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 latter of which was attended by Mr. Niinistö, President of the EU Council.
Let me first report that the Governing Council decided to confirm the reference value for monetary growth, namely an annual growth rate of 4½% for the broad aggregate M3. This decision was taken on the grounds that the components underlying the derivation of the first reference value in December 1998, namely the Eurosystem's definition of price stability and the assumptions for trend real GDP growth and the trend decline in M3 income velocity, have remained unchanged.
As before, the Governing Council will assess monetary developments in relation to the reference value on the basis of a three-month moving average of annual growth rates. The Governing Council has decided henceforth to review the reference value on a regular annual basis, with the next review to take place in December 2000.
Against this background, the Governing Council wishes to emphasise that the trend growth potential of the euro area could be considerably enhanced by structural reform in the labour and goods markets. The Eurosystem's monetary policy strategy would take such changes into account, as appropriate. The derivation of the reference value of 4½% is an expression of a medium-term-oriented approach. The generous liquidity situation in 1999 will have to be borne in mind.
The ECB will issue a press release today providing some background information on the review of the reference value carried out today by the Governing Council. The press release will also recall the role of the reference value within the Eurosystem's monetary policy strategy.
The Governing Council also conducted its regular review of the outlook for price developments and the risks to price stability in the euro area, this time including a review of the most recent forecasts and projections. After this examination, 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 on the deposit facility were maintained at 4.0% and 2.0% respectively.
Allow me to outline the main elements of our assessment of the latest information on monetary, financial market and other economic developments.
With regard to monetary developments in the euro area, the data up to October 1999 - which still refer to the period before our decision to raise interest rates - confirmed the picture of a generous liquidity situation in the euro area. The annual growth rate of M3 in October 1999 was 6.0%. This compares with 6.2% in the previous month. The three-month average of the annual growth rates of M3, covering the period from August to October 1999, was unchanged at 6.0%, and thus stood 1½ percentage points above the reference value of 4½%. The growth of the most liquid components of M3 remained very dynamic. In addition, the annual growth rate of credit to the private sector continued to exceed 10%. As we have noted on previous occasions, these monetary and credit developments are considered to have been driven mainly by the low level of interest rates, as well as by the pick-up in economic activity in the euro area.
The initial reaction of euro area financial markets to the Eurosystem's monetary policy move of last month was favourable. In particular, this was signalled by the continued decline in long-term government bond yields and the immediate substantial reduction in market uncertainty regarding the evolution of future long-term interest rates. Later in November, long-term bond yields in the euro area began to rise again gradually, in connection with developments in international bond markets and favourable expectations for world growth.
Indeed, the global economic outlook remains positive, and the view that the world economy is set for higher growth appears to be shared by the major international organisations. At the same time, the expectation that growth differentials between the main economic regions will narrow in the course of time is widespread. While real GDP growth in the United States is generally expected to ease, it is expected to accelerate in the euro area. Overall, relatively wide growth differentials between the major world economies will give way to a more balanced scenario, thereby underlining the potential for the euro to appreciate.
With regard to developments in economic activity in the euro area, the latest data confirm a strengthening of growth in the course of the second half of 1999. In particular, production growth in the industrial sector saw a further upturn in the third quarter and various survey data suggest that this will continue in the final quarter. All available projections indicate that this upward momentum will lead to an acceleration in real GDP growth, from around 2% this year to close to 3% in both 2000 and 2001.
Consumer price increases, as measured by the Harmonised Index of Consumer Prices (HICP), have recently resumed their upward trend, as expected. In October the annual rate of change in the overall HICP was 1.4%, up from 1.2% in September and August owing to higher price increases for food and non-energy industrial goods. The impact of higher oil prices on energy prices in the HICP, which had accounted for most of the upward pressure since June 1999, was countered in October by more moderate increases in other energy components. Some additional counterweight to the upward movement in goods prices came from a further moderation of increases in prices in the services sector. In general, the overall upward trend is expected to continue until early 2000 as a result of the increase in oil prices since spring 1999. Forecasts available suggest that price increases will nevertheless remain below 2% in the course of 2000 and 2001. However, the actual developments will very much depend on the behaviour of a number of factors, and in particular on wage developments remaining in line with price stability. In addition, our assessment has to take due account of prevailing uncertainties. On the upside, these relate to, inter alia, the behaviour of money and credit aggregates, the developments in oil prices and the path of the effective exchange rate, all of which are closely monitored with regard to their impact on price stability. On the downside, main factors are linked to the effects of deregulation and liberalisation.
