We have reviewed monetary, financial and economic developments and updated our assessment in the light of the information available. In view of the high uncertainty on future growth, and its implication for medium-term inflationary developments, the Governing Council has discussed extensively the arguments for and against a cut in the key ECB interest rates. The view has prevailed to keep interest rates unchanged. However, the Governing Council will monitor closely the downside risks to economic growth in the euro area.
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 July to September 2002, unchanged from the previous three-month average. The continuing strong expansion of M3 should be interpreted with caution, since it has been boosted considerably by high uncertainty in financial markets over recent months. At the same time, the low level of short-term interest rates continues to stimulate demand for the most liquid assets, which are included in the narrow aggregate M1. Loans to the private sector have stabilised at growth rates somewhat above 5%, a rate of expansion which, in real terms, is broadly 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 economic environment, we do not see the risk of this translating into inflationary pressure in the near future.
Concerning the second pillar, recent short-term conjunctural indicators and survey data suggest that real GDP in the euro area has continued to grow only moderately in the third quarter of this year. This is in contrast to earlier expectations that a more pronounced upswing would occur in the course of this year. Obviously, the hesitant pace of economic expansion and current, lacklustre confidence reflect the significant degree of uncertainty that has been building up over recent months. This uncertainty is associated with geopolitical tensions, the evolution of oil prices and developments in stock markets.
However, for the time being, the main scenario for the euro area remains that economic growth is expected to return to rates close to potential in the course of 2003. In fact, this expectation is consistent with all forecasts published by international organisations. Private forecasters, on the whole, also seem to share the same view. Moreover, financial markets have shown signs of stabilisation in recent weeks following a period of considerable turbulence. The expectation of an improvement in economic activity in the euro area is contingent on a recovery of growth in private consumption, supported by a reduction in actual and perceived inflation rates. This expectation is also based on a projected gradual recovery of the world economy and export growth which, together with the low level of interest rates, should help to strengthen investment.
Nevertheless, the uncertainty surrounding this scenario remains high. It is therefore very difficult, at this juncture, to predict the timing and strength of the economic upswing, both in the euro area and globally.
Turning to recent price developments, in September annual HICP inflation was 2.1%. For October, Eurostat 's flash estimate indicates an annual HICP inflation rate of 2.2%. This increase is again likely to reflect developments in energy prices, although no detailed information is available at present.
Looking at price developments for the remainder of 2002 and the early part of next year, despite the recent decline in oil prices, some upward impact may occur reflecting base effects and country-specific developments -- such as increases in indirect taxes or specific developments in services prices. Although difficult to anticipate, particularly due to the volatility of oil prices, a further increase in the annual rates of inflation around the turn of the year and a delay in the return to inflation rates below 2% can not be ruled out. However, this further increase should only be temporary.
Beyond the very short term, we consider that both the euro exchange rate, which has strengthened since early this year, and the overall economic environment are still contributing towards reducing inflationary pressure. Moreover, there should also be a further unwinding of the indirect effects of previous increases in oil prices and other factors that have added to the stickiness of the annual rate of HICP inflation excluding unprocessed food and energy prices. However, for inflation rates to fall below 2% in the course of 2003 and to remain in line with price stability thereafter, as indicated by recent forecasts, it is crucial that oil prices do not increase sharply again and that the upward trend in labour cost indicators observed in recent years does not continue. With regard to the latter, there seems to be notable inertia, despite the subdued economic expansion ; therefore, vigilance is warranted.
Regarding fiscal policies in the euro area, may I expressly refer you to the Governing Council 's statement of Thursday, 24 October on the Stability and Growth Pact. There is a strong consensus within the Governing Council that the principle of budgetary discipline enshrined in the Treaty and the Stability and Growth Pact are indispensable for Economic and Monetary Union and that the Stability and Growth Pact has been successful in promoting sound public finances and fiscal convergence, as well as in supporting the return to price stability. Moreover, the Pact is in the interest of the Member States.
