We continued our in-depth assessment of monetary, financial and economic developments and the discussions we had in early November on the appropriate stance of monetary policy, taking account of the new information. Overall, since our last meeting, the arguments in favour of a cut in the key ECB interest rates have strengthened. The evidence that inflationary pressures are easing has increased, owing in particular to the sluggish economic expansion. Furthermore, downside risks to economic growth have not vanished.
As a result, the Governing Council has decided to lower the key ECB interest rates by 50 basis points.
At today 's meeting, we also reviewed the reference value for monetary growth, which has an important role under the first pillar of the ECB 's monetary policy strategy. The Governing Council has decided to leave the current value unchanged at an annual growth rate of 4ï ¿ 1/2% for the broad aggregate M3. This decision was taken on the grounds that the evidence continues to support the assumptions which have formed the basis of the derivation of the reference value since 1999, namely those relating to trend potential output growth of 2-2ï ¿ 1/2% per annum and to a trend decline in M3 income velocity of ï ¿ 1/2 -1% per annum in the euro area. We will issue a separate press release this afternoon explaining in greater detail the background to this decision.
When comparing current developments with the reference value, it is important to remember that the reference value is a medium-term concept. Short-term movements of M3 do not necessarily have implications for future price developments. Moreover, deviations of M3 from the reference value must be analysed in conjunction with other real and financial indicators in order to understand their implications for price stability.
Turning to the most recent data, in the period from August to October 2002 the three-month average of the annual growth rate of M3 was 7.1%, unchanged from the previous three-month average. M3 growth has been influenced considerably by portfolio re-allocations in an environment of general uncertainty and particularly by stress in financial markets. At the same time, it also reflects the low level of interest rates in the euro area which makes the holding of liquid assets relatively attractive.
There is ample liquidity in the euro area. However, in the light of the sluggish economic growth, it is unlikely that this excess liquidity will translate into inflationary pressures in the near future. The recent moderation of the growth in loans to the private sector, particularly to non-financial corporations, supports this assessment.
Turning to the second pillar, recent information has strengthened the evidence of a decline in inflationary pressure. The sluggishness of real GDP growth in the euro area was confirmed yesterday by Eurostat 's first estimate, which indicates that quarter-on-quarter growth was 0.3% in the third quarter. This was towards the lower end of expectations. Recent euro area-wide survey data suggest that overall sentiment in the economy remains lacklustre, with business confidence improving somewhat but consumer confidence falling further. It is expected, therefore, that economic growth will also remain subdued in the coming months.
This disappointing picture mainly reflects the persistently high degree of uncertainty. Geopolitical tensions with potential consequences for oil prices, developments in financial markets, the sluggish growth of the world economy and the persistence of global imbalances are all factors that weigh adversely on confidence. These factors also have negative effects on euro area consumption, investment and the labour markets. As it is hard to predict when this uncertainty will start to abate, it must be taken into account in the more medium-term outlook for growth.
The subdued economic activity should limit potential upward risks to price stability and help to ease inflationary pressure. Let me elaborate on this.
First, when looking back, we recognise that inflation has been rather persistent despite the economic slowdown. This persistence has partly reflected a series of transitory developments, such as the indirect effect of previous oil and food price increases and a limited changeover effect. However, structural factors in the labour and product markets have also played a role, as mirrored, in particular, in the upward trend in wage developments observed until recently. This trend has only just shown signs of stabilisation. Services price inflation has also remained stubbornly high. Indeed, structural rigidities have impeded an appropriate adjustment of wages and prices. As a result, annual inflation rates have remained above 2% during most of 2002, including November, as has been confirmed by Eurostat 's flash estimate, which indicates an annual HICP inflation rate of 2.2%.
Second, when looking forward from now until the early part of 2003, although recent developments in oil prices have lowered short-term price pressures, there are still some factors that could keep annual inflation rates above 2% for several months to come. Yet this short-term outlook is related both to base effects and to indirect taxes and administered prices, i.e. to temporary developments.
