Let me start with the Governing Council 's discussion on recent economic developments and the decisions that the Governing Council has taken today in the field of monetary policy.
At today 's meeting the Governing Council reviewed the latest monetary, financial and economic developments. After a careful examination of recent trends, in the context of its monetary policy strategy, it confirmed its earlier assessment that the outlook for price stability remains favourable. Therefore, it decided that for the main refinancing operations to be settled on 10 and 17 February 1999 the same conditions will apply as for the first such operations settled earlier this year, i.e. they will be fixed rate tenders conducted at an interest rate of 3.0%. In addition, the interest rate on the marginal lending facility continues to be 4.5% and the interest rate on the deposit facility remains 2.0%.
Let me report in more detail on the Governing Council 's deliberations and thereby provide the explanations for the decisions which were taken today.
On 1 February 1999 we released the latest data on monetary developments in the euro area. These data confirmed the continuation of a favourable outlook for price stability in the euro area. The latest three-month moving average of annual M3 growth rates -LRB- covering the period from October to December 1998 -RRB- was 4.7%. This result was unchanged from the average over the period from September to November 1998 and remained very close to the reference value for broad money growth of 4 1/2% set by the Governing Council.
Developments in the narrow aggregate M1 have been more buoyant recently. Similarly, the growth of credit to the private sector continued to be high in December 1998. These developments seem to reflect, in particular, the current low levels of interest rates in the euro area. Although they are not considered by the Governing Council to imply inflationary risks at this juncture, in particular the developments in credit growth will need to be carefully monitored in the coming months.
With regard to the broadly based outlook for price developments and risks to price stability in the euro area, financial market indicators suggest that market participants continue to expect low inflation. Since early January, euro area long-term interest rates have continued to decline and the yield curve has shifted downwards.
At the same time, the latest developments are giving mixed signals as to the evolution of the world economy in 1999. On the one hand, recent events in Brazil have highlighted the fragility of the current situation in emerging markets, while on the other, output growth in the United States was much stronger in the last quarter of 1998 than expected. In the euro area too, available indicators continue to suggest a mixed picture. According to revised Eurostat estimates, real GDP growth remained broadly robust in the third quarter of 1998, while in more recent months activity may have slowed down. Such a slowdown is apparent in industrial production growth up to November 1998, in particular in the intermediate goods sector, which is particularly sensitive to any deterioration in the external environment. However, at the same time, production of capital goods and consumer durables has continued to expand rather strongly. A similar pattern can be observed in the decline in industrial confidence that has been apparent in the second half of 1998 in the euro area, while, however, stabilising in January 1999. On the other hand, consumer confidence in the euro area continued to increase in December and in January ; it has now exceeded the peak level reached in 1990, with retail sales up to November showing continued solid growth and car sales growing strongly during the last months of 1998. Finally, the mixed picture is confirmed by other data. Order books, which overall declined slightly further in December, apparently increased again in January, particularly with respect to export orders. Capacity utilisation in the manufacturing sector, which started to decrease in the third quarter recovered again thereafter, while December data on unemployment appear to suggest that the decline in unemployment rates stalled around year-end.
Therefore, with regard to the cyclical situation, recent data seem to confirm our earlier assessment that there are downside risks for output growth and that production may have slowed down around the turn of the year. Nonetheless, in the opinion of the Governing Council there are also no clear signals as yet of a stronger than expected weakening in output growth. Given the mixed picture outlined above, the Governing Council emphasised that further thorough analysis and very close monitoring of underlying trends are needed before any conclusions can be drawn concerning the broad outlook for 1999 and 2000.
