ECB Press conference: Introductory statement

Willem F. Duisenberg, President of the European Central Bank, Christian Noyer, Vice-President of the European Central Bank, Frankfurt am Main, 5 October 2000

With the transcript of the questions and answers

Ladies and gentlemen, the Vice-President and I are here to report on the outcome of today's meeting of the Governing Council of the ECB. The following decisions were taken today:

Including today's adjustment, since November 1999 we have raised ECB interest rates by a total of 225 basis points, with the objective of sustaining price stability in the euro area over the medium term. Today's decisions continue to aim at ensuring that upward pressures on consumer prices stemming from oil prices and the foreign exchange rate of the euro do not translate into more permanent inflationary tendencies. It is important to address these risks adequately in order to preserve steady GDP and employment growth in the medium term.

Let me explain our decisions in greater detail by reporting on our regular examination of recent monetary, financial and economic developments and their implications for monetary policy aiming to maintain price stability in the medium-term.

Starting with the first pillar of the monetary policy strategy of the ECB, the three-month average of annual M3 growth declined to 5.3% in the period from June to August 2000, from 5.5% in the period from May to July 2000. As had been indicated earlier, in August the preparations of telecommunications firms to transfer the funds due in early September to purchase licences in the German UMTS auction appeared to have a temporary upward impact on M3 growth. Taking this special factor into account, short-term developments in monetary aggregates seem to be more moderate than the August data would suggest. This notwithstanding, from a medium-term point of view, liquidity conditions continue to be ample in the euro area. This assessment is based on the protracted deviation of M3 growth from the reference value since the start of Stage Three of EMU, coupled with the still relatively high growth of loans to the private sector. Hence, risks to price stability stemming from monetary developments remain on the upside.

Turning to the second pillar, we had a thorough discussion on the main factors of relevance to the outlook for price stability at the current juncture.

One important factor under examination was the price of oil, which reached new peaks in mid-September before falling to some extent more recently. Contrary to earlier expectations, energy price developments did not moderate but rather continued to put considerable upward pressure on HICP inflation rates.

The low external value of the euro has heightened the risks of increases in import prices gradually being passed on to consumer prices.

As you are aware, the recent movements in the exchange rate of the euro gave rise to concerns, which the ECB shared with the governors and ministers of finance of all the G7 countries, that it might have adverse implications for the world economy. In order to address these concerns, on 22 September, at the ECB's initiative, the monetary authorities of the United States, Japan, the United Kingdom and Canada joined the ECB in a concerted intervention in the foreign exchange markets. The ECB and its partners will continue to monitor developments closely and to co-operate in foreign exchange markets as appropriate.

Within the euro area, data are pointing to strong real GDP growth in the second quarter of 2000, confirming our previous positive expectations for this year and for 2001. While the possibility cannot be ruled out that the increase in oil prices as such may temporarily dampen growth dynamics over the short term, the forces underlying solid growth in the medium term remain in place. These relate to external demand, which is supported by a strong world economy, as well as to domestic demand, which is supported by both continued favourable financing conditions and strong employment growth. Today's decisions should contribute to maintaining these overall prospects by preventing the emergence of expectations for inflation in the medium term. In fact, when monitoring bond market developments we saw our policy confirmed by continued expectations of lasting price stability and robust growth. We are committed to keeping this picture intact.

Monetary policy continuously needs to ensure that current inflation rates do not affect inflation expectations and thereby both price-setting and wage formation. It is particularly important that this message be understood in an environment in which oil price and exchange rate developments may lead to HICP inflation rates remaining above 2% for a more protracted period than earlier expected. We are currently seeing the direct effects of such external developments on the HICP rate of inflation, with 2.3% in August and, most likely, a higher rate in September. Earlier expectations that the high annual increase in energy prices would gradually moderate in the course of 2000, owing to a levelling-off or even decline in energy prices, have not materialised thus far. Hence, it will be some time before HICP inflation returns to rates below 2%. The action which we have taken today should be understood as a means of maintaining confidence in price stability over the medium term.

As I said at our previous press conference, higher oil prices imply a loss of income for the economy as a whole. In a market economy, the rise in the price of energy is to be reflected in relative price adjustments, so it should affect supply and demand in relation to both particular sources of energy as well as other goods and services. It will be important for social partners to continue to act as responsibly as they have done in the recent past. Wage moderation has made an important contribution to the progress in job creation and in reducing unemployment observed so far. A continuation of this attitude will be a key factor in contributing to non-inflationary growth at a robust pace and should ultimately result in higher employment and the preservation of real income growth for wage earners as well as in sustainable conditions for companies.