In conclusion, the current monetary policy stance should ensure a sustainable expansion of non-inflationary economic activity in the euro area. In line with its monetary policy strategy, the Governing Council will remain vigilant with regard to any risks to price stability arising either from domestic or from external sources and act in a timely manner.
Let me now give the floor to the Vice-President to introduce some of the additional topics we discussed during our meetings.
The Governing Council today also took a decision on the subject of the minimum reserve system. As you may be aware, interbank liabilities are not subject to reserve requirements. In this respect, the ECB allows those credit institutions which cannot provide evidence of their interbank liabilities - in the form of debt securities issued with an agreed maturity of up to two years or money market paper - to apply a standardised deduction to the aforementioned liabilities in the computation of their reserve base. Since January 1999 this standardised deduction has been set at 10% for both types of securities. Today, following a review of new statistical evidence available, the Governing Council decided to increase the standardised deduction to 30%. This decision shall have effect as from the determination of the reserve requirement to be fulfilled in the maintenance period starting on 24 January 2000. A separate press release presenting this decision and some background information on standardised deductions from the reserve base will be issued to you here today.
The Governing Council today approved the ECB's budget for 2000, which gives the ECB the green light to recruit further staff needed to support the ongoing activities of the ECB. This will bring the ECB's staff to slightly over 1000; the number of staff employed to date stands at 750.
At its meeting on 18 November 1999 the Governing Council approved the publication of an update of the book on "European Union balance of payments statistical methods" (the "B.o.p. Book"). This important book documents the statistical methodologies applied in Member States in compiling balance of payments statistics and, as such, improves the transparency of the compilation of euro area statistics. This new version includes additional chapters on: (i) investment income; (ii) estimation methods, especially for goods, investment income and portfolio investment; (iii) financial derivatives; and (iv) the stocks compiled for international investment position statistics. The book was published on the ECB's Web site at 4 p.m. yesterday and will be available from the ECB in hard copy format during the course of next week.
Finally, let me inform you that the General Council discussed the monetary policy objectives, strategies and intentions of the non-participating EU central banks against the background set by the monetary policy of the Eurosystem. This is the second time that such an exercise has been undertaken since the ECB was established.
We are now at your disposal, should you have any questions.
Question: Did you - in reviewing the reference value for M3 - also discuss the possibility of introducing a corridor around the reference value that - as some economists argue - could have helped to stabilise expectations?
Duisenberg: We did discuss this internally in the ECB, as it should be, before coming to our proposal and we decided to stick to our original decision of basing our strategy - at least one pillar - on a comparison with a reference value, and not a corridor. This was not discussed.
Question: Could I ask you: obviously the euro does have a bit of an image problem and is not proving attractive to investors today. Is there anything you think you could do to improve that image, to make it clear that the euro is a better currency than it looks today?
Duisenberg: Yes, I think so - to continue to pursue a policy that is oriented to price stability in the euro area, and with success, I might say. We do believe - if we get that message across and we will continue to do so - that that in itself will underline, as I have already said, our feeling that the euro has a strong potential to appreciate.
Question: Mr. Duisenberg, in an FT article of last week you made a very pointed statement about potential and trend growth. You said that there was perhaps a good case that the potential growth has risen, or the rate of potential growth has risen, and is not necessarily reflecting the trend of the last two decades. That is precisely - as far as I can get it - what you said. My question is: can you tell us more about the discussion of potential growth and how long it was actually discussed in the Governing Council? And the other thing is: did the fact of the approach to euro/dollar parity, which seems to be happening in the financial markets, have any bearing on that? In other words, would the discussion have been different if the euro had been a lot stronger in the financial markets?
Duisenberg: On potential growth, if I remember what I said and was reported correctly, I did not say that the potential growth was higher, but that it could be higher and could become higher than the trend rate of growth which we observe, which we put at the figure of 2% to 2½% for the euro area as a whole. If indeed the structural reforms in the labour market, in the good markets, were finally to be implemented throughout the euro area, then we could have a potential growth rate, or a growth rate, that is significantly higher than that currently perceived. But I did not say that it has already happened. The second question on approaching parity was not discussed very thoroughly. As you may know, we do not have an exchange rate target. On the one hand, the exchange rate is regarded as the outcome of the entire economic process and - may I add - the psychological process on both sides of the Atlantic. We are still faced with the phenomenon that we have a remarkable, continued high rate of growth in the United States and only a just recovering but accelerating rate of growth in Europe. That phenomenon, by itself, is what makes the exchange rate movements - let me call it - not inexplicable. Moreover, these movements, as I said earlier, underline our strong belief, as the rates of growth converge on each other, that the euro has a strong potential to appreciate. And the forecasts we have available - also the Commission forecast published last week - say that in two years time the rate of growth in Europe is expected to exceed the rate of growth in the United States.