With regard to the latest data on the Harmonised Index of Consumer Prices, the annual increase for December 1998 showed a further slowdown to 0.8%, compared with 0.9% in November and 1.0% in October. This development was in line with previous trends ; i.e. it was due mainly to a further reduction in energy prices and also, in December, to a decline in the price increases in non-energy industrial goods. Taking a forward-looking perspective, the general environment continues to suggest that there are no significant upward or downward pressures on prices in the short term. Furthermore, the pattern of risks to price stability has remained broadly unchanged. On the one hand, downward risks could materialise if import or producer prices were to fall further. On the other, given current wage demands, wage developments, especially when measured in real terms, could become a matter of concern and fiscal policies would also pose a threat to the favourable outlook for prices and growth and employment prospects, if the credibility of the Stability and Growth Pact were undermined. In addition, exchange rate trends need to be monitored closely given their importance for domestic price developments.
In conclusion, taking into account the latest evidence available, the Governing Council has not altered its assessment of the outlook for price developments. The Governing Council therefore decided to keep ECB interest rates unchanged at the levels currently prevailing.
I should like to take this opportunity to recall that real three-month interest rates, if measured as nominal rates corrected for current HICP inflation -LRB- as a very incomplete proxy -RRB-, stood at a level of 2.3% in January ; this is approximately 80 basis points lower than the level one year ago. At the same time, real long-term interest rates, measured on a similar basis, have reached a level of 3.0%, which is around 110 basis points lower than in early 1998. These levels are very low, both in comparison with other countries and with historical data for the euro area. Monetary and financial conditions therefore support continued economic growth in the euro area in line with price stability.
I should now like to inform you about some other matters considered by the Governing Council.
The end-of-day procedures relating to TARGET and access to the Eurosystem 's standing facilities were reviewed by Governing Council today. The Governing Council agreed that from tomorrow on the deadline for requesting access to the marginal lending facility will coincide with the deadline for access to the deposit facility, i.e. 30 minutes after the actual closing time of TARGET. Furthermore, the deadlines for requesting access to the Eurosystem 's standing facilities will be postponed by an additional 30 minutes on the last Eurosystem business day of a minimum reserve maintenance period.
As a final point, I should like to inform you that the ECB is planning an information campaign with regard to the launch of the euro banknotes on 1 January 2002. One of our aims in undertaking such an exercise will be to ensure that, by the time the euro banknotes become available, every person using and handling them will be fully acquainted with their features to the extent that everyone will be able to identify the banknotes as being genuine. In this respect, the ECB will be co-operating with the European Commission and the Member States to ensure that there will be no duplication of effort.
Question:... this extension of the period of access to the marginal lending facility. What is that for?
Duisenberg: That is because in practice the banks throughout the euro area still very much bunch their payment orders together at the very end of the day. That makes it difficult for them precisely to know what their liquidity situation will be overnight. It is only after they have finally bunched all their orders together very much towards the closing time of TARGET that they know precisely what liquidity needs or surpluses they may have. We have therefore given them an extra half hour, so as to make life easier for our counterparties and participants in the payment system to settle their accounts.
Question: Mr. Duisenberg, I have a serious problem with your assessment of prices - no upward or downward pressure. You have now been saying this for the past 6-8 weeks. If you draw a line of consumer prices since 1993, it goes from the top left to the bottom right fairly consistently. Of course it has been dropping faster since commodity and food prices began really to dive in 1997. However, does the ECB really consider that the zero line on the euro and the euro basis is some kind of floor for prices or does it not consider that there is indeed downward pressure and the evidence of the last six years might suggest that this is the case?
Duisenberg: When you look, in particular, at the causes of this consistent decline in the rate of increase of inflation, I have pointed repeatedly over the last months to the figures which were available for this. There was the fall in energy prices. In itself, we believe that to be a temporary factor. This persistent decline must come to an end at some point. And then, if we try to measure the underlying rate of inflation, the core rate of inflation - which is difficult, in the various countries it is somewhat easier to measure -, then you will come to considerably higher figures of price increases.
Question: How much lower will the euro have to fall for an intervention on the part of the European Central Bank, if any?
Duisenberg: If any... I do not know. Only if the euro were thought to be seriously out of line, in view of the fundamental factors, vis-à-vis other countries, might there be a need for a desirability of intervention, but I would not put a timeframe on it. At the moment it is certainly not the case.