Third, when looking beyond the short term, we consider that both the overall economic environment and the euro exchange rate, which has strengthened since early this year, will contribute further towards reducing inflationary pressure. Moreover, we expect the indirect effects of previous increases in oil prices and other factors to further unwind. Although wage-related risks remain in place, they are judged less likely to materialise as long as the economic environment does not change substantially.
The assessment which guided today 's monetary policy decision was that, overall, the prospect has strengthened for inflation to fall below 2% in the course of 2003 and to remain in line with price stability thereafter. Our decision should also help to improve the outlook for the euro area economy by providing a counterweight to some of the existing downside risks to economic growth, thereby supporting confidence. The most likely scenario is that economic growth will gradually recover in the course of 2003 towards rates more in line with potential. Falling inflation should support real disposable income and, together with a reduction in the gap between perceived and actual inflation rates, should underpin private consumption. Moreover, we expect an improvement in world demand. This, and the low level of interest rates, should benefit investment.
Let me point out that, with today 's decision, the key ECB interest rates have reached a very low level by historical standards. The Governing Council will continue to monitor closely all factors that may affect the prospects for inflation in the euro area.
The outlook for the euro area economy will also very much depend on visible progress in other policy areas. Regarding fiscal policies in the euro area, I would like to reiterate that budgetary discipline strengthens the conditions for sustainable growth of GDP and employment. Therefore, sound fiscal positions, as enshrined in the Treaty and further developed in the Stability and Growth Pact, are in the interest of all the Member States. Given the disappointing fiscal developments in some countries and the challenges which have emerged to the EU fiscal framework, we welcome the moves to correct or prevent excessive deficits, i.e. the implementation of excessive deficit procedures in the case of Germany and Portugal and the early warning issued to France. Countries with remaining imbalances are urged to prepare sufficiently ambitious consolidation plans for their forthcoming stability programmes. Emphasis should be placed on a growth-oriented consolidation policy that strengthens the productive forces of the economy. The Governing Council considers the recent Commission communication to be a good starting point for rebuilding confidence in the budgetary framework. As already reflected in the Statement on the Stability and Growth Pact of 24 October 2002, we fully support the Commission 's main objective, namely to improve the implementation of the Pact within the existing framework of rules.
Finally, I should like to stress again that there is still an urgent need to implement decisively the structural reform agenda. We note with some concern the slow progress in many euro area countries and call on governments to take determined action. The medium-term impact of these reforms on the economic growth potential of the euro area is likely to be substantial. A prompt implementation of structural reforms in the labour, product and financial markets is particularly important at this juncture since it would contribute to strengthening confidence in the euro area, thereby also supporting economic activity in the short term.
Question: Mr. Duisenberg, particularly given the size of today 's rate cut, would we be right in thinking -- as far as you are concerned -- that this rate cut clears the air for some time to come? Or, I mean, have you implicitly left some margin for manoeuvre in the case of a major shock like a war in Iraq? And also, was there a serious debate...
Duisenberg:... I think the first question I would answer in the affirmative.
Question:... and also, was there a serious debate about the actual size of the rate cut?
Duisenberg: We always have serious debates, but...
Question:... so some people were putting a quarter point option on the table?
Duisenberg: We weighed the pros and cons of a quarter versus half a point. And, in the end, there was -- again -- as usual, consensus that half a point was called for.
Question: Mr. Duisenberg, first of all, Happy Christmas. Secondly, I noticed from your statement that you omit the reference to the interest rate being appropriate for the time being. I would like to bring you back to the question which you have just answered in the affirmative. You do seem to leave some ambiguity as to your stance at the moment. I would like you to clear that up if you could. And secondly, could you tell us what exactly has changed since 7 November?
Duisenberg: Since 7 November there has not been any abatement of the uncertainty I would say, rather on the contrary, more uncertainty than ever. There has been increasing evidence of this. Also we now have available not only our forecast, which by the way we will publish next week, but also others. And these have also increased our concerns about the sluggishness of the economic growth performance. There have been, as I indicated in my statement, new survey indicators. There has been confirmation of our view, and maybe even for a few more months, that inflation will be -- albeit temporarily -- persistently over the 2% limit, but that it will come down. So, all those things have changed and also, if I may say honestly, if we had moved one month ago you would have been very surprised. Now I dare say you are less surprised than you would have been one month ago.
