The Governing Council reviewed the outlook for price developments and the risks to price stability in the euro area, in line with its monetary policy strategy. As a result, the Governing Council decided not to change the prevailing ECB interest rates. The interest rate on the main refinancing operations of the Eurosystem will thus remain 2.5%. In addition, the interest rate on the marginal lending facility will continue to be 3.5% and that on the deposit facility has been kept at 1.5%.
Let me give you some details about our review of the latest information on monetary, financial and other economic developments, as well as about our latest assessment of the monetary policy stance and thereby explain the decisions taken today.
With regard to monetary developments in the euro area, the 12-month growth rate of the broad monetary aggregate M3 increased from 5.3% in June to 5.6% in July 1999. The latest three-month average of M3 growth, covering the period from May to July 1999, rose to 5.4%, compared with 5.3% in the previous three-month period from April to June 1999. Overall, the annual rate of growth of M3 has been moving away from the reference value of 4 1/2% since the start of the year. This upward movement may be explained to a large extent by the very low opportunity costs of holding monetary assets, especially the most liquid components, but perhaps also by the gradually improving economic conditions in the euro area. At the same time, the annual growth rate of credit to the private sector remained high, even though it declined by 0.5 percentage point in July, to 10.4%.
The monetary policy strategy of the Eurosystem assigns a prominent role to the behaviour of M3. Accordingly, recent monetary developments merit close attention. At the same time, taking into account the fact that we are still in a very early phase of Monetary Union and that figures for broad money growth have been subject to some revisions in recent months, shorter-term monetary developments need to be interpreted with caution.
Concerning financial market indicators, the upturn in long-term interest rates in the euro area seen since early May continued in August and early September. Domestic factors seem to have played a dominant role, as indicated by the fact that differentials between US and euro area bond yields have narrowed further. In particular, market participants appear to be increasingly optimistic about the prospects for economic activity in the euro area. At the same time, expectations for inflation, as reflected by, inter alia, the signs emanating from index-linked bonds issued in the euro area, tend to indicate that markets still expect an evolution of consumer prices, which will remain compatible with price stability.
Developments in the world economy continue to show signs of improvement. Growth in the US economy continues and some positive economic signals have been recorded for Japan. While the outlook for stronger growth in the global economy is also supported by recent developments in other regions, notably South-East Asia, some risks remain, primarily in relation to the strength of the recovery in Latin America.
As regards economic activity in the euro area, industrial production data up to June point to a further improvement in output growth in the second quarter of this year, as has already been indicated by various survey data. Moreover, available evidence in terms of retail sales data and consumer confidence, while somewhat more mixed, suggest broadly sustained consumption growth. These developments are consistent with recently published forecasts, which foresee an upturn in economic growth in the course of this year. The downside risks pertaining to these projections have tended to recede and real GDP growth might eventually turn out to be somewhat higher than currently forecast.
As generally expected, consumer price increases, as measured by the Harmonised Index of Consumer Prices -LRB- HICP -RRB-, picked up in July, with the annual rate of change rising from 0.9% in June to 1.1% in July. This effectively reversed the downward movement in the overall HICP rate, which had been evident since April 1999. While prices for unprocessed food declined further in July, this downward effect on the overall HICP rate was more than offset by a stronger increase in energy prices, resulting from a continued rise in oil prices. We expect consumer price increases to rise somewhat further from their July levels, mainly as a consequence of higher oil prices. However, at this stage we also expect this further increase to level out below the ceiling we have defined as being compatible with price stability over the medium term.
In conclusion, the prospects for a sustained economic upturn in the euro area are good, as are the chances of continued price stability. However, we remain vigilant taking into account the upward risks to price stability. In particular, with a view to conducting a thorough assessment of the risks to price stability in the medium term, the increase in monetary growth over recent months and the high growth rate of credit to the private sector need to be monitored very carefully. In addition, the short-term upward pressure on consumer prices, which stems from the increase in oil prices over recent months and the lagged pass-through of developments in the exchange rate, have to be taken into account. If accompanied by continued wage moderation, these factors alone should not be expected to threaten the current outlook for price stability. Accordingly, the results of the wage bargaining round for the year 2000 will play a particularly important role for the further assessment of price developments in the euro area.
