M. Trichet presents the monetary policy guidelines of the Bank of France for
1997 BANK OF FRANCE, PRESS RELEASE, 17/12/96.
1. The ultimate goal of monetary policy is to ensure price stability, as required by
legislation. The objective of the Monetary Policy Council is that the increase in prices, as
measured by the consumer price index, should not exceed 2% in 1997, as in the medium term.
2. To meet this ultimate goal, the Banque de France uses two intermediate
objectives, one of which is external and the other internal:
-The objective of a stable external value of the currency: as it has been for
ten years, the stability of the franc will be maintained against the group of
the most credible currencies in the European Exchange Rate Mechanism.
-An intermediate internal growth target for the money supply as assessed
by the development of the narrow and broad monetary aggregates: in
1997, the money supply should be able to show a medium-term growth
trend of 5%. This figure is consistent with price inflation of no more than
2% and non-inflationary real GDP growth of about 2.5%, which could be
exceeded, in view of the potential for growth to catch up in the medium
term. The Monetary Policy Council has decided to simultaneously
monitor the main narrow and broad money aggregates in order to obtain a
concise estimate of all monetary developments.
3. Total domestic debt is an important indicator. It helps the Banque de France
make sure that the economy is supplied with enough financing to grow, and it enables us to track
developments in financing for businesses, households and general government simultaneously.
The Monetary Policy Council will keep a close eye on other indicators, including
all leading indicators of changes in prices, such as capacity utilization rates, production costs,
developments in incomes and commodity prices. The Monetary Policy Council will also monitor
long-term interest rates and the current account balance.
* * *
Before announcing the Council's monetary policy decisions for 1997, I would like
to discuss the results achieved in 1996.
1. The 1996 results are in line with the targets we set.
The ultimate monetary policy goal, which is price stability, was met. Businesses
delayed passing on part of the August 1995 two-point increase in the standard rate of VAT until
the beginning of 1996. The twelve-month rise in consumer prices was equal to and then above
2% during the first seven months of 1996, but subsequently fell back to 1.ó% in August and
September, once the VAT effect had disappeared. The twelve-month increase stood at 1.5% to
1.ó% in November and the latest forecasts predict a price rise of close to 1.5% for the end of
1996. The twelve-month price increase thus resumed its pre-August 1995 trend and will be less
than 2% at the end of 1996, in line with the objective set by the Monetary Policy Council.
The objective of a stable external value of the French franc vis-à-vis the most
credible currencies in the European Exchange Rate Mechanism was met.
Since the beginning of 1996, the franc has continued to move gradually closer to
its central rates against the other currencies in the European Exchange Rate Mechanism. This
firmness of the franc has gone hand in hand with the continuing overall competitiveness of the
French economy. The real effective exchange rate of the French franc has improved and exports,
as in previous years, helped to boost activity. The seasonally-adjusted current account surplus
for the first nine months of 1996 stood at almost FRF 84 billion. This was much greater than the
FRF 64 billion surplus posted for the same period of 1995. On the basis of current forecasts,
France will record the third largest current account surplus in the world for 1996.
Growth in the M3 reference aggregate, which is the reference for our internal
intermediate objective, showed a reversal in its trend. The expansion of M3 at the end of the
third quarter of 1995 was close to its medium-term growth target path of 5%, but subsequently
slowed sharply. The twelve-month increase of 4% in December 1995 gave way to a contraction
of 0.4% in October 1996, the last month for which figures are available. This reversal in the
growth of M3 was to a very great extent the result of a large-scale reallocation of investment
flows stemming from the fall in short-term interest rates since autumn 1995, which has been of
unprecedented magnitude and rapidity.
The M3-M2 aggregate, which includes assets paying money market rates of
interest, posted a twelve-month fall of 10.1 % at the end of October 1996. In response to the fall
in short-term interest rates and also a heavier tax burden on money market mutual funds,
economic agents reallocated their portfolios towards assets covered by the investment
aggregates, and particularly the Pl aggregate covering contractual savings products, including
housing saving plans. Year-on-year growth in P1 accelerated from 12.3% in December l995 to
18.5% in October 1996.