May I also again urge governments to implement decisively the structural reform agenda, both within the area of fiscal expenditures and revenues and in labour and product markets. Such action is needed to enhance potential output growth over the medium term. At the same time, the prompt implementation of structural reforms would contribute towards strengthening confidence in the euro area and thereby support economic growth in the short term.
Question: I have two questions. First, could you perhaps describe the extensive discussions that you had about cutting the interest rates, and perhaps, in particular, describe what the arguments in favour of cutting the rates were and tell us how evenly balanced they were? Second, given that you are here to serve the people of Europe, could you tell me how you would explain to somebody who has lost his/her job this month -- perhaps one of the 22,000 people in Germany who did, or somebody who risks losing their job because of the economic downturn -- why you have chosen to wait and delay cutting interest rates?
Duisenberg: Let me answer the last question first. If we had done something with interest rates, either earlier or today, the same people would have lost their jobs as well, because monetary policy can not give such an incentive to either employment, in this case, or economic growth, at least not in the short term. And so, I believe your question should be raised in other circles. As far as the first question is concerned, I think I have just described the discussions, and I point to the words I have chosen. We discussed extensively the arguments for and against a cut -- and I say a cut, not a change, in the key ECB interest rates -- but, in the end, the view has prevailed that it would be wise to keep interest rates unchanged, as we have done.
Question: Were you surprised by the Federal Reserve 's decision to cut its interest rates by 50 basis points and does the Fed 's mention of greater uncertainties stemming from high geopolitical risks change to that effect the ECB 's assessment of downside growth risks from external factors? And to follow up more specifically on the last question, was a vote taken on today 's decision, was it a consensus decision and how would you characterise a consensus?
Duisenberg: The fact that the Fed changed rates yesterday was not much of a surprise, though I was somewhat surprised by the magnitude. But the uncertainty quoted by the Fed in its Communiqué is the same as the uncertainty we feel. It has very much to do, as I said, with the geopolitical situation and the uncertainty surrounding future developments of oil prices. So, the climate is one of high uncertainty and there, I believe, the assessment made by the FOMC is very similar to the assessment made by the Governing Council. As regards voting, you know I never say anything. I believe it is enough what I have said, that, after an extensive discussion, the view prevailed that we would be well advised to leave interest rates unchanged today. That decision is of course carried by the entire Governing Council.
Question: Mr. Duisenberg, I have never heard you say before in this forum that the ECB has discussed the arguments for and against cutting or raising rates. Are you going to start doing this more regularly in the future in your opening statements?
Duisenberg: I do not know yet what we will say in the future. That depends on the circumstances in the future, but it is true that you have never heard me say that before. You have heard it for the first time today. What I will do in the future is up to the future.
Question: So, this may not be a permanent change in the way in which the ECB communicates?
Duisenberg: Not a permanent change. But, you are right, it is a change.
Question: You mentioned the risk of a downside growth rate in the discussions. Is this the first time that the Council has discussed cutting rates because of low growth and not only because of an improvement in the inflation rates?
Duisenberg: This is certainly not the first time we have taken into account the prospects for growth: we do so every time in every discussion because, after all, it is the secondary objective of the ECB, the first being price stability. Subject to price stability not being threatened, the ECB should help promote achieving the economic goals of the European Union at large ; and those goals are economic growth, employment, as referred to in Article 2 of the Treaty.
Question: I have two questions. First, how strong was the weight of the political factors in the decision not to cut rates today -LRB- by political factors I mean the discussion about the Stability Pact and the claims for a rate cut from the political world -RRB-? Second, you said that there is a strong consensus among the Governing Council to hold to the principles of the Stability Pact. Does that mean that there is not unanimity?
Duisenberg: It means what it said. There is simply a strong consensus. We do not take a vote, certainly not on that. I can not say anything more than that. And I can not answer the question about quantifying the strength of the political factors in play. We have a clear, forward-looking and medium-term oriented strategy based on two pillars. Those are the factors we take into account when coming to decisions, not pressure from politics, markets or even you.
