The Governing Council conducted its regular examination of monetary and economic developments and their implications for the maintenance of price stability in the euro area. It decided to leave the minimum bid rate on the main refinancing operations of the Eurosystem unchanged at 4.75%. The interest rates on the marginal lending facility and the deposit facility were also kept unchanged at 5.75% and 3.75% respectively.
Starting with the first pillar of the monetary policy strategy of the ECB, the three-month average of annual M3 growth stood at 5.4% in the period from July to September 2000, unchanged from the three-month period ending in August 2000. While remaining above the reference value of 4 1/2%, M3 growth, reflecting the increases in ECB interest rates since November 1999, has shown signs of moderation over recent months. A further factor to be taken into account is the fact that the growth rate of credit to the private sector increased to 10.8% in September. However, this was influenced by the financing of payments for UMTS licences. The growth rate of total MFI credit to euro area residents remained broadly unchanged in that month.
Turning to the second pillar, one issue under consideration was the likely further development in world economic activity and particularly real GDP growth in the euro area. Overall, the outlook for growth of the world economy remains favourable. In particular, as far as the decline in real GDP growth in the United States in the third quarter of 2000 is concerned, this may be seen as the first sign of an orderly slowdown towards more sustainable levels, in line with the projections currently available. More generally, the extended period of rising and high oil prices has increased the uncertainty surrounding the sustainability of recent growth trends. However, by contrast with previous periods of strong and prolonged increases in oil prices, the world economy is less dependent on oil today and inflationary pressures are still being contained. This should help to avoid any sustained negative effect on confidence, and thereby ensure that the impact of high oil prices on growth remains moderate over the medium term.
Very much the same line of argument applies to the euro area. Euro area real GDP has been growing at a high rate for four consecutive quarters, including the second quarter of 2000. Some monthly indicators which extend into, or cover, the third quarter of this year point to a possible moderation in growth rates. In particular, the pace of growth in industrial production appears to have declined somewhat and some survey data have also indicated that there has been a certain degree of moderation. However, survey data remain at high levels and should be underpinned further by positive factors such as high employment growth. There is thus good reason to remain confident that strong growth will be sustained in the euro area.
This picture is broadly supported by bond yields in the euro area. These have changed little over recent weeks. They continue to be compatible with market expectations of strong economic growth in the euro area in the medium term and with developments in consumer price inflation, which are in line with the ECB 's definition of price stability.
We trust that this assessment will also increasingly be reflected in exchange rates. These have clearly lost touch with economic fundamentals and this is posing risks to the world economy. For the euro area in particular the continued undervaluation of the euro vis-à-vis other major currencies is putting upward pressure on import prices. We shall, therefore, monitor exchange rate developments closely.
As regards developments in consumer prices, no additional euro area-wide data on the Harmonised Index of Consumer Prices -LRB- HICP -RRB- have become available since our last meeting. In September 2000 inflation rose to 2.8%, mainly as a result of higher energy prices. As I mentioned earlier, inflation rates may remain above 2% for longer than was expected just a few months ago, owing to unexpected developments in energy prices and the past decline in the euro.
In order to maintain price stability over the medium term it is important that economic agents accurately perceive the nature of current price developments. In particular, it needs to be recognised that current upward pressures can be successfully overcome if economic agents see them for what they are - namely, one-off or temporary price increases resulting from external factors - and act accordingly. These factors must not give rise to second-round effects. If oil prices do not rise further, as the markets expect, the effects of past oil price increases will gradually drop out of the annual inflation rate.
At the current juncture two main considerations should guide expectations regarding the outlook for the euro area economy.
First, the Governing Council is committed to maintaining price stability in the medium term. It will continue to assess thoroughly the outlook for price stability in the euro area. Monetary policy will not accommodate inflationary tendencies in the euro area and in this way will make its best contribution to sustainable growth.
Second, euro area countries are now in a much better position to withstand the adverse effects of a sharp oil price increase than they were in the 1970s. The Governing Council remains optimistic with regard to the economic outlook for the euro area. This positive outlook needs to be underpinned by responsible fiscal policy-making and by social partners reacting appropriately to the increase in oil prices. It is crucial that any loosening in fiscal policy be avoided. Similarly, continued wage moderation is important in order both to contribute to further decreases in the level of unemployment and to maintain a favourable outlook for price stability. It will be equally important for structural reform to be intensified further in order to allow current high growth rates of real GDP and employment to be sustained into 2001 and beyond, without generating inflationary pressure.
Let me now give the floor to the Vice-President to inform you about two further issues decided by the Governing Council today.
I should like to inform you that, in the course of next week, the ECB will release an update of the so-called Balance of Payments Book. This annual publication documents the statistical methodologies applied in EU Member States for the compilation of balance of payments statistics and, as such, improves the transparency of the compilation of euro area statistics. In addition to updated individual country chapters, this version includes two new chapters on the compilation and methodological standards for the euro area balance of payments and international investment position. The Book will be published on the ECB 's website and hard copies will be available at the ECB.
