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, Frankfurt, 12 September 2002.
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Ladies and gentlemen, the Vice-President and I will report on the outcome of today's meeting of the
Governing Council of the ECB, which was also attended by the President of the Eurogroup,
Mr. Christodoulakis, and Commissioner Solbes.
At today's meeting, the Governing Council continued its comprehensive examination of monetary,
and assessed new evidence that has become available over
financial and economic developments
the past few weeks. Our conclusion is that risks to price stability appear rather balanced. Against this
background, the current level of key ECB interest rates is appropriate.
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 7.3% in the period from May to July 2002, compared with 7.4%
in the period from April to June 2002. Hence, there is no indication of a significant reduction in
monetary growth over the last few months. The recent strength in M3 growth partly reflects both the
low opportunity cost of holding money and renewed portfolio shifts into M3 in an environment of
financial market uncertainty. In this context, monetary trends need to be assessed with caution. From
a longer-term perspective, there is concern that more liquidity is available in the euro area than would
be needed to finance sustainable, non-inflationary economic growth. However, at this juncture, there is
less risk that excess liquidity will translate into inflationary pressure, given the environment of subdued
demand. The trend in the growth of loans to the private sector also seems to point in this direction.
Concerning the second pillar, the latest data confirm a modest recovery in real GDP growth in the
euro area in the first half of this year. In the second quarter of this year real GDP growth is estimated
to have grown by 0.3% quarter on quarter, following upwardly revised growth of 0.4% in the first
quarter. In contrast to the first quarter, developments in demand appear to have been more broadly
based, as activity was supported by private consumption, export growth and inventories. However,
overall domestic demand growth remained subdued as a result of the protracted weakness of
investment.
Looking ahead, the most likely scenario is that of ongoing, albeit modest, growth in real GDP in the
second half of this year, with growth rates in line with potential growth in 2003. This delay in the
acceleration of economic activity in the euro area broadly corresponds with the world economic
outlook, given that the expected pace of the recovery has been scaled down over recent months.
Sharp declines in stock prices are having negative effects on consumer and investor confidence.
Consequently, the strength of the upturn in economic activity has become more uncertain, both inside
and outside the euro area. At the same time, however, the conditions for a stronger economic
recovery in the euro area remain in place. On the domestic side, private consumption should
particularly benefit from lower inflation and improved real disposable income, while investment should
be supported by low nominal and real market interest rates. Finally, the gradual recovery of the global
economy is also expected to continue. Nevertheless, risks to the economic outlook, both inside and
outside the euro area, need to be monitored closely.
Turning to price developments, in July annual HICP inflation was 1.9%, while the inflation rate
excluding unprocessed food and energy fell slightly to 2.5%, its first decline in 2002. Eurostat's flash
estimate for August, which indicates that annual HICP inflation increased to 2.1%, is fully in line with
previous expectations that inflation rates were likely to fluctuate at around 2% for the remainder of the
year. However, the short-term trend is also dependent on oil price developments, which have
increased significantly over recent months.
Looking further ahead, the recent appreciation of the euro exchange rate, as well as the overall
economic environment, should contribute to a reduction in consumer price inflation. Moreover,
services price inflation is expected to moderate somewhat, following particularly strong increases in
2002. However, for inflation rates to come down to levels below 2% in 2003, as currently projected by
most forecasts, it is crucial that oil prices do not escalate and that wage moderation prevails. With
respect to nominal wage growth, we have already noted an upward trend over recent years, which
continued even when the economy started to slow down. While the information from the latest wage
indicators does not signal a further acceleration, wage developments remain a cause for concern,
despite the weak cyclical situation.
With regard to the devastating floods which have hit three member countries in particular, we deeply
regret the substantial loss of life. The overall macroeconomic impact of these floods should be limited
and have no lasting effects. Certain food prices could temporarily rise as a result, also due to bad
weather conditions in other euro area countries, and while real GDP growth could initially be
dampened slightly it may subsequently be stimulated by reconstruction.
Overall, subdued aggregate demand and the strengthening of the euro should contribute to lower
inflationary pressure. At the same time, other factors - in particular monetary developments, but also
wage trends and oil price developments - might pose risks to price stability in the medium term and
therefore need to be monitored closely.
Regarding fiscal policies in the euro area, flood-related costs should lead to a review of priorities and
a reallocation of expenditure. In addition, against the background of recent developments, it seems to
be more warranted than ever to call on member countries to remain committed to the Stability and
Growth Pact. Countries with sound fiscal positions should safeguard their achievements, while
countries with remaining imbalances must avoid deficits in excess of 3% of GDP and implement
determined policies in order to progress towards budgets close to balance or in surplus. This is
essential for maintaining and further strengthening confidence in the policy framework in the euro area
and for establishing fiscal positions in all countries that allow automatic stabilisers to work efficiently
without endangering sound fiscal positions in the longer term.
In the field of structural reforms we continue to urge governments to implement, in a determined
way, the agenda set in the Broad Economic Policy Guidelines. Structural reforms will contribute to
expanding the euro area's potential for non-inflationary growth and to reducing its high level of
unemployment. At the same time, they will help to foster confidence among consumers and investors
in long-term growth and employment opportunities in the euro area, thereby having a positive effect on
spending and investment decisions in the short and medium term. Such confidence is fostered by a
determined and broadly based implementation of the reform agenda, focusing, in particular, on labour
and product markets.
We are now at your disposal for questions.