The Governing Council undertook a comprehensive examination of monetary, financial and economic developments and considered the evidence that has become available since its last meeting on 2 May 2002. Notwithstanding the recent decline in inflation, the outlook for price stability in the medium term remains less satisfactory than expected a few months ago. However, the economic outlook is still subject to uncertainty. Further evidence is needed before we can fully assess the upward risks to price stability over the medium term. Against this background, the Governing Council decided to leave the key ECB interest rates unchanged.
Starting with the analysis under the first pillar of our monetary policy strategy, the three-month average of the annual growth rates of M3 decreased to 7.4% in the period from February to April 2002, down from 7.6% in the period from January to March 2002. While the high annual growth rate of M3 still partly reflects the portfolio shifts to liquid positions which occurred last autumn, and there was some normalisation in the development of M3 in early 2002, this trend towards moderation has recently been interrupted. In addition, annual rates of growth of loans to the private sector have stabilised over recent months.
As regards the second pillar, our expectations for a gradual recovery in real GDP growth in the euro area have been confirmed by Eurostat 's recently published first estimates for real GDP growth. These preliminary estimates show an improvement of quarter-on-quarter growth rates from -0.3% in the last quarter of 2001 to moderately positive rates in the first quarter of this year. Moreover, business and consumer confidence has strengthened again more recently, as reflected in the data published by the Commission. Looking ahead, available forecasts all point to a continued strengthening in both domestic and foreign demand, relating to a more favourable external environment, sound domestic fundamentals and the absence of major imbalances within the euro area. Overall, they suggest that real GDP growth in the euro area should again be in line with potential growth later this year, with a further increase expected in 2003. Despite this rather positive outlook, the assessment of the short-term dynamics of real activity is still surrounded by uncertainty. Moreover, future oil price developments and economic imbalances elsewhere in the world economy remain elements of risk.
Turning to price developments, Eurostat 's early estimate indicates that annual HICP inflation fell from 2.4% in April to 2.0% in May. However, this decline is mainly due to a base effect relating to the spike in HICP inflation in May 2001. Moreover, in the first months of this year HICP inflation excluding the more volatile items of energy and unprocessed food prices has remained stubbornly high, reflecting in particular trends in services prices. While a further decline in the annual inflation rate is possible in the short run, the medium-term outlook remains less satisfactory than expected a few months ago. Over recent weeks the exchange rate of the euro has appreciated. This will contribute to containing inflationary pressures, but it is still too early to assess the impact of exchange rate developments on the outlook for prices
As stated on a number of occasions, the less satisfactory picture in the short term is due partly to a sequence of adverse but rather specific shocks to prices, including recent oil price increases. In principle, such shocks should unwind over time and therefore not affect the medium-term perspectives for price stability as long as past upward tendencies in prices do not become entrenched. The outcome of recent wage negotiations in some regions of the euro area is a cause for concern, especially in view of the negative impact this could have on continued employment creation. High wage increases must not spread across the euro area given that inflationary pressure, which would have unfavourable consequences for competitiveness, employment growth and consumption, is to be avoided.
At this juncture it is therefore particularly important for monetary policy to remain vigilant with regard to the further evolution of the key factors determining the outlook for prices.
Regarding fiscal policies in the euro area, it is vital that all Member States maintain a medium-term perspective in compliance with the framework of the Stability and Growth Pact. Maintaining such a perspective will lead to a successful transition to budgetary positions close to balance or in surplus and to a smooth functioning of automatic stabilisers in all member countries. Let me therefore reiterate that the Member States concerned must honour the commitments made to achieve balanced budgets by 2003-4. Moreover, governments are encouraged to push ahead with reforms relating to the size and structure of public expenditure and revenue, which will also create room for further tax cuts and absorb the fiscal costs of population ageing.
This reform agenda, as well as the urgent structural reforms relating to product, labour and financial markets, will be addressed in the forthcoming Broad Economic Policy Guidelines. Overall, such reforms reflect the key challenge for the euro area to expand its potential for non-inflationary growth and to reduce its high level of unemployment. The Governing Council calls upon Member States to make faster progress in accelerating and deepening structural reforms in order to provide economic agents with the proper incentives to enhance efficiency and entrepreneurship and to progress towards a knowledge-based economy as proclaimed in the Lisbon agenda and confirmed in Barcelona.
Question: Mr. President, you said that the outlook for price stability has worsened. I assume that that will be backed up by your staff forecasts that are to be released shortly. Can you say something on how much these forecasts would probably be affected if the euro appreciation of the last weeks would stay? If the euro would stay higher?
Duisenberg: It is, as I said, still too early to say. Just before the end of last year, we expected, as you know, inflation to fall to what we then called safely below 2% in the early part of this year. Now, the developments in January, the weather conditions and the oil price hikes in January and February have crossed this expectation to the extent that the medium-term perspective is that inflation will later than earlier anticipated fall to below 2% or stay at 2%. And the expectation for next year also is that we will be very close to the 2% limit. And if the recent appreciation of the euro, which is very welcome I must say, persists it will contribute to containing the inflation expectations and the forecasts for inflation. But it is still too early to make definite statements on the quantitative extent to which this will be the case.
