Today, the Governing Council continued its in-depth examination of monetary, financial and economic developments, incorporating in its assessment the new evidence that has become available over recent weeks. Our conclusion is that risks to price stability are at present balanced. Based on our overall assessment, we have kept the key ECB interest rates unchanged.
As regards the analysis under the first pillar of our monetary policy strategy, the three-month average of the annual growth rates of M3 was 7.1% in the period from June to August 2002, compared with 7.3% in the period from May to July 2002. Hence, monetary growth remained strong and liquidity in the euro area ample. Recent monetary developments, however, should be interpreted with care. On the one hand, monetary trends have been influenced by considerable uncertainty in financial markets and therefore partly reflect strong liquidity preferences among investors. On the other hand, the low level of short-term interest rates has tended to stimulate monetary expansion, reflected particularly in the increase in the narrow aggregate M1. At the same time, loans to the private sector appear to be stabilising at growth rates above 5%, a rate of expansion which, in real terms, is in line with the long-term average. Considering all the evidence relating to the first pillar, from a medium-term perspective, more liquidity is available than would be needed to finance sustainable, non-inflationary growth. However, given the current environment, we do not see the risk of this translating into inflationary pressure in the near future.
Concerning the second pillar, the latest data and survey results confirm that economic activity in the euro area remains subdued. These data and results also suggest that real GDP growth in the third quarter of 2002 may turn out to be similar to that of the first two quarters, when quarter-on-quarter expansion reached 0.4%. Against this background, previous expectations of an acceleration in economic growth in 2002 will not materialise. At the same time, a significant degree of uncertainty has been building up over recent months owing, in particular, to the sharp decline in stock prices and their potential detrimental effects on the economy, as well as to geopolitical tensions as reflected in surging oil prices.
Nevertheless, the main scenario for the euro area is a return, in the course of 2003, to economic growth rates in line with those of potential, as also reflected in forecasts by international organisations. However, the uncertainty surrounding the economic outlook is high. Sources of downside risks -- including oil prices, imbalances in the global economy, financial market uncertainties and their impact on consumption, investment, and thus on employment -- will be monitored closely. At this juncture, it is particularly difficult to offer a precise assessment of the timing and strength of the economic upswing, both in the euro area and globally.
Turning to price developments, in August annual HICP inflation was 2.1%. Eurostat 's flash estimate for September indicates an annual HICP inflation rate of 2.2%. While no detailed information is as yet available for individual HICP sub-components, the recent increase is likely to reflect the rise in energy prices. These developments generally remain in line with previous expectations of inflation rates hovering at around 2% for the remainder of the year, but short-term trends could be affected by future oil price developments.
Looking further ahead, the euro exchange rate, which has strengthened since early this year, and the overall economic environment should contribute towards reducing inflationary pressure. In addition, we expect rates of perceived inflation, which are currently high, to move closer to actual rates. However, the assessment that inflation rates will fall and remain below 2%, depends on the development of oil prices and the prevalence of wage moderation. In this respect, earlier this year we pointed to an upward trend in wage growth which, according to preliminary indications, may have come to a halt only recently. In the same vein we have noted the inertia of consumer price developments in the euro area, as reflected in the stubbornness of the annual rate of inflation excluding unprocessed food and energy. This rate was 2.5% in August, only marginally lower than early this year ; therefore, vigilance is warranted.
Overall, monetary policy will remain geared towards maintaining price stability and will continue to focus on the medium term, thereby providing a reliable anchor for consumers and investors. At the current juncture, aggregate demand and exchange rate developments should contribute towards easing inflationary pressure, while monetary developments, wage trends and oil price developments could point to risks in the opposite direction. Consequently, all factors which could influence the balance of risk to price stability will be monitored closely.