Question:... back to the first question which was the absence of... the interest rates being appropriate...
Duisenberg: Well, we hate using fixed formulas for certain situations, and despite the remarkable interpretation efforts by your colleague, Mr. Burckhardt, of every word and sentence that we say, well, as I said, we hate using fixed formulas, but we could have used the word" appropriate ''. It just slipped my mind, I must say.
Question: So rates are now appropriate?
Duisenberg: When the Governing Council decides that the rates will be such and such, they are -- almost by definition -- appropriate.
Question: Mr. Duisenberg, we recently had a discussion about the sense of the two-pillar strategy of the ECB. Would you please comment on this, and does the Council see any reasons for changing anything in the future in its strategy?
Duisenberg: We are aware of the comments made here and there and now and then about our two-pillar strategy. We have decided, in the course of next year, to come up with a serious evaluation, not necessarily a change, because we are still happy with our strategy. But we will make a serious assessment and evaluation of the monetary strategy in the course of, I think, the first half of next year.
Question: Two questions: the European Commission said yesterday that the economy may shrink in the first quarter. Do you share that view, is that possible? And the second question: you said two days ago in Brussels, at the European Parliament, that central banks in Asia may have shifted a lot of their foreign currency reserves to euro in the second half of this year. Can you elaborate on that? Do you have any numbers on how many euro they bought? Is this still going on? And finally, what effect does it have on the euro?
Duisenberg: In our projections we do not see that shrink in the first quarter of next year, that is all I can say about it. And that is even more than I can say about the next question. There is a movement going on, which started in the second half of this year, of large foreign central banks increasingly holding their reserves in euro. But I can give you no figures at the moment, and the figures we have normally come from the IMF and, as you know, with great delay. So for us it is mainly individual and anecdotal evidence, which is solid, but which I can not disclose.
Question: You are not informed that certain central banks buy euro?
Duisenberg: Sometimes we are. But sometimes not, and sometimes foreign central banks even make it public themselves.
Question: This is still going on?
Question: Mr. Duisenberg, I would have two questions for you, if I may. First, the M3 expansion of 7% you said is not inflationary, but real. When is this expansion inflationary, because we have had this excess liquidity for almost a year now? Second question: did the ECB have a consensus view on the reform of the ECB 's Governing Council once we have enlargement?
Duisenberg: The growth rate of M3 at its current magnitude, around 7% at an annual rate per three months or per month, would be a cause for concern if, at the same time, the economy was performing at or above its potential output growth rate. But because that is not the case, we do not have this concern. Then, on the second question, I am very sorry that I can not inform you yet about the details, but it was a great achievement, I can assure you: today we have reached an agreement about the reform of the so-called" voting modalities '' in the Governing Council in the event of a significant enlargement of the Governing Council. We need, however, I think a couple of weeks to translate this agreement, which was, as it had to be -- and this is the only time that I will disclose voting behaviour -- unanimous. We are unanimous in having reached a proposal for a recommendation, which we will make to the European Union Council for changing the voting modalities of the Governing Council. Basically, if you want, I can mention a few elements of it. We wanted the reform in case the Governing Council becomes too large and unwieldy to take decisions effectively and efficiently. We wanted to start from a few principles, that is, we wanted at all costs to preserve the principle of one man, one vote which we have at the moment in the Governing Council. We wanted the reform to be transparent, we wanted it to be robust. That is, we did not want to have to change the rules every time a new country enters the European Union. And then there was one other principle to which we also paid due respect, that is: if you have a Governing Council which comprises countries of very different size and you limit the voting frequency of individual members over time, then you would run the risk that decisions could be taken by a number of Governing Council members that would be, may I call it, unrepresentative for the euro area as a whole if you measure it by GDP or by population or however. And that was the most complex and difficult problem to solve. But we have solved it and it has led us to a solution where, basically, we will divide the total number of Governing Council members into three groups: one comprising the largest countries, a second group comprising one half of the total number of countries and the third group comprising the remainder. And the voting rights assigned to each group would differ. And then the last principle which we happily maintained is that there is only one group that has a permanent voting right, and that is the Executive Board. So no country, or no other person or member of the Governing Council will have a permanent voting right, but no country will be out of the vote forever. So that is covered at both ends. I am sorry to be so long, I wish I could tell you more, but to translate all this into a perfect legal text which stands, we need some time. But I expect that in, say, two or three weeks time, we will be able to make public and explain to you in full detail the fundamental agreement -- which basically for us was a rather historical agreement -- which we have reached.