The only way to prolong a non-inflationary recovery, and hence to substantially re-absorb the still very high unemployment, is for all responsible parties to act decisively, in the near term, to increase flexibility in the labour, product and service markets. This would also be the best way to allow the economy to take full advantage from the present stance of monetary policy.
Taking all this information into account, the Governing Council decided to maintain the prevailing ECB interest rates. In addition, it stressed that low inflation and therefore low interest rates should encourage higher investment, helping to prevent the emergence of capacity constraints during economic expansion. At the same time, the expected improvement in economic activity offers greater opportunities to cut fiscal deficits further and to enhance structural reforms. Indeed, the creation of this virtuous circle depends on all policy-makers playing their part.
Let me now give the floor to the Vice-President to introduce three additional topics, which we discussed during our meetings.
In addition to reviewing the main monetary, financial and other economic indicators, we discussed issues relating to the transition to the Year 2000.
We are now approaching the final phase of testing activities in connection with preparatory work for the Century Date Change. On 25 September 1999 the ECB and the EU national central banks will conduct a demonstration of the TARGET Year 2000 compliance in which - according to current information - several hundred EU credit institutions will participate. Prior to this, the ECB and the national central banks have already successfully tested their TARGET components first at the national level, and thereafter in cross-border tests. To a large extent credit institutions have already taken part in these tests.
In parallel, as announced a few weeks ago, on 29 June 1999 the ECB together with the national central banks successfully completed the bilateral testing of the ESCB applications that are necessary for the conduct of monetary policy operations. The testing exercise, together with the parallel remedial actions, has proved that these systems are Year 2000 compliant.
You may recall that on 15 July 1999 we decided to close TARGET on 31 December 1999, in order to smooth the transition not only for the ESCB institutions, but also for the other financial institutions. This day can thus be kept free for end-of-year operations and for making full back-ups of the relevant systems.
In the area of TARGET, as well as in the area of monetary policy implementation and liquidity management, we are also reviewing our contingency procedures to minimise any potential Year 2000-related impact. It is worth noting that general contingency procedures had already been put in place shortly before the launch of the euro.
In addition, we will use an efficient communication infrastructure between the ECB and the national central banks to monitor developments over the Year 2000 transition period. The ECB will also share information with the Joint Year 2000 Council and will thereby extend its monitoring capabilities beyond the Eurosystem to a global perspective.
As far as our monetary policy framework is concerned, we are convinced that it is flexible enough and has built-in mechanisms designed to deal with any level of liquidity demand that might arise in the euro markets. Indeed, should any adaptation be advisable, this would be of limited importance and consistent with the overall set-up. We have analysed different scenarios and have come to the conclusion that the Eurosystem will be in a position to cope with any potential increase in the demand for liquidity. The stock of banknotes held by national central banks is sufficient to allow for a considerable additional demand for banknotes in circulation and the amount of collateral available in the Eurosystem will be sufficient to allow for the corresponding increase in refinancing needs of the banking system.
We are therefore confident that the Eurosystem will continue its operations smoothly on 3 January 2000 after the Century Date Change.
We also reviewed cross-border retail payment services, which are essential for the smooth functioning of the Single Market. We believe that citizens and businesses can only benefit fully from the fundamental principles of the free movement of goods, services, capital and people if they are also able to transfer money as rapidly, reliably and cheaply from one part of the European Union to another, as is now the case within each Member State. Despite the introduction of the euro, however, there is still a clear gap between the service levels of domestic and cross-border retail payment systems in terms of quality, efficiency and pricing. The substantial disparities between domestic and cross-border services ought now to be reduced, and should ultimately disappear. In order to encourage the development of cross-border payment systems enabling the public to benefit more fully from the single currency, the Eurosystem has drawn up a set of objectives for cross-border retail payments in the euro area. These will be detailed in a separate press release which will be issued in the coming days. The Eurosystem calls on the banking and payment service industry to fulfil these objectives by 1 January 2002 at the latest.