Regarding fiscal policies in the euro area, the Governing Council notes with concern that there is still insufficient ambition in some countries to bring budgets to positions close to balance or in surplus over the medium term. The current fiscal problems in some countries arise from the fact that these countries did not take the opportunity to improve substantially on their fiscal positions when economic growth rates were considerably higher than is currently the case. Given that this opportunity was missed, there is now no alternative but for all countries with remaining imbalances to make firm commitments to avoid excessive deficits, in keeping with the Treaty provisions, and to attain budgetary positions close to balance or in surplus, as required under the Stability and Growth Pact. Swift, decisive action is necessary in order to set up credible adjustment paths based both on realistic assumptions on the economic environment and on well-specified consolidation measures. Such adjustment paths must entail significant yearly improvements in the cyclically adjusted budget balance, and must be followed strictly and be completed within the shortest possible time-frame. To underpin this process, the ECB calls for strict monitoring procedures for the implementation of the consolidation strategies, the full use of the excessive deficit procedure and the application of rigorous accounting rules.
Fiscal consolidation is not detrimental to the outlook for economic growth. The attainment of budgetary positions in line with the Stability and Growth Pact will gradually create scope for dealing with ageing-related issues and their impact on public finances. In any case, in the short term, the Pact does not place constraints on those member countries already in compliance, although it does call for the transition to be completed in the few remaining countries. Direct effects on short-term demand are to be counteracted by higher credibility of the conduct of fiscal policy -- boosting confidence and thus private spending.
We also urge governments to overcome the inertia in implementing structural reforms, both within the area of fiscal expenditures and revenues and in labour and product markets. Any further delay in tackling, with greater determination, the underlying reasons for limited growth in potential output over the medium term, and for only partially exploiting the current potential, is costly. It would also make it increasingly difficult to reach the objectives set in the Lisbon Agenda. Structural reforms take time to unfold fully their benefits and should therefore be frontloaded. Under the current circumstances, frontloading is particularly needed as it would support confidence.
Question: Mr. Duisenberg, I have two questions. The first question is: in Brussels, on Tuesday, you said that the ECB is" right to keep its powder dry ''. This means there is some powder but you do n't want to use it now. Is this interpretation right? And my second question is...
Duisenberg: My answer to the first question is" yes ''.
Question: My second question is: do you mean that all four countries which have deficit problems should start reducing their cyclical deficit by 0.5% from 2003 onwards, and not from 2004 onwards? So, if you say" yes '' you are in line with the European Commission.
Duisenberg: Yes, I say" yes '' again... and they should start as soon as possible. But in the statement issued by the Ministers, together with us, it says" at least one-half percent ''.
Question: Mr. Duisenberg, are you worried that the current climate of doubt around European financial institutions, particularly in Germany, could risk financial stability in the euro zone or the transmission mechanisms of monetary policy? That is my first question. My second question goes back to your testimony in Brussels ; there you seemed to give the impression that neither monetary nor fiscal policy could spur the European economy. Does that mean you, as policy-makers, can only sit and wait and you can do nothing to improve short-term prospects?
Duisenberg: First of all, on the -- may I call it --" robustness '' of financial institutions, generally speaking in Europe they are robust. I do n't say that they do n't get hurt by what is happening in markets, especially in equity markets, but they can stand some headwind. Their capital position is generally very robust, so, is it a cause for concern? The answer is no. The second question was about what I said in the Parliament, and that I can repeat here. The main problem plaguing our economies both here and across the Atlantic is the combination of uncertainties prevailing and confidence lacking. I believe the authorities, both the monetary and fiscal authorities, can contribute towards eliminating the uncertainties and boosting confidence by following a steady line by inspiring confidence through their steady, determined following of the policies, as they should do. I think that it is the best contribution under the current circumstances that the policy-making authorities can make.
Question: Mr. Duisenberg, I am well aware that you do n't have a mandate to support growth, but prices have something to do with growth. Could you just explain to me why, some months ago -- almost half a year ago -- you called an interest rate of 3.25%" appropriate '' -- and with positive growth perspectives, growth catching up in 2002 to potential rate -- and now, with these deteriorated growth perspectives, it is still appropriate? Could you just explain to me what is going on in your mind during your analysis when you say that?