Question: I have a question about the accession countries. The ECB 's basic message to the accession countries regarding EMU membership seems to be one of caution, of not taking things too quickly. I wanted to ask your opinion whether after EU membership two years of continuously meeting the Maastricht criteria would be sufficient evidence that a country is ready for EMU membership or would more than that really be economically needed to justify this move?
Duisenberg: Well, after the accession countries have become a member of the European Union, which is to be expected just before the middle of 2004, the time when the elections for the European Parliament take place, their central banks will automatically become a member of the European System of Central Banks, but not of European Monetary Union. For that, another number of years will be required in order to fulfil the Maastricht criteria in full and it remains to be seen how quickly, and that may differ from country to country, every individual country is in a position to comply with the criteria. And one of the criteria, as you know, is to have been a member of the European exchange rate mechanism, which they are invited to join sooner rather than later. But you have to have been a member for two years and, during those two years, not to have depreciated your currency. So I can not put a timetable on when those tests will be met. But the moment of judgement will come not before two years have elapsed from the moment they become a member.
Question: I have two questions. First of all, do you agree with, do you favour, the economic policy co-ordination proposals contained in the Commission 's submission to the Convention on the future of Europe? And secondly, tomorrow a working group of the Convention will meet to discuss possible improvements to the Stability and Growth Pact. Are improvements to that Pact possible or should they all go home and stop wasting their time?
Duisenberg: I was not aware that tomorrow that working group was meeting. Of course, improvements could always be possible. But to my mind, it is more important to adhere to the goals set in the Stability and Growth Pact as it stands than to already start talking about changing the rules of the game. That is where my emphasis would be. Now the first part of your question was on the recommendations. Yes, we agree with the recommendations made by the Commission.
Question: President Duisenberg, we have seen the euro appreciate some 7 or 8% against the dollar over the past couple of months. Is it your belief that there is still potential for the euro to appreciate, and are the euro 's levels anywhere near a point where it might dampen the prospects for growth especially in the economies where early signs of recovery are seen?
Duisenberg: First of all, the euro has appreciated vis-à-vis the dollar, but what is more important is to look at the overall effective appreciation of the euro which is decidedly less than simply the nominal appreciation vis-à-vis the dollar, and that is where the effects come from. In no way do we believe that at the present time the exchange rate is any impediment to the further growth and recovery of our exports.
Question: Mr. President, it could well be possible that this is the third year that the ECB is going to miss its 2% average inflation target. Would you say that is a threat to the ECB 's credibility? And is n't there a chance that this could impact inflationary expectations, which could then change the inflationary outlook?
Duisenberg: It is true that this probably will be the third year where we will miss or at least only come close to our stated objective. But we can explain why. In the past three years we have had an unusual accumulation and coincidence of negative shocks. I am referring to two oil price hikes, which we can explain but which we can not take away and about which we can do nothing using monetary policy. So in a certain sense we have been disarmed of the weapons we use to fight inflation. We have to absorb that. There have been other shocks, too: I 'm thinking of September 11, I 'm thinking of the foot-and-mouth disease and other veterinary illnesses which have had an unexpected but upward impact on inflation and which help to explain this. I do believe that the prompt and adequate reaction of the ECB to underlying developments in the outlook for price stability in the form of a range of interest rate changes has been adequate, and that the fact that we are close to but not at, admittedly, an inflation rate in line with the maximum of our stated objectives can not but enhance the credibility of the ECB.
Question: Mr. Duisenberg, you listed quite a few causes for concern on the price stability front in your opening statement, to the extent where it kind of begs the question why you are not taking action as early as today to do something to counter that. To what extent would it be right to infer that maybe you are waiting to see how far these more recent benign impacts on inflation like the exchange rate, like oil prices prove sustainable and may have some fundamental implications for the policy outlook?
Duisenberg: Well to the extent to which it is likely, as future prices indicate, we expect some moderation in oil prices. But as I said earlier, we have to wait a while before we can fully assess the impact on the appreciation of the euro. There are many uncertainties, but the risks have moved, let me say, in an upward direction. But we need more information, more data to come to an ultimate judgement.
Question: But those uncertainties could shift back again, if the rise in the exchange rate and the fall in oil prices is sustained over the coming months?
Duisenberg: Well they could come back again, and they could even increase and then we would react. But as to when is completely undetermined.
Question: Just to follow up on that point: you said the risks have moved in an upward direction. Does that mean since last month, or does it mean since the end of last year?
Duisenberg: Since the end of last year, but we need time to fully assess what the impact of the ongoing developments is going to be.
Question: The second question I have is this: you talked a bit about the 2%. Are you in any way beginning to look differently at 2% and thinking that maybe it is just a fluke, really, if euro area inflation is below 2%, that it is almost unrealistic to think that inflation would be below 2% in most normal years?