Question: Mr. Duisenberg, if the ECB were to continue to stick strictly to its two pillar mandate and monetary rules such as the" Taylor rule '', is it not the case that the ECB should, in fact, perhaps raise rates very soon, given the high rates of M3, ample liquidity, high core inflation prices, high service prices and the threat of higher oil prices? Does this present a dilemma given the weakness of the real economy at the moment and the lack of confidence, especially here in Germany?
Duisenberg: That is a very hypothetical question. If we were to stick to rules like the" Taylor rule '', what would you do then? Well, we do not stick to rules like the" Taylor rule '', so I prefer not to speculate. We have a two-pillar strategy, and in the light of that two-pillar strategy we have come to the decision that we have taken today, as I have amply explained.
Question: President Duisenberg, a quick question on M3. You pointed out that there is high M3 growth. The September figure does not give us a good impression for the three-month rate we expect to see in a few weeks. Basically, since you have no real explanation for the high growth other than the current financial market environment, do you think that the 4.5% level, which I think you are going to discuss next month, is still an appropriate reference value? Second, can you give us any information on how you stand in your discussions on reforming the Governing Council once the new members have joined the euro area? Can you rule out that there could be a scenario in which, if there are many more countries voting on interest rates, there could be a rate decision that would not be taken in consultation with one of the biggest countries, say the three biggest?
Duisenberg: The rate of growth of M3 hovering consistently around or above 7%, considerably higher than the 4.5% reference value, can be explained partly, but not wholly. Partly, because there is a notable preference for holding liquid assets and for portfolio shifts occurring in the light of the uncertainties in the financial markets. But then we have to explain the rest, so to speak, of the differential with the reference value, which, in itself, we do not question. We have to explain the rest of the differential against the background of the economic circumstances. And, as I have said, with this very slow, moderate, sticky pace of recovery and the below-potential performance of the economy, we do not see, from the liquidity available, the M3 figures, a threat to inflation.
Duisenberg: As to reforming the Governing Council, we continue to discuss it. We hope to be able to come up with a proposal shortly, as the Heads of State have asked us to do as soon as possible after the ratification of the Nice Treaty. We are working hard on that. On the particular aspect of taking monetary policy decisions by a -- let me call it -- simple majority, which, in the future, could give rise to a situation where the monetary policy decision is taken by a group in the Governing Council, which, by the way, includes the Executive Board, which could be regarded as not representing the major part or the most important part of the European Union or the euro area. We do take this into account in our preparations for formulating a proposal. So, on the one hand, we are very keen on and agree to maintaining the so-called" one man, one vote '' principle. On the other hand, we are looking for a mechanism -- and we think we have already found it -- to also take into account the" degree of representativeness '' in the vote of the Governing Council. So the problem you signal is indeed there, but the solution, I think, we will have at hand.
Question: Mr. Duisenberg, two questions on the two pillars. You have been explaining M3 expansion for almost one month now by the uncertainties in the financial markets. Second, if you are discussing a reduction in interest rates then I suppose that the second pillar becomes more important than the first. Does this mean -- if I understand you correctly -- that the projections, maybe next year, will show a -RRB- that the trend growth rate can not be achieved ; and b -RRB- that you still hope that the inflation rate will drop below 2%? Would that be the basis for your discussion in the next round?
Duisenberg: Well, may be for the next round. But, of course, as yet we do not know the projections for next year. We will have these figures in December. People are still working hard to get them ready.
Question: You just said in answer to Ms Dieckhöfer 's question that you think you have found the mechanism for how you will vote in the future. Will you tell us what that mechanism is and if not, will you tell us when you will tell us what this mechanism is?