Finally, I would like to inform you that we also discussed issues related to fraud prevention. I would like to emphasise that the ECB shares the concerns of the European Parliament, the EU Council and the Commission about the protection of the Communities ' financial interests against fraud and other detrimental activities. Consequently, for the sake of transparency, efficiency and accountability, the Governing Council decided to establish an external Supervisory Committee to enforce an Anti-Fraud Scheme at the ECB. This Committee will establish a co-operative relationship with the European Anti-Fraud Office -LRB- OLAF -RRB-.
Question: With regard to the Year 2000 problem, handling the liquidity situation is one thing and that is one problem that the European System of Central Banks has to look at. But have you made any studies in regard to the liquidity impact or the changes of behaviour which may be irrational on the part of savers vis-à-vis monetary and credit aggregates, because we could be in a situation, for instance, where savers decide to liquidate assets, financial assets, to put money on accounts - you would have a clear situation in which monetary aggregates would therefore indicate very little in terms of an irrational indicator for policy. Have you any opinion on that?
Noyer: We will see if there is a specific demand for liquidity that is clearly related to this period, that will probably show up in the last weeks of this year and the very beginning of next year. If this is the case, we will of course have to take due account of that in terms of disturbances in the monetary indicators. But that can be taken into account within the framework of our instruments and analysis. So, of course, if there is a special disturbance, we will have to take that into account and make an assessment excluding the exceptional factor that would then have arisen. But that is not a big problem in theory, in terms of the policy indicators. But you will remember that, when we made the choice of the monetary policy strategy last year, and we made the choice of the reference value, one of the explanations for calling that a reference value was that we were cautious for many reasons. One of the reasons was that there might have been a special shock related to the introduction of the euro. I would say the same sort of caution must be exercised with the Year 2000. There might be a shock, at least in the statistical series, and we must, of course, be prepared to deal with it. However, we have the technical capacities - we think so - to make the distinction between the trends that are behind that and any event or statistical move that would be clearly linked to a very transitional Year 2000-related shock.
Question: Mr. President, it was always stated that the ECB is in charge of monetary policy for the entire euro zone and not only for the big countries like Germany. So let me ask you: was the decision to leave interest rates unchanged influenced to some extent by the shopping list of Mr. Welteke, who obviously likes low interest rates for his sluggish economy at the moment? As you know, he stated in Berlin for television just a few days ago that inflation" is under control '' and that the ECB interest rate should remain unchanged. We all know that the low interest rates will not solve the German unemployment problem and let me recall that monetary growth has now been clearly above the reference value for an extended period. And, furthermore, the reference value is not just another figure, but an important help. It seems to achieve something that no central bank in the world has ever achieved yet, namely to keep inflation between 0 and 2% in the medium run. So I would like to have your opinion on that.
Duisenberg: Well, my opinion is very brief, can be very briefly formulated: our decisions today, again and as always, were based on a euro area-wide analysis of economic and financial developments - and nothing else. And, as regards the development of M3, I can only repeat what has just been said by the Vice-President and what was said in reply to the first question we had. We have to deal with monetary figures in a structurally changed environment, monetary figures which are only of a very recent nature, and we have to interpret them with extreme caution.
Question: You have painted a rather positive, optimistic picture of the economy in the euro area and also of the inflation outlook. The inflation outlook is at the moment, as you said, benign. I am wondering whether you would say that the tightening bias that you said, a few weeks ago, was creeping into the ECB 's thinking, that this tightening bias is creeping out again, so to speak. And, secondly, can I ask you about your elusive forecast, let 's put it that way. You said that the GDP growth might eventually turn out to be somehow higher than currently forecast. Can you give us a figure or can you tell us at least what you think the current forecast is?
Question: I would like you to put a figure on" this somewhat higher than currently forecast. '' And if you are not willing to do that, maybe you can give us an indication of what you think is currently forecast, so that we know what you think, what will be then higher than - what figure?