Duisenberg: Well, I pointed out in my introductory statement that there are still risks but the risks are balanced. There are upside and downside risks to our primary objective. And then maybe I can briefly answer your question that, contrary to what you suggested, the word" appropriate '' was not used in my introductory statement today.
Question: Are interest rates appropriate now?
Duisenberg: Of course they are. Otherwise we would have changed them.
Question: In Brussels, you said that some of the downward risks to the ECB 's main growth scenario have in fact materialised within the last few months and inflation risks have declined. Do you see any risks that the ECB is lagging behind the curve also, cutting rates too late, and are you ready to carry the responsibility if the euro zone falls into recession because of too tight economic policy or policy mix?
Duisenberg: Well, I first of all deny, and I deny explicitly, that monetary policy is tight. I pointed to the ample liquidity conditions, I pointed to the low level of interest rates prevailing already and I am, of course, in charge of taking responsibility for whatever we do, and I am fully prepared to do so.
Question: Could I give a continuation question? The ECB rate was 2.5% in spring 1999. Why is the situation less serious now when it is 3.25%?
Duisenberg: You should not only look at the nominal level of interest rates but also at the real level of interest rates. The real level both of short-term and long-term interest rates is lower than it has been over the past 40 years. So, monetary policy and the monetary policy stance are in no way a hindrance to the resumption of economic growth.
Question: Mr. Duisenberg, two questions: Has the slump in stock markets in Europe exceeded your expectations in any way? It may be worth recalling that since your last rate cut in November 2001 the EURO STOXX index has lost about 40%. And is there a point at which the ECB has to attach more importance to stock price movements, because they could have an unwelcome impact on both prices and growth? And secondly, while you have to conduct monetary policy for the euro area as a whole, it 's probably the case that you can not ignore developments in individual countries and there are some concerns that Germany may experience a credit crunch ; we have heard before that some financial institutions are in great difficulties. Are there any concerns that in the euro area 's largest country there could be such a development?
Duisenberg: The impact of stock prices has in itself indeed been rather dramatic. But as I said in answer to an earlier question, generally speaking, the banks and the financial institutions can weather a storm very well because of their sound, robust, underlying position. As I said in my introduction with regard to loans to the private sector, I also hear the noises about a credit crunch. As far as we can analyse it -- and we do, of course -- we see no signs of a credit crunch prevailing. This is evidenced by the fact that -- and this is euro area-wide, admittedly -- growth in loans to the private sector is exceeding 5% at an annual rate, which is in line with the historical average for this factor. And we do hear the noises, we do not know precisely what the credit to the private sector is being used for or where it goes, but we see no signs for the euro area as a whole of a credit crunch in the sense you mentioned.
Question: What will be the consequences of EU enlargement for the euro? I mean, we are going to have a new situation: in 2004 there will be ten new member countries plus the three old member states which will not use the euro. They will be new members but will not belong to the euro zone. Will this new situation put the euro in danger?
Duisenberg: We do not believe this by any means. All these accession countries are in a process of transition and approaching the economic performance of the average of the euro area. They are not yet there, but you have to distinguish between membership of the European Union and membership of the European Monetary Union, the adoption of the euro. And that is still a long time off. And so we see no danger. As one of my colleagues, actually my successor in the Netherlands, said to me yesterday evening, you have to realise that the combined GDP of the ten accession countries we are talking about is smaller than that of the Netherlands alone.
Question: Mr. Duisenberg, going back to the issue of confidence, you say that the main problem for the economy is the lack of confidence, but monetary policy can not do much. And on Tuesday you said that if monetary policy tried and it failed, then it would be a major disaster for the ECB. But to justify some of your past rate cuts, you have said that boosting confidence was one of the goals. For example, on 8 November, you said that" with our move today we want to restore confidence '', and you have said similar things on other occasions.
