Mr. Duisenberg reports on the outcome of the second meeting of the Governing Council of the European Central Bank  (Central Bank Articles and Speeches, 8 Jul 98)
Central bank: ecb | Type: speech | Date: 1998-07-08

Mr. Duisenberg reports on the outcome of the second meeting of the Governing Council of the European Central Bank Introductory statement by the President of the Europe Central Bank, Dr. W.

Duisenberg, at the press conference held in Frankfurt on 8/7/98.The Governing Council first assessed current economic developments in the e area.

The general picture is one of continued economic expansion combined with broadl inflation.Several forecasts made during spring 1998 have even suggested slightly l rates of inflation for 1998-99 compared with expectations in autumn 1997.

As far a developments are concerned, inflation as measured by the harmonised consumer price (HICP) is estimated to have risen slightly in April, to 1.4%, but has not increased furOutput growth has remained strong in recent quarters, with annual growth close to or even exceeding 3%.

Economic growth has been driven increasingly by dome demand rather than net exports, as might be expected at this stage of the cycle consumption and stockbuilding have been the main factors underlying domestic demand to dThe favourable conjunctural situation has started to feed through into the market, although improvements here have in some countries been too slow to appear. evident, however, that economic growth alone will not reduce the urgency to procee structural adjustments in order to tackle unacceptably high rates of unemployment.As regards monetary and financial developments in the euro area, the an growth rate of the broad money supply (M3H) accelerated in April to around 6% from 5.

March.

The growth rate of M1, the narrow money supply, also picked up, to around 10%. shall monitor these developments very carefully.In principle, the economic performance I have just described provide favourable environment for continued fiscal consolidation.

It is with some concern observe that in a number of member countries the prospects for this to actually develo be, to put it mildly, rather subdued.In this respect, I should like to underline three aspects.

First, any dividend' resulting from the current cyclical upturn should be used to bring deficit levels down, rather than relaxing control over expenditure.

Second, most Member States go a step further, and indeed improve structural balances as they are not yet in compl the obligations under the Stability and Growth Pact.

This implies that the benchmark policy must now be a budget close to balance or in surplus - in surplus especially i with high ratios of debt to GDP.

Third, further structural adjustments in fiscal polic help to improve the policy mix in some countries and in the euro area as a whole from t Stage Three.I would not at the present time want to try to convey too strong an impres the implications of these various economic developments for the appropriate stance of policies in euro area Member States.

Although the responsibility for these policies re national central banks until the end of this year, the Governing Council had an exte thorough discussion on a euro area perspective of monetary policy.

We will continue this issue closely before we enter the regime of a single monetary policy.

For the time encouraging to see the credibility of monetary policy being reflected in the exchangeuro countries.

There is currently no sign of exchange rate tensions among euro area c Forward exchange rates are expected to be virtually identical to central rates, suggest pre-announced rates are considered credible.

I consider this a remarkable achievement.Following its review of economic developments, the Governing Council settle number of organisational issues.- i.

It adopted the Rules of Procedure of the European Central Bank.

Th will be published in the Official Journal of the European Communities- ii.

It approved, in accordance with the Rules of Procedure, the establis of eleven ESCB committees to assist in the work of the European Syst of Central Banks (ESCB).

The committees are as follows (listed alphabetical order): Accounting and Monetary Income Committee, Banking Supervision Committee, Banknote Committee, External Communications Committee, Information Technology Committee, Internal Auditors Committee, Legal Committee, Market Operations Committee, Monetary Policy Committee, Payment and Settlement Systems Committee, and Statistics Committee;- iii.

It formally adopted a budget for the European Central Bank for the se half of 1998 and agreed on the establishment of a Budget Committee assist the Governing Council in ECB budget-related matters;- iv.

It laid down specific rules applicable to staff transferring fr European Monetary Institute to the European Central Bank.

ECB Decisions relating to the Conditions of Employment will be published the Official Journal of the European Communities.The Governing Council also took a number of decisions relating to var aspects of its preparatory work for Stage Three.

## (a) Monetary policy issuesThe Governing Council decided on the introduction of a minimum reserve syst by the ESCB at the start of Stage Three.