Duisenberg: In no way. We are not thinking of changing our definition of price stability.
Question: But is n't it going to be unusual in most circumstance for inflation to be below 2%?
Duisenberg: Well, whether it is unusual, it is an ambitious target, if you want to call it a target. But it is simply a fact that the treaty mandates us to maintain price stability. Now the question is how to define that. We think that defining an upper limit of 2% is in a way ambitious but, in light of the circumstances, in light also of past events, it is ambitious but not impossible.
Question: Mr. President, Hans Eichel, the German Finance Minister, said earlier this week that a higher external value of the euro and lower interest rates are a more favourable constellation than vice versa. Given the latest rise in the euro, would you agree with that assessment? My second questions is, I think you did not mention the word" appropriate '' in your monetary policy stance this time. Can I assume that you are not exactly sure anymore whether your monetary policy stance is appropriate right now?
Duisenberg: Well, to take the last question first, I did point to some increased risks for price stability. So, it is not by chance that the word" appropriate '' no longer appears in my statement. I want to emphatically state that that is not to say that there is now a so-called" bias '', as Mr. Sims always asks, that has crept into our considerations.
Duisenberg: Mr. Eichel has apparently said that a higher exchange rate and lower interest rates were more favourable that the other way round.
Question:... more favourable than the other way round, with a lower euro and a higher interest rate.
Duisenberg: I would tend to agree with that.
Question: You told us that the appreciation of the euro was very welcome. Could you explain why and could you explain what role this appreciation of the euro played today in terms of your decision not to move the rates? Also, up to what level would the appreciation of the euro be very welcome?
Duisenberg: I can not answer the last question because I do not speculate on what the" appropriate level '' is for the euro in a world that is ever-changing. As far as the first question is concerned, the euro exchange rate is one of the broad range of indicators we look at when assessing -- through the second pillar of our strategy -- our monetary policy stance. And then, I said literally, over recent weeks -- and it is weeks only -- that the exchange rate of the euro has appreciated. This will help to contain inflationary pressures and that is welcome, and this is one of the counter-forces against other forces which point in another direction.
Question: Allow me to ask more about the euro appreciation, but this time about the yen. The Bank of Japan has actively intervened in the Forex market recently, selling the yen to push it down because the Ministry of Finance is concerned that, at this moment, the strong yen and weaker dollar might jeopardise the growth of Japan. And this is not at all good for the rest of the world. Do you share such a concern about Japan and also have you done anything in the Forex market in co-ordination with the Bank of Japan?
Duisenberg: I must first of all say that I do not take questions on either matter. I have no judgement on the adequacy or the usefulness of the policies executed by the Ministry of Finance in Japan. I fully understand their fear that an ever-stronger yen might jeopardise the early signs of recovery which are emerging in Japan. On co-ordination, which is effectively asking questions about interventions, I will always comment afterwards.
Question: So, still, upside risks remain. You responded to my colleague that upside risks had risen since the beginning of the year. I would like to ask you if there are more risks on the upside since the last press conference or if you judge them to be the same. Given the fact that inflation came down in the last months and the euro appreciated, did these upside risks increase?
Duisenberg: Well, I indicated in my introduction one other factor, which we look upon with some concern, and that is wage agreements which are being concluded here and there. I 'll not comment on the" here '' or the" there '', but they seem to be adding to the upside risks. So there you have one other reason.
Question: Mr. Duisenberg, I have two questions. First, the ECB Council certainly approved the projections that are supposed to be published in eight days. What are these projections worth if you are saying that the interest rates are not going to change and that there is a higher expectation that in two or three months or maybe one month interest rates will not remain unchanged? Second question, risk projections. How big is the risk that American share markets and the American stock exchange will collapse and that this might have an effect on the dollar rate? How do you see this and its impact on the world economy?
Duisenberg: I can not answer the last question. If there is a sudden collapse in any financial market that would be speculating to an irresponsible extent. And you can imagine yourself, what the consequences would be. Now, we will publish -- as we do twice a year -- our new forecast in, I believe, seven days time, in the forthcoming issue of the Monthly Bulletin, and this still has to be finalised. Also, after today 's discussion there were suggestions -- although they are staff forecasts -- and suggestions can be made and have been made. They will contain ranges and I can assure you that they will reflect the slightly worsened outlook for inflation as compared with the previous prognosis. That is not to say that they have already reached a level which would cause us to act today.
Question: Mr. Duisenberg, Mr. Mer, the French Finance Minister, told us today that the Stability and Growth Pact is nothing to worry about because it is not written in stone. Could you please comment on this? Should we not be worried that more and more State will try and neglect the rules of the Stability and Growth Pact?
Duisenberg: I heard about this statement on my way down to this room. When I heard about it, my spokesman added that the French Ministry of Finance had immediately toned it down. And I have reason to believe, I might say from the highest sources, that there can be no doubt that France, as a full member of the euro area and the European Union, will live up to its commitments which it took upon itself when establishing the Stability and Growth Pact at the Summit in Dublin.