The governments of the euro area countries can help the economy to adjust smoothly to the increase in energy prices in several ways. One way is to step up efforts towards structural reform aimed at enhancing the functioning of labour and product markets. This will increase the resilience of the economy to adverse shocks, increase competition and ensure appropriate price-setting by companies. Governments must avoid the mistakes of the past, when fiscal policies were relaxed in response to the effects stemming from increases in energy prices. At the current juncture, fiscal policies should avoid any pro-cyclical bias and should aim at reaching sustainable fiscal positions in the medium term more quickly.

We are now at your disposal, should you have any questions.

Question: President Duisenberg, Professor Issing has announced that the ECB is likely to publish inflation forecasts in the near future. What value does the publication of these forecasts have, given the fact that you apparently have to revise them every four to six weeks? And secondly, was there a formal vote today?

Duisenberg: I will not comment on votes. And the effects that forecasts will have, which will have to be revised almost continuously, whereas we will not publish them continuously, is a normal fact of life. Circumstances change considerably and continuously and forecasts - whether they are published or not - will have to be re-assessed and re-formulated continuously as events develop.

Question (translation): Mr. Duisenberg, in the recent past it seemed if the European Central Bank was specifically insisting on surprise effects. It was surprising to have interventions on 22 September 2000 and it was equally surprising to see that you have today increased your interest rates? What about predictability and accountability? Do they no longer count, are they no longer important?

Duisenberg: Sometimes surprises cannot be avoided. As my colleague, Alan Greenspan, has said, "sometimes surprises can be an element of policy" and they have to be. But it is not our aim to surprise. With interventions; yes. The surprise elements are a basic factor in the success of eventual intervention. With interest rates: no. It is not our aim. And then I would like to say that the fact that interest rates would be changed in the course of the closing months of 2000 was widely recognised in the markets. The only surprise that markets and media may have perceived is the timing. And on the timing, we had our own considerations, but it was not a consideration that we wanted to surprise the markets. The direction of the move, I would like to say, cannot have come as a surprise to the markets.

Question: Mr Duisenberg, I wonder if you could tell us if we are any closer to that condition of neutrality on the ECB's monetary policy stance than we where before today's move to 4.75%. Is it more or less neutral now or could we expect something more in the future? And I just have to follow up on what you said on fiscal policy. You said that in Europe government fiscal policy should avoid a procyclical bias. But many would say that that bias is already locked in the budgets adopted by a large number of national governments. So, do you think that the budgets for 2001 at the national level are not in any sense, on a procyclical course or do you believe that they have already overshot the markets?

Duisenberg: First, I can only repeat what I have said on earlier occasions. We do not precisely know what the so-called "neutral rate" is. We do believe that the monetary policy stance we have adopted today is appropriate to current circumstances, including our assessments of inflation-area developments for the medium-term future. So we do regard it as the appropriate monetary policy stance. And I cannot say anything else or more about that. In my remarks about fiscal policy and the budget in general, you can indeed derive from them, but to various degrees for various governments, that we are - to say the least - somewhat critical of the procyclical stance that seems to appear from many budgets that have been brought to our attention either confidentially or openly.

Question: Mr. President, there are speculations that the US Federal Reserve was only willing to participate in the intervention if the ECB in turn would hike interest rates soon. Were there any conditions to this intervention? And secondly, you never said with how much you intervened in the market on 22 September. Our calculations put the amount at more or less the same as the Federal Reserve and the Bank of Japan - at EUR 1.6 billion - would you care to comment on that? And the final question: Given that you have acknowledged that the full effects of the previous rate hikes have yet to be felt on economic growth, are you not taking risks with economic growth by hiking again so soon today?

Duisenberg: First, as far as conditions on interventions and the participation of others are concerned, I would like to limit myself to referring to the Communiqué that the G7 issued in Prague, which says that the G7 partners are committed to monitoring developments very closely and to co-operating in foreign exchange markets as appropriate. The amount of the interventions? Let me say this: All the estimates that I have seen reported in the media, ranging from EUR 1.5 billion to EUR 20 billion, are more or less correct. And we do believe that the best contribution to maintaining the current climate of robust, even strong growth throughout 2000 and 2001 and even beyond that is to preserve the climate of price stability.

Question: You see no threat to growth from this rate hike?

Duisenberg: No, we see no threat to growth from this rate hike. On the contrary, we do believe that this rate hike and this monetary policy stance create the best conditions for the robust growth which is going on - and with which we do believe that the euro area has more or less reached may I call it "cruising altitude" after the acceleration - and for preserving that cruising altitude for the medium-term future.