Question (translation): On the exchange rate, the euro/dollar exchange rate: one has the impression that, whatever you say, whatever you do, the euro has continued to slide against the dollar. So, is it a problem of communication, is it the markets who have a problem vis-à-vis the euro? The second question is: this depreciation of the euro against the dollar - is it not a piece of good news? Because some people seem to be thinking that it is a disaster. Could it not be said that it is very positive for the European economy and can it not contribute to the recovery of economic growth in the euro area?
Duisenberg: Well, you correctly said that - whatever I say or whatever I do - the euro continues its movement. So, I am perhaps best advised to stop saying anything, although, for once, you have not exaggerated. The movements that the exchange rate has shown over the past six months have a two-sided effect. On the one hand, they have increased the import price level in the euro area. So, that has an upward impact, albeit a small one, on future inflation rates. On the other hand, it is undeniable that it makes it easier for our exporters to compete in world markets.
Question: Mr. Duisenberg, are you worried about all the negative comments in the press on the euro? And what might the motives behind that be?
Duisenberg: What might the motives be? I am an economist and not a psychologist. Well, let me say what I say ever more often: as a central banker, the one thing I have learnt is not to speculate on anything, but rather to fight speculation wherever I can. So, I will refrain from any speculation - also on this aspect.
Question: Mr. President, do you see any signs that the growth of M3 could slow down a little bit in the foreseeable future and could you elaborate a little more on why you left your reference point at 4.5%?
Duisenberg: We do not yet see signs of a slowing down, although we expect it over time - but the lags are long, as you know - to do so as a result of our increase in interest rates last month. That might - but it will take time for it to materialise - lead to a smaller growth of M3 in the future. The decision to leave the reference value unchanged was based on the consideration that the factors underlying this decision, the 4½% figure, have remained unchanged. So they did not give any reason - and I will explain it in a minute - to change the overall figure. As you know, the 4½% figure for the reference value is based on our measure of what price stability is. We define price stability as an increase of 2%, or less, in consumer prices. Then it is based on the trend rate of economic growth as we perceive it, which - as I have just said - we still estimate at between 2% and 2½%, and - as a minor factor - on the trend rate of change in the velocity of circulation of money, which is still estimated at between ½% and 1% per year. Well, adding all these figures up, you again, like last year, arrive at a total of around 4½%. Now, what I added today is that if - indeed, also in response to the first question - if potential growth were to rise in the course of time, and if there were convincing evidence that this was happening as a result of structural reforms in the functioning of the various markets, if the potential rate of growth were thus to go higher, then that would also be a reason to reconsider our reference value. But, it is too early to tell whether or not that will materialise.
Question: Mr. President, at the last press conference you told us about a high-level seminar on monetary co-operation with the pre-accession countries in Helsinki. Could you tell us whether some progress has been made or what has been decided or discussed?
Duisenberg: It was what we regard as a highly successful conference. It was attended by all central banks and, in 11 out of 12 cases, by the Governors of the central banks of the accession countries, both the countries that are actually already negotiating and countries that are on the verge of starting negotiations. But it did not only cover co-operation on monetary policy. It covered a broad range of areas in order to make these central banks familiar with concepts, such as the legal framework required for not only the central banks, but also the banking system and the financial markets, with the necessity to change - on accession - the legislation and infrastructure in their countries, with the thought that accession would have implications for their currency regimes, which are now very diverse in the various countries. I would judge it to have been a very successful conference which will form the basis for increased and intensified bilateral contacts, as well as for more specialised multilateral contacts in the various areas of central banking, let me call it that way. And the next such conference, an all-encompassing conference, will take place next year in Vienna, again under the sponsorship of the European Central Bank and, in that case, the National Bank of Austria.
Question: Mr. President, excuse me if I return to the exchange rate. But from what you have been saying, did I understand you correctly that you would not worry much if the euro were to go far below parity? That is my first question. My second question is: the low level of the euro, that the low exchange rate level decreases the effect of the interest rate increase last month. So we could argue that you have to increase the interest rates again, because the exchange rate level is too low. Could that be possible?