Duisenberg: First, on the bias. It 's creeping and it remains creeping - but at snail 's pace, you might say. The bias was introduced by me in reply to a question.
Question: So it keeps creeping in then?
Duisenberg: Oh, it continues to creep. And on the forecast. If you compare the forecast we had, with those of most of the international institutions as well as those of national forecasting bureaus, we have forecasts of some 80 institutions, which we regularly consult. Back in April, the general forecast was that growth this year would be in the order of 2%, that next year it would be in the order, generally speaking, of 2 1/2%, of 2 1/2%. We now distinctly feel that both these forecasts will be surpassed in reality. For this year, we now expect an outcome higher than we and everybody else expected in April, and the same holds true for next year. So we are distinctly, I might confirm this, more optimistic now on the outlook of the development of the real economy, both for this year and for next year, than we were three months ago.
Question: Next week you will participate in the ECOFIN meeting in Turku, in Finland, and there will be discussions about the plans to strengthen the co-ordination of economic policy. How do you see this process and what is your role in this co-ordination.
Duisenberg: Now, before that discussion takes place and before I answer that question, I would rather have the discussion first in Turku, in which I will make my contribution, together with Mr Noyer. And then, afterwards, we can report on what role we see for the ECB. I want to emphasise that we, the ECB, will be a full participant in the broad macroeconomic dialogue that was decided upon at the Cologne Summit.
Question: Then, what is your message to the Ministers of Finance in Turku? Is it to cut more budget deficits?
Duisenberg: Well, the message you might want to repeat is what I said in my Introductory Statement, namely to continue on the road to increasing flexibility in the labour, product and service markets, to take measures especially in a period when the economy and the economic outlook are brighter than we had foreseen earlier. It seems to be a golden opportunity to take further measures both in the sphere of reducing the fiscal deficits and in the sphere of structural measures to increase the flexibility of markets. And that is the message I give here today, via you, and I will also give it directly in Turku.
Question: Just coming back to creeping bias some analysts said that the introduction of that bias was an indirect way of helping the euro escape from dollar parity. Well, the euro performed its great escape act. You must have looked at that with some satisfaction, but looking now at the level of the currency, we heard Ernst Welteke saying early this week that he thought 1.05 was an appropriate level for the currency. Do you agree with that or do you think that he was wrong to say any specific level for the euro?
Duisenberg: I will not be tempted to indicate any specific level which is good. I publicly declare that the level at which the euro is trading now and has already been trading for 5 or 6 weeks is, to my mind, an understandable level.
Question: So, do you agree with Mr. Welteke 's broad remarks or do you think he was wrong to make that statement?
Duisenberg: I am not reacting to anybody 's remarks in this area and you will have noted that the word" exchange rate '' did not appear in today 's statement. And I might add that this was deliberate.
Question: Mr. Duisenberg, last time you mentioned that the issue of variable rate repos could be discussed at this meeting and I am wondering if you did discuss it and what was the result of the discussion?
Duisenberg: Well, the answer is: No, we did not discuss it.
Question: But last time you expected the discussion to come up. I mean do you think.
Duisenberg: I did not indicate a specific date when it will be discussed. It will undoubtedly be discussed at one of the forthcoming meetings, but what the result of that discussion will be, I can not predict.
Question: Mr. Duisenberg, I would like to come back to the question of M3. Deutsche Bank recently made a study of M3 in relation to inflation and in relation to interest rates, as seen from the last 40 years and in terms of how the Bundesbank was behaving. And it showed a quite close relationship between inflation and the interest rates, but no relationship to monetary growth. The question is now: is inflation much more important than monetary growth, M3, or how should we judge it?
Duisenberg: Well, the answer is that we, like the Deutsche Bank, are studying and assessing the impact of developments of M3 on inflation in the medium term. And the monetary aggregate, as you know, is an important reference value underlying our policy decisions. But, at the same time - and here I come back to the first question asked - we are still at a very early stage. And it is not sure to what extent the structural and cultural shock of the introduction of the euro may itself have changed behaviour and relationships of investors and consumers across the euro area. So we have to deal with it very, very carefully and we do not yet have long enough time series for the new situation to come up with conclusions which are very similar to the conclusions that, for example, the study of the Deutsche Bank came up with on the basis of a time series extending over 40 years or so.
