central bank, you said, but it did a lot of good for the euro, for some time. Did it make you change your mind? Do you think strong intervention by the European Central Bank could push up the euro?
Duisenberg: No, that is not what happened. What I was referring to were some large transactions effected in Tokyo, which did not help the euro - on the contrary, they brought it down. And they had nothing to do with interventions. It was not a central bank. And so, it had nothing to do with the question as to whether or not I have changed my mind - but I have not changed my mind.
Question: I meant the intervention that was in the market. It was probably not on Monday, but on Tuesday. It was said that the Bundesbank had intervened quite strongly.
Duisenberg: Well, it may have been said that the Bundesbank intervened, but I can say that the Bundesbank did not intervene. There were no central bank interventions.
Question (translation): On the IMF again, Mr. President. If Mr. Trichet were to "sacrifice" himself and were to agree to the top job at the IMF, would you be prepared to "sacrifice" yourself and have an eight-year term of office here at the ECB?
Duisenberg: Well, Mr. Trichet aside, I have already shown my willingness to "sacrifice" myself.
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