European Central Bank: Press conference - introductory statement
Introductory statement by Mr Willem F Duisenberg, President of the European Central Bank and
Mr Lucas Papademos, Vice-President of the European Central Bank, at the press conference held in
Frankfurt, 6 March 2003.
* * *
Ladies and gentlemen, the Vice-President and I will report on the outcome of today's meeting of the
Governing Council of the ECB.
We have comprehensively reviewed monetary, financial and economic developments today. We
concluded that the outlook for price stability over the medium term has improved in recent months,
owing in particular to the subdued pace of economic growth and the appreciation of the exchange rate
of the euro. As a result, the Governing Council has decided to lower the key ECB interest rates by
25 basis points.
Let me explain our assessment of recent economic developments in more detail.
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 November 2002 to January 2003,
compared with 6.9% in the period from October to December 2002. The continued strong monetary
growth reflects an ongoing pronounced preference for liquidity in an environment of high financial,
economic and geopolitical uncertainty. Although liquidity remains ample, it is not expected at this stage
to give rise to inflationary pressures, given the current economic context and the expectation that
some of the portfolio shifts will be reversed once the financial market uncertainty diminishes. Recent
data on loans to the private sector, notably the weak growth in loans to non-financial corporations in
late 2002, confirm this assessment.
Turning to the analysis under the second pillar, available data and surveys indicate that economic
activity in the euro area remained sluggish in late 2002 and in the first months of 2003. In light of
recent developments, the outlook for economic growth in the euro area in 2003 has weakened
compared with previous expectations, owing especially to the geopolitical tensions and the associated
rise in oil prices. Accordingly, only a very modest rate of economic growth should now be expected
this year.
Considering price developments, according to Eurostat, annual HICP inflation is estimated to have
been 2.3% in February 2003, slightly up from 2.2% in January. The main factor behind this change
seems to be the rise in oil prices. In addition, some base effects related to food prices may have
contributed to the renewed increase in annual inflation in February.
The ongoing volatility in oil markets makes it difficult to forecast short-term inflation developments.
However, once some normalisation in these markets has occurred, more fundamental factors should
dominate price developments. First, the significant appreciation of the nominal effective exchange rate
of the euro over the past year is expected to continue to feed through the economy into consumer
prices, via import and producer prices. Second, the moderate pace of economic growth should also
reduce inflationary pressures, influencing price and cost-setting behaviours. If oil prices moderate in
the future, as currently expected by markets, the most likely outcome will be that inflation rates will fall
below 2% in the course of 2003 and remain clearly at levels in line with price stability thereafter.
This baseline scenario relies on the assumption that, especially in an environment of subdued
economic growth, wage moderation will prevail. In fact, some recent indications suggest more modest
wage developments towards the end of last year, but this picture would need to be confirmed in the
future.
Overall, ECB key interest rates have reached levels which are very low. On the basis of the currently
available information, this policy stance, while contributing to the preservation of price stability over the
medium term, provides some counterbalance to the various factors which are currently having an
adverse effect on economic activity.
Looking ahead, the most likely scenario is that economic growth will gradually recover once the factors
contributing to the high economic uncertainty have diminished. While the expected weak economic
activity at the beginning of this year will imply low average economic growth in 2003, a rise in quarterly
growth rates should materialise in the course of the year. Over time, the euro area economy should
benefit from a global economic recovery and the prevailing low levels of interest rates, as well as from
falling inflation supporting real disposable income and underpinning private consumption growth.
However, any judgement on future developments is overshadowed at present by the geopolitical
tensions and their potential resolution. Monetary policy cannot address this kind of uncertainty.
Depending on further developments, the Governing Council stands ready to act decisively and in a
timely manner.
The prospects for the euro area economy will depend very much on measures taken in other policy
areas. As for fiscal policy, adherence of all countries to the framework laid down in the Treaty and the
Stability and Growth Pact will support stable and sustainable public finances, and will thereby
contribute significantly both to confidence and to favourable financing conditions for the private sector.
In most cases, the fiscal policy stance implicit in the updated stability programmes strikes a
reasonable balance between letting automatic stabilisers operate and seeking further consolidation
where needed. In some cases, current consolidation ambitions are weak. In order to further boost
confidence in the fiscal framework and the economic environment, it is essential that appropriate
consolidation plans are implemented in all countries with remaining imbalances. Hence, the
commitments made in the stability programmes and the requests to further improve fiscal positions, as
subsequently agreed in the ECOFIN Council, must be implemented in full. In this respect, the
measures should be part of a comprehensive and growth-oriented strategy, which for most countries
means putting the focus on both restraining the volume, and reforming the structure, of public
expenditure.
Finally, the outlook for the euro area economy could be significantly improved if governments
strengthen their efforts to implement in labour and product markets. Such reforms
structural reforms
are important to ultimately raise the euro area's production potential, improve the flexibility of the
economy, and make the euro area more resilient to external shocks. In particular at the current
juncture, when economic activity is subdued, taking measures to make the euro area a more attractive
place to invest in can contribute substantially to fostering confidence.
We are now at your disposal for questions.