The Governing Council has today also adopted an ECB Regulation establishing transitional provisions for the integration of Greek credit institutions into the Eurosystem 's minimum reserve system, as a consequence of the introduction of the euro in Greece as from 1 January 2001.
Question: President Duisenberg, I have a question with respect to your open market operations. The EONIA seems to drop considerably before the end of the reserve period every month, indicating excess liquidity in the market, and the recent research paper by two of your economists seems to suggest that this may be a systematic issue that the Eurosystem is providing too much liquidity to the market. Could you elaborate on that, please?
Duisenberg: Very little, I am afraid. I am aware of this fact. There has even been the tendency on some days for the EONIA to look as though it would fall below the minimum bid rate, but it did not happen. But we are of the opinion that, despite the series of interest rate increases which we have executed since November 1999, the liquidity situation, the overall liquidity situation in the euro area, can still be regarded as ample.
Question: Two questions. Do you think that the fall in the euro since its launch is now over? And the second is related to what you said earlier about a more normal pace of growth in the United States. What do you mean by a more normal pace of growth? Could you elaborate on that?
Duisenberg: The developments of the euro exchange rate over the last two weeks have - may I call it - been gratifying and have somewhat - but not yet totally, of course - corrected the strong undervaluation of the euro, as we believe. There are, as there should be, more normal growth rates in the United States. That means that the extraordinary growth rates which we have seen in the United States for a prolonged period of time and which we and other authorities did not regard as being sustainable in the very long term are coming down from annualised rates of 5 1/2% or even close to 6% per quarter in the direction of lower rates for what seems - to me - to be a normal and to be expected - may I call it - soft landing in the United States, which is in the interest of the entire world.
Question: Does your last comment mean that you are now confident that the euro has turned the corner against the US dollar?
Duisenberg: It is too early to judge.
Question: You say you see euro area inflation remaining at over 2% temporarily. What does that mean? Are you talking about months, or for a longer period than that?
Duisenberg: Well, originally, about three to four months ago, we thought it would only take perhaps two to four months for the higher oil prices and the weak performance of the euro to peter out and gradually disappear from the figures. Now that we have had still further and sustained increases in oil prices and a prolonged or protracted period of a relatively weak euro, which is not in line with the fundamentals, we have come to the conclusion that it may take somewhat longer than the two to four months I mentioned earlier before price inflation comes back to levels at which we would want them to be.
Question: On interest rates: is the horizon still clear on interest rates? You used that phrase last time, that the last hike cleared...
Duisenberg: Well, our decision of today indicates that we still think that the monetary stance we took on 5 October is still appropriate for the current circumstances.
Question: The Iraqi President, Mr. Saddam Hussein, this week obtained approval from the United Nations to have his country 's payments in oil for a food programme paid in euro. Is that a development that you consider fortunate for the euro area, that more oil is paid for in euro rather than in US dollars?
Duisenberg: Well, we have always been convinced that the euro will play an increasingly international role over time, but it may be a slow process. I am not commenting on the decision of any individual country. Nonetheless, the fact that this is happening illustrates that we may have been right in our expectations.
Question: Mr. Duisenberg, could you please tell us whether there have been any interventions by the ECB alone or together with other central banks since 22 September? Maybe there have been interventions that we do not know about. My second question concerns second-round effects. At the moment, do you see any risk that these second-round effects may emerge in the coming weeks?
Duisenberg: I shall take no questions on interventions. Concerning second-round effects: We are seeing here and there in the euro area a tendency - a commendable tendency I would say - over the past few years towards moderate wage contracts. These moderate wage developments, which have been greatly conducive to the recovery in employment growth, are coming under tension and pressure here and there.
Question: One more question on interventions. You told us several weeks ago that you would tell us when there had been interventions. Have you changed this policy?
Duisenberg: No, I have not changed this policy. I shall tell you when there have been interventions.
Question: Mr. Duisenberg, I would like to ask you why people are losing confidence in the single currency. You explained in one paper that it is because of the lack of" real cash ''. They do not have cash yet. Would you mind explaining this again a little bit more, please?
Duisenberg: Well, the recent movements in the exchange rate of the euro do not bear witness to a further loss of confidence. What I have said in relation to the availability of what you call" real cash '', which I would call" banknotes and coins in circulation '', is that in the perception of the general public the fact that the euro already exists today, and has existed since 1 January 1999, is not sufficiently appreciated, because they do not have what you call the" real money '' in their hands and pockets yet. I personally wish that we already had them. But it simply can not be.