Question: Mr Duisenberg, you are not only going to Turku, you are going to Washington to the G7 and the IMF Annual Meetings. In its outlook, the IMF pointed out that the risks of the equity markets in the United States and in the world as a whole may be too high, and they also refer to the dollar. What is the analysis that you are going to bring into the G7 and do you think that this analysis will have some effect on the ECB and so, what?
Duisenberg: I would like to point out that the structure of the economy, especially the financial structure, and, for example, the ownership of equity and the dispersion amongst the public at large in the United States is very different from that in Europe. The general phenomenon, which the IMF pointed to, is whether asset price inflation is going on. And asset price inflation in the United States, in the first instance, expresses itself in terms of the development of the prices for equity. In Europe this phenomenon is related far more to developments in the area of real estate. Now there are some pockets of the euro area where we see a hefty development of real estate prices, but certainly not euro area-wide. Certainly not enough to give us cause for concern, but we try to monitor it as closely as we can.
Question: Mr Duisenberg, I would like to come back to the issue of the variable rate tender. There has been some speculation whether you might switch to the variable rate tender and then there have been comments, I believe of Mr. Issing, who said this might lead to an undesired increase in interest rates because banks tend to bid up themselves. To me, this argument always applies, and not only today. And still you pick the variable rate tender as one of your possible instruments. Could you give us another argument, that only applies to the specific situation today, against the variable rate tender?
Duisenberg: No, I can not. We did not even consider the issue in the Governing Council today. We have the instrument available, in principle, to switch to a variable rate tender if we were to deem that necessary. But, from our decisions today, you can derive that we do not deem it necessary at short notice.
Question: President Duisenberg, your friend, Karl Otto Pöhl, after he was President of the Bundesbank, said that he did not really understand what M3 had to do with official rates. He said he never understood the correlation between the two. Now I ask you, perhaps to prevent a myth, if you think that too. Is M3 so important or is it just a way of keeping the hawks and the doves in a balance on the board? This is the only reason, he said, it was ever mentioned - to keep the hawks and the doves on the board on an equal footing?
Duisenberg: We do think, I do think, with many others, that money matters and that the developments in the monetary aggregates do have an impact over time, with a long lag, on the rate of inflation. The transmission mechanism as such is somewhat in the dark, I admit. But money matters. We understand that, and that is why we also take it as an important reference value. But only as a reference value to guide us in our policy decisions. And it has nothing to do with hawks and doves.
Question: Let me ask again: how strongly must the money supply M3 rise before you say that the official interest rates must rise?
Duisenberg: Of course, I can not answer that question because - and I keep on coming back to it - we have to interpret the movements in M3 in a totally new environment and with totally new time series with great caution. So it would be very irresponsible if I even tried to begin to answer your question.
Question: Mr. Duisenberg, if we were to look over the last eight or nine months of this year, we would see that other central banks in the world have tended to move interest rates more often than the ECB has done. The ECB has only done it once in April. Is that a sign that your approach to monetary policy is less activist, so to speak, than, say, the US Fed or the Bank of England, that you prefer to wait a long time before seeing the impact of rate changes? We saw the Bank of England change yesterday and the Fed has moved recently, but the ECB has kind of held firm for longer than other central banks.
Duisenberg: We explicitly base our monetary policy decisions on - what we have publicly said - a medium-term outlook. We are not moved by the day-to-day fluctuations in economic variables as we see them, as I also indicated in my statement. We tend to attach greater importance to three-month moving figures than to the volatility of one-month figures, or even daily figures. So, from that you might derive that we are indeed not inclined to try to fine-tune the economy with monetary policy, or to give fine-tuning answers to short-term developments. So, in that aspect, you might say that we are somewhat less activist than some other central banks in the world tend to be.