Question: Mr. President, I would like to continue the intervention theme. Are you satisfied with the result of the intervention?

Duisenberg: That's about all I am going to say about interventions. We are very satisfied with the results of the intervention.

Question: Could I ask you, you keep raising, you keep putting up interest rates, you keep tightening monetary policy, but it doesn't seem to be having much impact because there are a lot of factors that are beyond your control, whether it is governments, which are loosening policy through fiscal policy, or the exchange rate, which has been falling. It is almost as though the impact has been very small, despite the fact that we have had a number of interest rises now?

Duisenberg: Our impression is that the number of rate hikes - which, as I said in my introduction, now amount to a total since November 1999 of 225 basis points - are working their way through: "It ain't over yet". They are working their way through into the economy and, of course, in the short run there is always a multitude of other factors also having an impact on inflation. But our strategy is a forward-looking and medium term-oriented, which will ensure that inflation remains under control and within the boundaries we have set for ourselves for the medium term.

Question: Mr President, was this interest rate rise useful in order to show that you still had a certain strength after this billion-level intervention? So my first question is: was it to show strength? My second question is: do you now hope that less money will flow into the United States of America so that the euro will be indirectly supported?

Duisenberg: To answer your first question: there is no link between the intervention exercise and the rate hike of today. Today's rate hike is exclusively based on an analysis of the two pillars of our monetary strategy. In addition though, I do not deny that the two actions are, maybe you can say, "consistent" with each other. But there is no direct link. As to the hope that the capital outflow to the United States will be diminished, of course, there is that hope, but we do not count on it, we do not reckon with it. But the simple fact that the interest rate differential between these two great economic areas, as from today, has narrowed somewhat should be a factor helping this development.

Question: President Duisenberg, the fact that you just said that the two actions - the intervention and the rate hike - are consistent with each other...does that mean the rate hike was in some way motivated to boost the external exchange rate of the euro? And my other question is: 25 basis points versus 50 basis points - in the past, you have said that 50 basis points might mean that there will be a pause in the tightening cycle; 25 basis points might mean that there is more to come. Why didn't you move to 50 basis points today?

Duisenberg: I don't want to repeat that sentence which I have said in the past, and so I won't repeat it today. We thought that 25 basis points was the appropriate answer to the assessment of future price developments which we had so carefully made. And on the first question, we do not have an exchange rate target, as should be well known by now. So today's interest rate move was in no way influenced by developments in the exchange rate, except that past developments in both oil prices and exchange rates were longer and more protracted than we had anticipated earlier andthey do work their way through orthey threaten to work their way through, both of them, into domestic inflationary expectations. But then the latter, inflationary expectations, is the only predominant reason for our move today.

Question: Just to follow up, would you say that today's move clears the horizon, these are words that you used before?

Duisenberg: I find it very difficult to answer that question, for me it clears the horizon. I do not want to say anything about future developments and, above all, I cannot say anything about future developments. We will judge that when the time is ripe and the time may be a long time off.

Question: You do not want to tell us whether you took a vote today or not, but perhaps you could tell us if there were dissenting voices with regard to this move on exchange rates.

Duisenberg: The main reason why I don't want to tell you whether there was a vote today, is that if I tell you today then I would have to tell you every two weeks. But I can assure you that there was the maximum possible degree of consensus of today's decision that is imaginable.

Question: My second question: you also said that this rate hike was not connected with the intervention. But I was wondering if, during your negotiations with your partners prior to the intervention, the question of the interest rate came up?

Duisenberg: Never.

Question: Mr. Duisenberg, in this room there are always more questions than in the oracle of Delphi, but I think it is also time to give some compliments for the guts that the ECB has shown at this time. My question would be about the European Commission and European Council. According to a very strict interpretation of the Maastricht Treaty, there would be a need for exchange rate orientation before interventions can take place. Please, have there been any developments in this direction so far?

Duisenberg: No, that is a wrong interpretation of the Maastricht Treaty. The Maastricht Treaty provides for the possibility of the Council of Ministers giving so-called general orientations for exchange rate policy. As long as the Council of Ministers has not done so, the sole body competent to decide on the "if" and the "when" and the "level of interventions" are the European Central Bank. In addition, the Council of Ministers - at its Summit in Luxembourg in December 1997 - decided and made it public that so-called general orientations would only be issued in very exceptional circumstances. Well, such exceptional circumstances have not arisen and, therefore, you might justifiably conclude that both the initiative for the interventions and the action itself were fully in the hands of the Governing Council of the ECB.