Question: President Duisenberg, are you discouraged that core inflation has declined only marginally in the past several months and, if it does continue to persist around the current levels, does it limit the scope of monetary policy to respond to further economic weakness?
Duisenberg: Well, as you know, monetary policy is in the first place inspired by future inflation developments and not so much by the economic weakness. It can help, but only marginally. Discouraged? No. Somewhat disappointed? Yes. But it is also explicable: part of the core inflation that remains stubbornly high is, in particular, the persistent rise in prices of services and that, in turn, is in part dependent on the fact that in Europe we have an internal market. But the market in services is still very much fragmented. And in trade in services, in contrast to trade in goods, competition across borders is governed less by official rules than by culture and unwritten rules, and is thus more limited. Therefore, where competition is less, prices may rise more. So, also there, we call for structural reforms.
Question: Mr. Duisenberg, I have two questions. One concerns the voting procedures. Does it mean you will start these new procedures when there are 18 national governors in the Council? And my second question is similar to the one of Mr. Hutter. I do n't understand why you only say" excess liquidity is only dangerous in the near future ''. Normally, you have the medium-term future when you decide...
Duisenberg: Sorry, I did n't say that it was dangerous in the near future. You must have misunderstood me.
Question:... it is not dangerous in the near future.
Question: If you say in the medium-term future there is no danger...
Duisenberg: I said ample or excess liquidity present in the euro area does, in our view, not pose a threat to price stability because there is so much slack in the economy and I did n't put a time-limit on that. On your first question, I should have maybe added in the first place that our agreement also includes that the voting members should be the members of the Executive Board, of which there are 6, plus 15. That makes it 21. When does it start? When you add another three countries. So you do not start already with new procedures when only one country is being added, but at least three, and that brings you to 21.
Question: Just one additional question. You answered with the word" affirmative '' to the room for manoeuvre which is still there, which you still left there, or if not, I did n't understand. Can you please be more explicit on that, first? And second, did you take a vote this time and how big was the majority? Like last time?
Duisenberg: On voting I never answer questions, with the exception of on the voting modalities where we had to be unanimous, and I told you we were and are unanimous. On the interest rates, I said we had a good discussion, weighing not even the" if '' of a cut but the" how much ''? 25 or 50 basis points, to be honest. And at the end of that discussion I concluded that the Governing Council had decided that interest rates would be cut by 50 basis points. And the Governing Council concurred when I concluded that. So that was enough. Now, on the room for manoeuvre I did n't answer the question. Maybe Market News International could repeat its question. Then I can repeat my answer.
Question: Did you leave some margin for manoeuvre in the case of a major shock like a war in Iraq?
Duisenberg: Yes, but I would n't speculate on any kind of shocks. We now have the key interest at 2.75% and that answers your question by itself, I would say. But it was not one of our considerations.
Question: The legal situation of Mr. Trichet is more uncertain than ever. Would it be legally possible that Mr. Noyer, the ex-Vice-President, would replace you at the head of the ECB? I know you said something on that yesterday, but could you explain this again?
Duisenberg: My answer is, well, in the first place when something is before the courts you do not comment. I do n't comment and particularly not when it concerns such an esteemed colleague of mine. So, on the hypothetical question whether other people would be eligible for the job, I think it is wise not to go into that either.