Among the three main functions that a minimum system could usefully perform, the Governing Council attaches particularly high import its contributions to the stabilisation of money market interest rates and to the enlar demand for central bank money by creating or enlarging a structural liquidity shorta market.In the light of the potential burden which a minimum reserve system could i on the private sector and the effects it might have on the financial activity of credit the euro area, the Governing Council has decided on features which fulfil the two money management purposes outlined above, while at the same time allowing an adequate remuner of minimum reserves.A number of details of the minimum reserve system that will be applied already specified in previous documents published by the European Monetary Inst Additional features agreed upon yesterday include the liability base, the lump-sum allow the rate of remuneration.

With regard to the latter, the ECB will remunerate minimum holdings at a level corresponding to the rate of its main refinancing operations.

The Council intends to decide on the exact specification of the minimum reserve system in N1998 at the latest.

This decision, in particular as regards the reserve ratio (which defined within a range of 1.5% - 2.5%), will be based on the early data from the new s money and banking statistics.Further details are provided in the separate press release that is being iss this morning.It is intended that the precise features of the minimum reserve system published in the form of an EU Council Regulation.

For this purpose, the Governing C adopted an ECB Recommendation for an EU Council Regulation on the application of minimu reserves by the European Central Bank.

In accordance with the provisions of the Statu ESCB, the EU Council, acting by a qualified majority and after consulting the Eu Parliament and the Commission, is expected to adopt this Regulation.The Governing Council also adopted ECB Recommendations for EU Council Regulations concerning the collection of statistical information by the ECB and concer powers of the ECB to impose sanctions.

All three ECB Recommendations will be publishe the Official Journal of the European Communities for general notice.

## (b) Foreign exchange issuesThe

Governing Council decided on the size and form of the initial trans foreign reserve assets to the European Central Bank from the national central banks par in the euro area.

This transfer is to take place on the first day of 1999.

It has been initial transfer will be to the maximum allowed amount of EUR 50 billion, adjusted dow by deducting the shares in the ECB's capital subscription key of the EU central banks w not participate in the euro area at the outset.

The transfer will thus be equal to EUR 50 billion, i.e. approximately EUR 39.46 billion.The Governing Council furthermore agreed that this initial transfer should gold in an amount equivalent to 15% of the sum I have just mentioned, with the remaini being transferred in foreign currency assets.

I should stress that the decision on the gold to be transferred to the ECB will have no implications for the consolidated gold h the ESCB.The precise modalities of the initial transfer will be finalised before the year.Before the end of the current year the Governing Council will also have to an ECB Guideline pursuant to Article 31.3 of the Statute of the ESCB, which will sub operations in foreign reserve assets remaining with the national central banks - inclu to approval by the ECB.In connection with the setting-up of common market standards, the Govern Council also reached agreement on a number of issues related to the quotation and publi reference exchange rates for the euro.

Specifically, it was agreed to recommend to participants the 'certain' method for quoting the exchange rates for the (i.e. 1 euro = X foreign currency units) and to have daily reference exchange rates f computed and published by the ECB.Further details are provided in the separate press release that is being iss this morning.

## (c) Payment systems issuesThe

Governing Council decided on the conditions for the participation o non-euro area EU central banks and credit institutions in the TARGET (Trans-Euro Automated Real-time Gross settlement Express Transfer) system.

In TARGET the ESCB wil provide central bank liquidity in the course of the day (i.e.

intraday liquidity) necessary to avoid delays in the execution of payment orders.

If intraday liquidi reimbursed at the end of the day it becomes overnight credit granted by the ESCB, wh evident monetary policy reasons, cannot be offered to institutions outside the e Nonetheless, non-euro area EU central banks and institutions in those countries connected to TARGET.The Governing Council considered that giving such institutions outside the area unlimited access to intraday credit would have created risks for the conduct of policy that it was not ready to take.

A facility will therefore be put in place to enabl area EU central banks to provide collateralised intraday credit in euro to their credi subject to a ceiling both at the level of the non-euro area EU central banks and at tha area credit institutions.

There will also be a liquidity deadline, set at 5 p.m., for credit institutions so that they do not incur an overnight overdraft in euro.Further details are provided in the separate press release that is being iss this morning.The Governing Council also agreed that a report on recent developments in field of electronic money - and their monetary policy implications - would be publ September 1998.

## (d) Legal protection of euro banknotesFinally, the Governing Council agreed on a number of legal instruments aime enhancing the protection of euro banknotes.

In particular, an ECB Decision o denominations, specifications, reproduction, exchange and withdrawal of banknotes ha adopted, as well as an ECB Recommendation regarding the adoption of certain measure enhance the legal protection of euro banknotes and coins.

Both documents will be publi general information in the Official Journal of the European Communities.