Duisenberg: I also said, if you wish to keep on quoting me, that a steady hand in monetary policy provides a stable anchor for consumers and investors. They know what we are doing, they trust what we are doing and that in itself already helps confidence to be restored.
Question: My actual question is related to that, but the actual question is: Has the ECB learned something about the effectiveness of rate cuts with regard to confidence? Is there something new to suggest that rate cuts are not actually that effective in boosting confidence? Have previous rate cuts by the ECB not been as effective as hoped in boosting confidence?
Duisenberg: I think all previous rate cuts have proven to be appropriate in the given circumstances. And so our decision today not to cut rates is equally appropriate and is based on experience, and we learn from experience.
Question: Mr. Duisenberg, you mention that you are expecting countries with fiscal imbalances to make firm commitments to avoid excessive deficits. Do you think that what the French finance minister said yesterday in a statement, that France will go back to an austerity policy in 2004, is that kind of commitment, or do you expect France to do that earlier?
Duisenberg: I will not comment on individual countries here. The task of doing what you ask rests with the Commission, and in the past and, you can be sure, in the future, we will be squarely behind the Commission in its judgement. And that includes the statements made by the ministers -- I should say by all but one minister -- and the ECB that the adjustment has to start as soon as possible, that is, in 2003, to be precise.
Question: Two questions if I may. One monetary policy question: Mr. Issing says, when he looks back to his time at the Bundesbank, that the liquidity trap was resolved by reducing interest rates. If we look at the inverted interest rate curve, then we have to ask, does this lead to considering a change in interest rate stance? The second question is on Ecofin and financial supervision: is it true, as was said in Brussels, that there was an agreement that Lamfalussy standards would be established for" Allfinanzaufsicht '', which would mean that the central banks would lose some of their say in the supervisory functions?
Duisenberg: The answer to the first question is very brief. That is no. To the second question, the discussions about the future structure of supervision and regulation of banking and insurance and pension funds are still in full swing and we are fully involved in those discussions. Our position is that not only the ECB but also national central banks should be involved in all layers of the structure to the maximum extent possible or feasible. But the discussion is n't over yet.
Question: I guess both my questions are rather speculative, but they certainly are fair speculations. The first question is, you know every time we talk about interest rate policy, we always hear from the IMF or the OECD, which have very prestigious economists who apparently know what they are doing, that your monetary policy is far too tight and that they always demand an interest rate cut. You on the other hand, of course, talk about the risks to price stability and I imagine that the inflation rate is still above your target of 2%, as you said in your comments, so as a result, you would like to leave things unchanged. But why is it, do you think, that everyone outside of the European Central Bank is telling you to lower interest rates to promote growth? The second question is, you also said that a number of EU governments missed the chance to consolidate when times were good. I guess you were referring to both 1999 and 2000 and also in particular to Germany and France. But according to Keynesian economics, during a period of a declining tax base and weak growth, you would want to have a more expansionist fiscal policy. So would n't that be something that would be more of a suggestion for these countries, I mean, now that they really can not afford to cut back and save all that much, even if the Stability Pact requires them to do so.
Duisenberg: Well, let 's tackle the last question first. You have to distinguish between the structural deficit and the structural measures underlying the budget position and the cyclically caused deviations from the desired path. And what we are saying is, it 's much more important for growth and confidence-inspiring if governments follow their pre-announced target of reducing their deficits, structurally, that is, in the direction of a position of a balanced budget or even in surplus. That is confidence-inspiring, especially also in times when the economy or economic developments are weak or weaker than anticipated. Do n't forget that out of the twelve euro area countries, eight have already achieved the goal that they agreed on when they concluded the Stability and Growth Pact in Dublin. Eight have already achieved it. They have full room to let the automatic stabilisers work and they are doing that and they are using that room. But, admittedly, the other four countries have less room to let that happen and that 's why it is so disappointing that they did n't create the room at a stage when they had ample opportunity to do so.