Question: Mr. President, the Bank of Japan has just started to publish its inflation forecast and we trust that the ECB will follow soon. But what kind of forecast will we see and whose forecast will it be? Will it be a conditional forecast and will it be a forecast of the Governing Council or of the ECB staff?
Duisenberg: We are still working hard on the possibility of publishing forecasts in the future. We have devoted a lot of discussions, both inside the ECB as such and in the Governing Council, to that subject. What format they will have, what the timing will be, what the coverage will be and, especially, what meaning they will have for the policy-making of the Governing Council, as such, are still very much under consideration. In addition, we do realise that we will have a lot of explaining, or even education, to do, as and when forecasts are published.
Question: Mr. Duisenberg, in the October issue of the ECB Monthly Bulletin there is a very positive appraisal of the informal Eurogroup, the Euro-11 meeting preceding the ECOFIN. I remember that only one or two years ago you seemed to be a bit dismissive of this group. So, what has changed to make your appraisal so much more positive?
Duisenberg: Well, if anything has changed, maybe it is the experience of working together with the Eurogroup, that is the 11 - now already 12 - Ministers of Finance, of engaging in a very constructive dialogue about all our policies, both monetary as well as economic and financial policies, once a month. It has developed, and still is developing, in the direction of a truly constructive dialogue. So, although in the beginning I may have been a bit sceptical about the significance of such a dialogue, I must say I increasingly appreciate it as a golden opportunity both to hear and to tell our, may I call them our political counterparts, what we think of them and what they think of us.
Question: You said that, despite the recent developments in the exchange rates, you regard the euro as still being seriously undervalued. How seriously do you regard it as being undervalued? And the second question is: what impact do you believe the outcome of the US presidential election will have on the exchange rate between the US dollar and the euro?
Duisenberg: Seriously undervalued means relatively seriously undervalued. And with regard to how seriously the outcome of the US elections will affect the foreign exchange markets, I have heard from market participants so far - and I do not have any better sources than that - that they expect the effects - whatever the outcome will be - to be limited. And I believe that they are right, as markets almost always are.
Question: Mr. Duisenberg, a question about the first pillar of your monetary policy strategy: at 5 1/2%, M3 growth is now closer to the reference value of 4 1/2% as a result of the interest rate hikes. Your statement in this respect sounds" very moderate ''. Now, does that mean that your money supply goals have been achieved or do you think that the reference value for next year should be set higher?
Duisenberg: I did not say" very moderate ''. What I did say was that it" has shown signs of moderation over recent months ''. That is only one thing. But the monthly, or the three-monthly M3 figures still remain significantly above the reference value, which we have set at 4 1/2%. So we will continue to monitor it very closely. But they are signalling - let me call it - no further deviation from the reference value, but rather some movement in the direction of the reference value.
Question: Two questions on the euro. Mr. Fabius said that the euro was undervalued by at least 20%. Do you share his view on that? And could you tell us why there have not been any interventions over the past few days? Quite a number of market operators were expecting interventions over the past few days.
Duisenberg: I am not inclined to put a precise figure on the degree of undervaluation of the euro. I know that there are many figures circulating on the markets - from Mr. Fabius, from the IMF, from many organisations. I prefer to abstain from playing a role in that discussion. I simply share the feeling that the euro is still seriously undervalued. And, on interventions, I can only repeat what I said earlier: I will not take questions on interventions.
Question: Is there a risk that slower economic growth in the United States will to some extent cause a slowdown in economic growth in the euro area?
Duisenberg: We have explained throughout that the undervaluation of the euro is to a very large extent due to the significant growth differentials between the United States and Europe. Now that that differential may be declining, there is every reason to believe that that undervaluation may, over time, also be gradually corrected. On the basis of all the information that we have, we are continuing to look forward to a robust rate of growth in Europe, both in 2000 and in 2001, and hopefully beyond - robust meaning a rate of growth at or in excess of 3% per year.
Question: President Duisenberg, over the past year you have always said how astonished you are that the euro is undervalued in relation to economic fundamentals and you have constantly raised interest rates in the Governing Council. You have almost closed the interest rate differential vis-à-vis the United States. My question is: can it be that there is something wrong with the Maastricht Treaty and the ECB? Is there something that is missing here? Or is there something clearer that the President could say?
Duisenberg: I do n't think so. We have consistently said that the euro is undervalued. We share that judgement with all other authorities, at least in the G7 context, and a resumption or a continuation of the economic growth performance of the euro area will, over time, correct that undervaluation by itself. That is our strong belief. I do not see a deficiency in the" Maastricht Treaty ''. The Maastricht Treaty is unequivocally clear about what the mandate is for the European Central Bank, that is, that the primary objective is to maintain price stability. And the exchange rate as such could only have an impact on that mandate if, over time, the exchange rate itself were to be one of the factors undermining our efforts to maintain price stability. But that is all.