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, 8 May 2003.
* * *
Ladies and gentlemen, the Vice-President and I will now report on the outcome of today's meeting of
the Governing Council of the ECB.
The first news I can report is that today we successfully concluded our discussions of the ECB's
monetary policy strategy. However, I would ask you to postpone any questions you may have on this
subject to a little later this afternoon. A press release will be issued on this matter and Mr. Issing will
join us for a special press briefing in the form of a seminar on the outcome of our discussions. This
seminar will take place in this room immediately after the press conference. You will also note that, as
a consequence of the conclusions we reached, I have restructured today's introductory statement
somewhat, and I will be following this new structure in the future. The introductory statement will
henceforth present first economic analysis, followed by monetary analysis. It concludes by
crosschecking the analyses conducted under these two pillars.
Turning now to our discussion of monetary policy, we have decided to keep our key interest rates
unchanged. Taking due account of new economic and monetary information as well as the latest
geopolitical developments, we concluded that the current monetary policy stance remains consistent
with the preservation of price stability over the medium term. At the same time it maintains a monetary
environment that is conducive to economic growth. With the end of the military action in Iraq, important
downside risks to the economic recovery have diminished, and our focus is now again on the other
forces that have been shaping the economic outlook. The Governing Council will carefully monitor
future developments and assess whether conditions for price stability continue to develop favourably.
Let me explain our assessment in detail.
In the context of our economic analysis, focusing on the short to medium term, recently published
survey data and the latest information from conjunctural indicators suggest that economic activity in
the euro area has remained subdued so far this year. Looking ahead, we continue to expect a gradual
strengthening of real GDP growth to start later in 2003 and to gather more pace in the course of next
year. Factors supporting this outlook are an expected recovery of global demand, the prospect of
falling inflation benefiting real disposable income growth, and the low level of interest rates. Moreover,
the recent unwinding of uncertainties associated with geopolitical tensions should contribute to an
economic recovery. Such an assessment also seems to be reflected in recent financial market
reactions. Since the end of the war in Iraq, financial market volatility has declined significantly, with a
notable increase in stock prices.
Nevertheless, there continue to be downside risks. First, there are the risks originating from the past
accumulation of macroeconomic imbalances outside the euro area, and lately concerns have arisen
with regard to the SARS virus. Moreover, there is also some uncertainty over the extent of the
adjustment still needed in the euro area corporate sector in order to enhance productivity and
profitability, which could have an impact on employment growth and thus private consumption.
As regards price developments, the annual rate of HICP inflation generally fluctuated at around
2.3-2.4% between the autumn of last year and March 2003. Broadly speaking, declining inflation rates
in services and non-energy industrial goods have been offset by rising rates in energy and processed
food prices. Conversely, in April energy prices are expected to reflect the decline in oil prices following
the developments in Iraq. This expectation is in line with Eurostat's flash estimate for the inflation rate
in April, which was 2.1%, i.e. 0.3 percentage point lower than in March.
Looking ahead, current indications do not point to further strong declines in the inflation rate in the
immediate future, but lower oil prices, an environment of moderate economic growth and, of course,
the effects of the significantly higher exchange rate of the euro should all contribute to reducing
inflationary pressure beyond the short term. The outlook for inflation will also depend to a significant
extent on wage developments. The available indicators suggest that labour cost growth has shown
signs of stabilising in the course of 2002. Moderate wage trends are indeed crucial both to maintain
price stability and to foster employment growth.
In the context of our monetary analysis, focusing on the medium to long term, the broad monetary
aggregate M3 has now been growing strongly over a protracted period. Moreover, the data for more
recent months do not suggest that a process of correction has started. As a consequence, the euro
area economy continued to accumulate liquidity significantly above the amount needed to sustain
non-inflationary growth. The strong monetary expansion contrasted with the more moderate growth in
loans to the private sector. This is consistent with our assessment that monetary developments
continue to be fostered by portfolio shifts, reflecting a sustained preference on the part of investors for
liquid and secure assets in an environment of high uncertainty. However, the low level of interest rates
has also contributed to strong monetary growth.
When interpreting monetary trends, particular account needs to be taken of the portfolio shifts towards
increased demand for monetary assets for precautionary reasons. The reduction in geopolitical
tensions should support an unwinding of these portfolio shifts. A reversal in monetary trends would in
any case dampen the concerns regarding the medium to long-term implications of recent monetary
dynamics. As a consequence, monetary developments will continue to be monitored closely.
Overall, it currently appears that inflation rates should decline to below 2% over the medium term, in
particular given the outlook for economic activity and the significant appreciation of the euro. It also
appears that the strong expansion of M3 should not adversely affect this outlook, as portfolio shifts
have played a prominent role; in particular, the build up of liquidity should not translate into inflationary
pressure as long as economic growth remains modest. Hence, cross-checking the information from
the two pillars leads us to conclude that the risks to price stability over the medium term remain
limited.
Regarding developments in 2002 were generally not satisfactory. In particular, countries
fiscal policy,
that had not achieved sound fiscal positions in earlier years when the economic conditions were more
favourable are now struggling to keep their budgets under control. Looking ahead, it is crucial to
underpin the fiscal policy framework with decisive action, strong peer pressure and consistent
implementation of the rules of the Treaty and of the Stability and Growth Pact. Countries should
maintain budgetary positions close to balance or in surplus over the cycle, and, where this is not yet
the case, take the required structural consolidation measures. This also creates the necessary room
for the operation of automatic stabilisers. At the same time, governments are advised to place the
emphasis on growth-oriented consolidation policies that strengthen the productive forces of the
economy. By strengthening confidence, a credible medium-term fiscal consolidation strategy will also
support economic growth in the short term.
Finally, structural reforms are essential to increase the euro area's growth potential and enhance its
ability to better withstand external shocks. Indeed, such reforms, which should aim to reduce rigidities
in labour and goods markets, could significantly strengthen the degree of resilience of economic
activity to such shocks, both in the euro area as a whole and in its regions. Renewed momentum in
the process of structural reform will be important to foster consumer and investor confidence in
medium and long-term growth and employment opportunities in the euro area. This, in turn, should
also have a positive short-term effect on spending and investment decisions in the euro area.
We are now at your disposal for questions.