Duisenberg: Now, if outsiders, sometimes also central bankers, say we have to act more quickly and swiftly and be more determined to cut rates in the current situation, then I would like to point out that we base our monetary policy decisions on a thorough analysis of both monetary developments and a wide range of indicators related to the real and the nominal economy. And the end result of that analysis is what, for us, is crucial in determining whether or not to change the monetary policy stance. And I refer to one piece of advice in particular that we have recently been given -- of which you will be well aware -- that is from the Managing Director of the IMF, who had the thesis that monetary policy is, in a time of economic headwind, as we are going through now, the first line of defence. I must confess that I asked him, both publicly and privately, since when is monetary policy the first line of defence? And as I confirmed in Parliament also, I am still awaiting the answer.
Question: I do not know if I am allowed to ask this question, but how strong was the consensus among the Governing Council for the decision that has been taken today?
Duisenberg: Very strong.
Question: A question concerning deflation. In the last testimony to the Parliament you mentioned that there is no risk of deflation. But have you not seen any symptoms which show that Euroland and Germany in particular is on the verge of deflation? As the Bank of Japan said to me before, it is so difficult to judge what deflation is and, as a matter of fact, they failed to judge it and then it was too late to judge and to act. Maybe you could give me your view on it.
Duisenberg: Well, as you know, our policy line is that we, as I always say, hate deflation as much as we hate inflation. That is one thing. We see no signs of deflation emerging. There are two countries with inflation rates close to 1%, i.e. Germany and Belgium. But we also see no signs in these countries that this development might" degenerate '', so to say, in the direction of deflation. The latest indications are that even in Germany the inflation rate is not falling further ; it may even be creeping up somewhat but it remains very, very low indeed.
Question: President Duisenberg, did I understand you correctly when you said that today, after a somewhat considerable period of time, you appealed to the governments and the social partners as you have always done over the years, but that it did not really lead to anything? Did you mean that seriously? Obviously you always meant it seriously, but whether you meant it very passionately is a different matter. That is my first question. Second question: was the reason why you said today that you would keep interest rates stable also because you always have to bear in mind what needs to be done if there is a downturn in the economic cycle?
Duisenberg: Well, I am rather happy that you ask about my" Leidenschaft '' -LSB- passion -RSB-. I think you are right, I have put more emphasis on it today than I have done on previous occasions. But that is also a reaction to the events of the past couple of weeks, in particular what happened this week in Brussels. So we strongly support the European Commission in its actions as guardian of the Stability and Growth Pact. If that sounds like" Leidenschaft '', then at least it shows that even central bankers can have emotions. And the second question was, at a time when the cycle is not as benign as we would want it to be, what is the task of monetary policy? That depends on our strategy and on our mandate, on what monetary policy can do. But then I am also saying, do not ask for monetary policy to perform tricks it can not do. And, at the current juncture, what you can and should most expect from a central bank is that it does its utmost to inspire or re-inspire confidence amongst consumers and investors. We should at least keep our promise -- the promise we made in our mandate -- to deliver stable prices, and that is what we are doing.
Question: Actually I would like to ask the same question that Mr. Sims asked. Mr. Duisenberg, is what you have said today still the neutral stance of the ECB or were you indicating an easing bias?
Duisenberg: I would be inclined to say that I have answered that question already -- not when Mr. Sims asked it, but when you asked it.
Question: Would you be so kind as to repeat it, using these words? Would that be possible?
Duisenberg: I can repeat the words I used in my introductory statement. There it said:" Our conclusion is that risks to price stability are at present balanced. Based on our overall assessment we have kept the key ECB interest rates unchanged. '' Now, if you take the explanatory bible which has recently been published by the Börsen-Zeitung and put the two statements together, then you can draw your own conclusions.