Mr Duisenberg reports on the outcome
of the latest meeting of the ECB Governing Council
Introductory statement given by Dr Willem F Duisenberg, President of the European Central Bank, to
the Press Conference, held in Frankfurt on 4 November 1999.
* * *
Ladies and gentlemen,
The Vice-President and I are here to report on today's meeting of the Governing Council of the ECB.
The was that the Governing Council has decided to increase the ECB
outcome of today's meeting
interest rates. The forthcoming main refinancing operations of the Eurosystem will be conducted as
fixed rate tenders at an interest rate of 3.0%, starting with the operation to be settled on 10 November
1999. This increase implies an upward adjustment of 50 basis points from the rate of 2.5% applied to
previous such operations. In addition, the interest rate on the marginal lending facility will be
increased from 3.5% to 4.0% and that on the deposit facility from 1.5% to 2.0%, both with effect from
5 November 1999.
Overall, on the basis of prospective developments, the Governing Council considers that today's
decision will counter the upward trend of the balance of risks to price stability. This decision will
therefore contribute to sustaining non-inflationary economic growth in the euro area over the medium
term.
The main argument for raising the interest rates was the fact that since around the beginning of the
summer the balance of risks to future price stability has gradually been moving towards the upside. In
fact, the economic situation in spring 1999 had given rise to concern about downward risks and had
led to a precautionary interest rate reduction by 50 basis points on 8 April 1999. However, the current
economic environment is far more favourable. Moreover, several indicators, including monetary
growth, suggest that there is ample liquidity in the euro area. Inflation rates are expected to increase
gradually in the months ahead, mainly as a result of the increase in energy prices earlier this year
working its way through to consumer prices. The latest data on industrial producer prices confirm this
pattern. Over the medium term, however, it is important to prevent the availability of ample liquidity
from translating into upward pressure on prices. In particular, an increase in interest rates now should
help to counteract further liquidity growth over the medium term and contribute to maintaining
inflation expectations safely below 2%.
With regard to the perception that an increase in interest rates now would endanger the resumption of
economic growth, the Governing Council is of the opposite opinion. A timely rise in interest rates will
avoid the need for a larger increase in interest rates later and, hence, will contribute to stronger growth
over an extended period of time.
Concerning the size of an increase in interest rates, against the background of a fundamentally
changed situation, the precautionary interest rate reduction made in April 1999 is no longer justified.
Furthermore, today's move by 50 basis points appeared to be the best way in which to avoid
uncertainties regarding the future course of monetary policy. In addition, such a move is expected to
contribute to reducing any uncertainty premia potentially prevalent in financial markets and also to
help to contain a possible increase in volatility in money markets towards the end of the year. Under
these circumstances, the alternative of moving by less than 50 basis points now and examining the
need for an additional step later on could potentially introduce unwarranted uncertainty for the period
ahead.
Let me now provide you with more detailed information on monetary, financial and other economic
and thereby further explain the decisions taken today.
developments,
With regard to monetary developments in the euro area, the monetary data up to September 1999
reinforced the view that M3 growth is on a rising trend. The three-month average of the annual growth
rates of M3, covering the period from July to September 1999, was 5.9%, which is almost
11⁄2 percentage points above the reference value of 41⁄2%. This deviation from the reference value has
steadily increased during 1999. The strong growth of the most liquid components of M3 is particularly
noteworthy, suggesting that the very low level of interest rates favoured the strong growth of monetary
aggregates. The pick-up in economic activity is likely to have further stimulated M3 growth. Credit to
the private sector also continued to expand rapidly in September 1999, at a rate in excess of 10%. The
demand for loans remained strong throughout the first three quarters of 1999, supported in particular
by the low level of bank lending rates and the ongoing economic recovery. Overall, these
developments indicate a generous liquidity situation in the euro area.
Euro area financial market developments over the past few months confirm the general change in
economic conditions and perspectives for the euro area by also anticipating an acceleration of
economic growth. This is reflected in the rise in government bond yields and the associated
pronounced steepening of the yield curve since spring 1999. Today's decision should contribute to
firming financial market expectations of stronger growth without increasing inflationary pressures.
economic activity
With regard to itself, current information indeed continues to support the view that
there is an ongoing strengthening in the euro area. The outlook for the world economy remains
positive; this mainly relates to the sustained growth of the US economy, but also to the apparent
strengthening of the recoveries in South-East Asia and Japan. Most recent data releases for the euro
area suggest an acceleration of real GDP growth rates in the second half of this year. This is indicated
by confidence and survey data, as well as by production data for the industrial sector extending into
the third quarter of the year. Therefore, the prospects for a continued improvement in output growth
remain good.
Concerning consumer prices, in September 1999 the annual rate of change in the Harmonised Index of
Consumer Prices (HICP) was 1.2%, that is to say unchanged from August 1999. On the one hand,
upward pressures related to the surge in oil prices in recent months and to the rate of change in prices
for seasonal food. On the other hand, in September the increases in both services prices and prices for
non-energy industrial goods were more moderate than in August. Countervailing price movements of
such a kind may possibly continue in the coming months, while expectations remain that there will be
some overall upward movement in the HICP rate in the short term, which will mainly be linked to
energy prices.
In conclusion, the downside risks to price stability have disappeared. Instead, monetary developments,
together with the accumulating evidence of improved economic prospects, confirmed the view
expressed earlier by the Governing Council that the balance of risks to future price stability has
gradually moved towards the upside. This assessment argued in favour of adjusting the interest rates
within the context of a monetary policy stance which is conducive to maintaining price stability over
the medium term.
Containing inflationary expectations in a forward-looking manner is decisive for ensuring sustainable
growth in GDP and employment. This would be greatly facilitated if individual member countries
were to make convincing progress in the structural reform of the labour and product markets, which,
over the medium term, would enhance the euro area's production potential and thereby curb upward
pressure on prices as the recovery proceeds. Together with fiscal consolidation in the context of the
Stability and Growth Pact and the necessary moderate wage developments, such reforms could make a
crucial contribution towards transforming the current cyclical upswing into a process of longer-term
non-inflationary growth.
Other business
In a press release dated 1 July 1999, the ECB indicated that an announcement would be made in
November with regard to the decision on the public relations agency selected to prepare and execute a
Europe-wide information campaign for the introduction of the euro banknotes and coins on
1 January 2002. In this regard, I am now pleased to announce that the Governing Council has decided
to negotiate the contract with Publicis. Further information on this matter can be found in a separate
press release which will be issued this afternoon.
Finally, I should like to draw your attention to the fact that the second meeting of the Governing
Council to be held in December has been rescheduled. As announced yesterday, the meeting has been
brought forward from Thursday 16 December 1999, to Wednesday 15 December 1999, in order to
enable several Governing Council members to attend a first gathering of a new forum consisting of
ministers of finance and central bank governors (the so-called "G20"), which is to be held in Berlin on
16 December 1999.