Duisenberg: I will tell you what that mechanism is as soon as we have finalised and formulated the proposal. But we are working on formulating a proposal, taking into account a variety of principles. I already mentioned" one man, one vote '', I mentioned the degree of representativeness, I could also mention the fact that the proposal has to be transparent, to be easily understood. It has to be robust. It can not be that whenever a new country joins the European Union you have to change the rules of the game again. Given all these sometimes complex principles which we take as the starting-point, it is very difficult to fulfil the requirements of another principle, that is transparency. And we also want continuity, we now have a track record of decision-making of almost five years, and it has, in our feeling been a success, that process of decision-making and we want continuity of that process. Formulating a proposal is, I can assure you, a very complicated task and it is even more complicated to present the proposal in a way which will be perceived as simple and straight-forward and I can not, at this stage, take one element out of it and present it independently. You have to, I am afraid, wait for and look at the proposal in the whole context in which it is made.
Question: My question is a bit naughty, I am sorry, but today there was a strange letter in the Financial Times addressing you, Mr. Duisenberg, saying" Duisenberg, cut the rates '' and there was also the word" orthodoxy '' in the second kind of headline. Do you feel that you are being orthodox sticking to an inflation target, and not cutting the rates with a rate of inflation which is not considered a threat by most of the economists? Most of the economists feel that the real threat is coming from a very, as you say yourself, very weak economy.
Duisenberg: First of all, I have not seen that letter, so I can not speculate on what I would answer had I seen it. But do I feel orthodox? The answer is no. I feel confident and I hope I will be perceived as being credible. If you want to call that orthodoxy, then I do not mind.
Question: Mr. Duisenberg, I think it is fair to say that you, the ECB, disappointed a lot of people today by not cutting interest rates. I just wanted to ask you about what seems to be an inconsistency in your statement. On the one hand, you talked about a slow, moderate, sticky pace of recovery and, on the other hand, in your statement you said that you expected euro zone growth to return to rates close to potential in the course of 2003. That seems to imply a very rapid recovery in the euro zone if you are going to get back to potential growth rates next year.
Duisenberg: Not on average.
Question: Not on average? Well can you just specify or give some indication other than forecasts that you mention here. Can you say anywhere where you see the recovery really starting to happen? We have had some consolidation in stock markets, but are there specific areas where you say yes, the recovery is already under way and there is an upswing that will bring us close to the potential growth rate?
Duisenberg: We have forecasts, the old ones, the new ones, as I just said, are still under preparation. We have surveys, but they sometimes give, admittedly, conflicting signals. On industrial production, the survey is rather positive, on consumer confidence the survey is much more, as I would call it, lacklustre, and there is not much movement there. Then we have the expectation that inflation will come down to below 2%, we think it will happen. But of course we are taking into account the fact -- and are disappointed by the fact -- that it will come later than we originally anticipated. But if and when inflation comes down -- and do not forget I also added the word" perceived inflation '', which, at the moment, is considerably higher than actual inflation and we do regard that as a temporary phenomenon -- if and when inflation comes down, it will give a boost to real disposable incomes and thereby support, in particular, private consumption.
Question: How would you respond to those who are saying, in view of the Stability Pact, that the ECB is simply using its interest rate instrument as a stick to beat politicians with for not pushing through the reforms that you have asked them to do?
Duisenberg: Well I would say the same, I think, as the politicians concerned, that is, in the words of Queen Victoria:" I am not amused. ''
Question: My question is actually related. I was wondering whether the public debate on the Stability and Growth Pact had any impact on the decision-making process this morning?
Duisenberg: Well, you would have to be a psychiatrist, because what you are actually asking is: to what extent did it have an impact on the minds of the individual members of the Governing Council. Certainly, it is a factor we perceive. But then let me say that the utterances and the discussions about the Stability and Growth Pact are very much a thing, I believe, of the past --, of the very recent past. I was very pleased when I attended the Eurogroup finance ministers ' meeting to observe the determination of the ministers to uphold the Stability and Growth Pact and to stop talking about it.
Question: You said that today you discussed the arguments for and against a rate cut. I would like to know why you mentioned this today? And does that mean that next time you are going to discuss the magnitude of a cut?
Duisenberg: We revealed today that we discussed it to indicate that we indeed had an in-depth discussion and we weighed all the pros and cons of today 's decision. It says nothing about the size nor the moment of a rate cut, I say again, sometime in the future.