Question: My question is related to the cross-border retail payment service initiative. Does this mean that euro area commercial banks will be asked to lower significantly the costs of the cross-border transfers?
Noyer: It is a little bit more complicated than that. I apologise that we are not able to provide for a detailed explanation of the initiative today. What we would like to do is to ensure that the necessary structural measures within the banking system, to a certain extent also between the national central banks of the Eurosystem and the banking system, are taken so as to lower the costs, but also to increase the efficiency of the system, to increase the speed of payments and so on. It is not intended to fix the final costs and the financial relations between customers and banks - we think that it is the market that must provide for that - but to ensure that a maximum of efficiency and flexibility as well as competition between banks on that very issue does exist or is improved. So we will give details on that. We are not going to publish the amounts of fees or to give instructions to banks to change their fees and cut them by X or Y%, but to ensure that all the banks take the necessary steps to progressively provide for the same sort of service in terms of availability, quickness of delivery of payments and costs between countries that they are performing internally today. That it is the objective.
Question: The ECB has already said that it can deal withany liquidity crisis coming at the end of the year. Does that mean that the Year 2000 would play no role in the timing of a rate decision, a rate change?
Duisenberg: They will not.
Question: Year 2000 issues will not play a role?
Duisenberg: No, we have not said that we can deal with any liquidity crisis, as you formulated it. We can deal with an increased demand for liquidity that may arise. We do not think that the public at large should be worried at all, but we can not help it if the public at large is worried and thus asked for greater liquidity. In that case, we can, through the banks and directly, handle any increased demand for liquidity that might arise.
Question: Would this mean that if you would be making your decisions on interest rates towards the end of the year, you really need not take into account any sort of liquidity problems?
Duisenberg: I do not think that interest rate policies would have an impact on the effects or the anticipated effects of the century date change.
Question: I think my colleague 's question was the other way round. The liquidity squeeze, or the possibility of thereof, would have an impact on your decision-making regarding interest rates. In other words, economists say that central banks generally, not only the ECB, will have a short, a brief window only left this year - now open - before they can not move rates anymore because liquidity would be a problem and thus the decision regarding interest rates is limited towards the end of the year?
Noyer: No, just to build on what the President has said. You must bear in mind that there are two differences between the situation, let us say, in the United States - I am just taking this as an example, and could be any other large economy - and in Europe. The two differences are: first, concerning the banknotes: because the NCBs are now printing euro banknotes, they have accumulated a stock of national banknotes to cover the period between now and the Year 2000. So we actually have far more banknotes in the vaults than central banks would normally have. These stocks enable us to provide for liquidity in banknotes to a much larger extent than normal, so that, in practice, everything is as if we had prepared for a special event. But the event we have been preparing for was, of course, different. But it can also be used for that purpose. The second difference: in our monetary policy implementation framework there is a facility that does not exist in most of the other monetary policy frameworks around the world, which is what we call the marginal lending facility. Through the marginal lending facility, if there are unexpected needs, on a given day or at a given time of day, from the banking system that have not been covered through tenders, all the banks may immediately come to the Eurosystem and take all the liquidity they need. I mean, there is no ceiling to that. They can take everything they need whenever they need it, that is on 31 December or 30 December, that is no problem. The only question mark was: is there enough collateral? As you know very well, looking at the tenders, the amount of collateral is far, far higher than that which is actually used both for payment systems and for monetary policy operations. So, they could increase their liquidity value on any given day by a very high factor. So, these specific features are the fundamental reason why we say that there is no problem with liquidity. And, having said that, you can also see that it is not related to the interest rate policy conducted, because the marginal lending facility works whatever the interest rate for this facility may be. The cost for 24 hours, or even a few days, is really of minor importance.
Question: Just finally, since you had the General Council meeting today as well, in other words: Eddie George was here. Britain raised the interest rates yesterday. Did you discuss the rate hike in Britain yesterday, and does it have any impact on the ECB 's thinking on monetary policy?
Duisenberg: He was here, I can confirm that. He was already here yesterday afternoon, so that we already discussed it yesterday afternoon. And it had no impact on our decisions today.