Duisenberg: The exchange rate - and I can apparently not repeat it often enough - is one of the main indicators forming part of the second pillar of our monetary policy strategy. So it will be watched closely. By itself, it will not trigger a monetary policy reaction. A monetary policy reaction will always be based on an analysis of the two pillars of the strategy. And whether or not I am concerned is not so relevant. I would become concerned if our strong belief - the potential for an appreciation of the euro, the future strength of the euro - were not to materialise over time. But these things always take time.
Question (translation): Mr. President, I have a question on the review of the reference value for M3 in the event of a stronger growth potential. The stronger growth potential in the case of productivity advances would clearly also mean that the upward movement of prices is not developing as had initially been expected - viz. the United States. This means that a higher growth potential does not necessarily demand an increase in the reference value for M3. My second question: you have given the forecast or anticipated growth rate as 3% in the forthcoming year and in the year after that, or as just under 3%, and the rate of inflation as below 2%. Is this a first attempt at publishing ECB forecasts?
Duisenberg: The first question, I did not understand. As to the second question: indeed, when we make judgements about the forecasts of others, we also - for the time being, internally - compare them with those of the European Commission, the OECD, the IMF and our regular survey of forecasting institutions. We, of course, also compare those forecasts with our internal preliminary forecasts, which will ultimately be published in the course of next year, as I have often announced. But what is striking so far is that all the forecasts I have mentioned, both the external and the internal, are strikingly similar in their outcome. So, for example, the forecasts that were published by the European Commission, although the underlying assumptions were sometimes slightly different from ours, their outcome was virtually identical. So, I would point out that the European Commission also forecasts average inflation in 2000 and 2001 to be 1.5%, and we see no reason to deviate from that forecast.
Question: Mr. Duisenberg, financial markets are betting that interest rates will be 1.5 percentage points higher again by the end of next year. The OECD, on the other hand, says there will be no change. Do you think that the financial markets might be exaggerating?
Duisenberg: Would you excuse me that I will not join in the speculation on interest rates for the future? So, I will not give a judgement on that.
Question: I have two questions. Is your monetary policy still far too accommodative, as some operators say? And then I have a question to the euro depreciation. How much importance do you attach, in respect of the euro depreciation, to the intervention in Germany of the Chancellor to save an almost bankrupt company, or to the importance of hidden parallel accounts for the biggest German party which was in government here in Germany for sixteen years?
Duisenberg: Given the fact that our monetary analysis and our monetary policy stance allows for an expected price development of less than 2% over the next two years, i.e. over the medium-term, I do not share your hypothesis that our monetary policy would be far too accommodative. It would only be so if price developments would happen to exceed our limit of 2% in the medium run. All I want to say about the recent intervention in Germany - in the company market, may we call it like that - is that it does not enhance the image which we want to have of being an increasingly market-driven economy across the euro area.
Question: A couple of notes again on M3, if you do not mind. I was going to ask you, first of all, about the timing of the next review. What is your gut feeling about whether it will be a full year before you look at M3 again or might you have a look at M3 a little bit earlier on next year? The other thing is about the reliability of M3.
Duisenberg: On the first one, I can be very quick. Our expectation is - as announced - that we will have the next review of the reference value for M3 in December 2000.
Question: So you definitely will not look at it before that?
Duisenberg: Not "definitely", but "not likely".
Question: And the second point was on the reliability of M3. Do you see M3 as getting more reliable? We thought about Y2K effects and so on. When will it be before we can make some firm conclusions about the relationship between M3 and the price level?
Duisenberg: Our studies, as published in a Working Paper two months ago, already indicate that we perceive a very stable relationship in the money demand function, in the relationship between M3 and prices over the medium term. And the figures, as our statisticians have assured us, are becoming more reliable almost by the day. But we do, of course, have this Y2K effect which may cause some hickups in the development of the figures.
Question: Mr. Duisenberg, I would like to know if the ECB is prepared, in principle, to intervene in the market in co-ordination with the Fed and the Bank of Japan?
Duisenberg: On interventions: all I can say is that, as you know, we have the instrument available. As to whenever and wherever and how we are going to use it, I will not speculate.
Question: I would like to come back to that question of the German Government's intervention in the Holzmann case. You made it fairly clear that you thought it was not compatible with the market-driven economy we would like to see in the euro area. But what do you say to the public comments of the German Government: "this is the way we do things in Germany; we are an elected government and we feel we have the right to form our economic policy" - in other words, it is their concern, not that of the European Central Bank?
Duisenberg: No, but I was only referring to the fall-out, to what impression of the European economy these actions have given and give, I think. And, whatever I may say to the German Government, I would rather say to the German Government directly.
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