Question: Mr. President, you already said to my colleague that there was the maximum degree of consensus in the decision that you took today in the Council. But I do not know if there was a long discussion about the convenience of taking the decision today or at your next meeting in Paris. And my second question is: can you give us your opinion of the last discussion among politicians in Europe about the convenience of a low external value of the euro?

Duisenberg: I did not understand the last question, I must confess. The first question I can answer. We had a very extensive and useful discussion about economic developments and our assessments of today, I don't recall ... Christian ... how long it lasted. I think about 51 minutes?

Noyer: Something like that. It was quite fast.

Question: And my second question was about the political crisis that two weeks ago the politicians entered into a discussion about the convenience of a weak euro for Germany, for example, or other countries of the euro area. Do you have an opinion on these questions of the politicians?

Duisenberg: As a central banker, I stay out of these discussions.

Question: Mr. Duisenberg, I am sorry, but I have a maybe very stupid question. I heard what you said, but I could not follow you. You say that there is no link between the intervention exercise and the rate hike of today. So you convey the impression that these are measures which are apart, one from the other. Yet both have effects on the money market, and the money market rate went up after the intervention. And your interest hike of today has an effect on the money market rate, too. So I cannot see why these things have no link - to me, they are closely linked. Perhaps you can explain it to me; I really do not understand your argument. And the second question then would be...

Duisenberg: May I interrupt you - perhaps the answer may prevent your second question. When I say there is no link, I mean that there is no causal relationship between one decision and the other. The intervention decision was based, amongst other things, on a common judgement shared by the ECB and its partners in the G7 that the recent developments in the exchange rate of the euro had brought and were bringing the euro so far out of line with what would be justified by the fundamentals of the various parts of the world that they threatened to distort the further development of the world economy. And that is what induced us and all our partners to try to stop this potentially detrimental movement. The interest rate decision of today was, as I said, based exclusively on our analysis in the context of our monetary policy strategy of future medium-term threats to price stability, which is our primary aim. Now, as to that the effects of the two actions are not inconsistent with each other, I stated this - as a matter of fact - but not as a causal relationship. Do you still have your second question?

Question: I am sorry, yes. Mr. Duisenberg, considering all you said, would you say that and in how far you have sterilised the interventions in the money market? You gave the money market more liquidity: there was a difference of 18 billion last week, I think. Did you sterilise part of the intervention?

Duisenberg: In taking our allotment decisions, as we do every week, we took the impact of the interventions on the liquidity conditions in the euro area into account.

Question: To put it very bluntly: What is the good of interventions if they are later sterilised in the market?

Duisenberg: Well, the good of interventions becomes apparent if the results you have achieved are satisfactory. And I have already said that they were. In the subsequent allotment decisions, as I have said, we did take the liquidity developments that arose, amongst other things, from the interventions into account when deciding on the precise amount of the allotment.

Question: You didn't answer my question.

Duisenberg: I thought I answered it three times already.

Noyer: I could repeat it, but I cannot say different things.

Question: Mr. Duisenberg, Mr. Summers, the US Treasury Minister, said immediately after the intervention that the United States would stick to its policy of a strong dollar. How strong is the threat that the United States would not join with you if a second intervention were necessary?

Duisenberg: I can only refer to the statement, which was signed by the United States Minister, as it was by all of us including myself, in Prague, namely that we, i.e. the ECB and the G7 countries, will monitor future exchange rate developments closely and that we will co-operate in the exchange markets as appropriate.

Question: Mr. Duisenberg, I will try to put the question again and ask for your forecasts. You said that you will publish forecasts. You said to the European Parliament that it would be by the end of this year. What timing will that have in connection with the press conference and in connection with the publication of the review of the reference value of M3? Does that mean that both will be in a certain connection, logically and as far as the contents are concerned?

Duisenberg: We have not decided on the precise timing yet, nor on a press conference, nor on the way forecasts will be published. It is to be expected that it will be relatively soon, as also indicated by Professor Issing in the speech he delivered at the end of last week. And I can assure you we are working very hard all across Europe to come to a result in time. As far as the press conference is concerned, I cannot imagine that we will devote a special press conference to forecasts. I can only mention that, by way of exception, the next meeting of the Governing Council - but that has nothing to do with forecasts - will be followed by a press conference, because it is to take place in Paris.

Question: But my question was concerning M3 as a reference value and I wanted to find out whether there is a logical connection between the reference value and this important forecast data?

Duisenberg: We have not come to a decision on that, so that I will not speculate.