Question: I would like to follow up on the question with respect to TARGET. Could you tell us a little more about the problems that occurred at the end of last week at Banque de France and probably about any compensation for the banks that suffered from the breakdown of TARGET?
Duisenberg: At the Banque de France last Friday, while major work was being executed on their system, there was a technical failure of a computer, actually a hard disk in the computer of the backup system literally broke. That caused a problem in the settlement in TARGET towards the end of Friday. It had the result that certain payments, large amounts of certain banks, could either not be paid or not be received, so that those institutions were compelled to take recourse to the lending or the deposit facility. It has been decided - the problems have in the meantime been overcome - it has been decided by the Governing Council today that those institutions which are said or claim to have suffered from this because they were forced to borrow at a higher rate than otherwise would have been the case will be compensated, in principle, by charging them the EONIA rate, the overnight interest rate, for the amounts concerned, and not the rate of the marginal lending facility. It will quickly be investigated by the Banque de France, in close consultation with the European Central Bank, to ensure a harmonised approach across the euro area-wide TARGET system. We expect that everything will be settled within one month 's time.
Question: There has been some speculation this week, particularly in Italy, that the ECB might eventually tend to favour a variable rate tender. I know you do not want to indicate any specifics, but could you just tell us what your basic feelings are about a variable rate tender. The Bundesbank had favoured that as a matter of principle. Is that something that you fundamentally would advocate?
Duisenberg: It is something I would not fundamentally oppose and it will come some day, but not yet.
Question: This is a sort of a general question. What do you think, if there would be any factor which could endanger the stability of the euro, any challenging factor in the future undermining the stability of the euro, could you comment on that please?
Duisenberg: I can not think of any factor that could undermine this strong currency.
Question: Mr. President, the G7 countries will be meeting on 20 February in Bonn and you have been invited to attend. Are there any special matters you as an observer would like this Conference to deal with in view of the still ongoing debate on a reform of the global financial system, a new architecture, and what points would you raise as being most urgent?
Duisenberg: I will participate in the G-7 meeting for certain agenda points. It is not yet entirely clear what will be on the agenda. Presumably we will talk about exchange rates and certain regimes that one could envisage for exchange rates. And, in that context, the ECB will not be in favour of any particular regime on exchange rates which could force it to put aside the primary objective which the ECB is pursuing, namely internal price stability.
Question: Hello, Mr. Duisenberg. A couple of questions please. I would like to ask one more about the dollar. European exporters have been quite pleased the last couple of weeks with the strength in the dollar and a little bit of weakness in the euro. How do you proceed that? Have you been pleased with the euro-dollar rates the past week?
Duisenberg: We have discussed the developments and we have concluded that the developments over the past few weeks in which the euro has moved from US$ 1.16 to US$ 1.13 today, that that is a matter of puzzlement. That is one thing we try to explain why it has happened. We can think of partial reasons, but also that it is not a matter of concern.
Question: You say" not a matter of concern ''. Is that something you would have like to see, a little bit of strengthening in the dollar?
Duisenberg: We are also in a learning process. I mean these girations in the exchange rate, in the past, for the dollar, they have been very, very much larger than what we have seen now. And we also have to get used to the fact that the impact of exchange rate variations on the euro area as a whole is far less marked than in the past. The movements in the exchange rates would have an impact on the individual countries with exports representing only about 10% of the euro area as such. The euro area very much approaches the idea of a relatively closed economy. And so, well I often say it like this: if you ask a European" what does the euro do '', he will answer:" well, today it was US$ 1.13, yesterday it was US$ 1.14 ''. He will give you a precise answer. If you ask an American:" what does the dollar do? '' The answer you will get:" a dollar? ''," a dollar is a dollar ''. And we have to learn, I think, in Europe also to say more than we have done so far:" a euro?
Question: I would really like to ask you one more question if I could? The US economy grew much more strongly than people had expected in the fourth quarter. And there is some concern that it would have not grown the effects that it would have on the global economy. I am just wondering, there are some economists who think now that if the US continues to grow strongly that that could have an effect on how you, the ECB, would conduct of monetary policy. What effects do you see in Europe on a strong US economy?
Duisenberg: I only see favourable effects, if the US economy were to remain that strong. But then we also realise that this indeed surprisingly strong performance of the US economy may, in part, be attributed to temporary factors. In the fourth quarter they had - although they have had some snow thereafter - exceptionally good weather in the United States which is favourable for output growth. One has to realise that some effects may also have come from the ending of the General Motors ' strike and, by definition, these are temporary factors. So there are some temporary elements in this strong performance which we also take into account. But on the whole, the developments of the United States ' economy in the fourth quarter have had and will have a favourable, positive impact also on developments in Europe.
Question: Mr. President, you said we 'll only intervene on currency markets if the euro is fundamentally misaligned. Now, what exactly do you mean by that, what euro-dollar rate would you mean - what would be roughly the rate at which you would intervene? I presume that would mean that the fundamentals were out of line. And another question: were there other important points that you discussed today that you would like to inform us of?
Duisenberg: Well I would n't like to engage in speculation, is the President 's answer. And if I were to answer your questions, I would be engaging in speculation, so I wo n't.
Question: And the other question? Are there other important issues that you discussed in the Governing Council today that you would wish to inform us of?
Duisenberg: No, I think I have given you a full and comprehensive view of what we discussed today.
Question: I have two questions: One is, would you be able to give a short comment on today 's rate decision by the Bank of England and by the Danish Central Bank which lowered the rates today, and the second question concerns the euro zone money market which is currently trading well above the repo rate. Are you satisfied with this development on the money market at the moment or is there something that you would like to be improved in the course of the next weeks?
Duisenberg: Well, on the last question, we are satisfied with the developments in the money market. And the transition to a truly integrated money market across the euro area has been rather swift and smooth. We are satisfied with that. On the interest rate moves of other countries, I can not comment, with the exception that, as the Danish Governor told me, truly, it has become possible for the Danes to lower their official rates partly as a result of the successful launch of the euro. And the successful developments of the euro and in the euro area have certainly contributed to the success of the monetary policy in Denmark.
Question: You have been talking today about fiscal policy in Italy, which has been warned by the Commission, about the deficit goal, just this week. What point will monetary policy have to counterbalance like fiscal policy in countries within Euroland, what are the boundaries that you see before you would act?
Duisenberg: Well, Mr. Noyer has participated in the discussion about Italy, and I am sure that he will not tell you anything about their discussion, despite the leaks that have come out of Brussels.
Noyer: No, I think that is very much the responsibility of the Commission to make the proposal for the assessment of the stability programmes proposed by governments. The fact that we are invited to take part in the discussion will certainly not lead us to leak anything of what any assessment could have been. What we could simply say is that precise execution of the Stability and Growth Pact is an important element in the global assessment by the ECB of the balance of risks. If there was a development that would strongly deviate from the line in which governments have engaged themselves, our global assessment would have to take that into account, but we can not say more today.
Question: But does that mean that they would have to go to the edges of the Stability and Growth Pact boundaries before you would act or would you step in before that?
Noyer: What I mean is simply that, for the time being, what we have taken into account for the foreseeable future, for the years to come, was the fact that governments have committed themselves to the Stability and Growth Pact. And this is an important element, taking a medium-term perspective of the likely developments in the euro area. Now, we of course consider that normally this should be implemented and that this factor is well known. But I do n't want to comment further. There is no special new assessment that the ECB would like to give today about what are or are not the monetary stances of countries.
Duisenberg: And then you have to realise that the discussion which takes place about these things in the Economic and Financial Committee is not a discussion which itself would lead, or has to lead, to action. It is a discussion to prepare the ministers who will meet to discuss the same subject next Monday, and they will take action.