The rate of interest paid on housing savings plans has remained unchanged at
5.25% since February 1994, whereas comparable market rates have fallen sharply. This gave a
strong boost to the reallocation of investment flows. Year-on-year growth in housing savings
plans accelerated significantly, rising from 14.1% at the end of 1995 to almost 26% in October
1996.
In addition, twelve-month growth in the P2 aggregate covering investment in
bonds and life insurance products remained buoyant. It stood at 12.3% in June 1996, with new
investment accounting for 9%.
At the same time, formation of liquidity was dynamic. The narrow money
aggregates M1 and M2, which cover transaction balances and liquid savings, showed annual
growth trends in October 1996 of around 5.8% and 7.5%, respectively. In particular, the growth
of M2-M1, covering passbook savings deposits, accelerated from 7.6% in December 1995 to
9.6% in October 1996.
In such a context, it is important to monitor closely the investments which, within
the P investment aggregates, constitute fairly close substitutes for monetary assets in the strictest
sense. M3 + P1 posted significant annual growth of around 4%.
On the financing side, total domestic debt showed a yearly growth trend of around
3.3%. Total domestic debt incorporates the debt financing obtained by resident non-financial
agents in the corporate, personal and public sectors, be it in the form of borrowing from credit
institutions or debt issues on domestic or international markets, and is thus a valuable yardstick
for analyzing the financing provided to the economy. Even though government debt continues to
be the most dynamic component of total domestic debt, its twelve-month growth slowed sharply
from 13.4% in December 1995 to ó.9% in September 1996. Outstanding lending by credit
institutions to the private sector is practically stable, particularly owing to the corporate sector's
sizeable cash surplus. According to the National Institute for Statistics and Economic Studies
(INSEE), the self-financing rate of companies and near-companies stood at around 114% in the
second quarter of 1996.
I shall now make a few comments concerning interest rates, which fell across the
board in 1996.
This decline in interest rates, which began in October 1995, corresponds to a
considerable increase in confidence in the French franc and in the creditworthiness of France in
connection with the policies set forth by the President of the Republic and the Government for
the reduction of government deficits, the stability of the franc and Monetary Union in 1999. In
1996, the Banque de France's repurchase tender rate was cut from 4.45% to 3.2% today. It is one
of the lowest rates in the G7 countries in both nominal and real terms. The five-to-ten-day repo
rate fell from 5.85% to 4.75%.
Short-term market rates eased substantially, with three-month rates shedding
almost 400 basis points since October 1995 and currently standing at around 3.4%.
The easing in short-term rates went hand in hand with a significant decline in
long-term rates, which are the reference for a large share of lending to the private sector.
Ten-year rates have fallen by more than 100 basis points since October 1995.
Thanks to the credibility of every component of its economic policy, France today
enjoys the lowest medium- and long-term market rates in the European Union, and the third
lowest rates in the world, bettered only by Japan and Switzerland.
This brings me to the monetary policy decisions for 1997.
1.
The ultimate goal of monetary policy is to ensure price stability, as
required by legislation. The objective of the Monetary Policy Council is that the increase in
2% in 1997. as in the
prices, as measured by the consumer price index, should not exceed
medium term.
2.
To meet this ultimate goal, the Banque de France uses two intermediate
one of which is external and the other internal:
objectives,
-The objective of a stable external value of the currency: as it has been for
ten years, the stability of the franc will be maintained against the group of
the most credible currencies in the European Exchange Rate Mechanism.
-An intermediate internal growth target for the money supply assessed
in
by the development of the narrow and broad monetary aggregates:
1997, the money supply should be able to show a medium-term growth
trend of 5%. This figure is consistent with price inflation of no more than
2% and non-inflationary real GDP growth of about 2.5%, which could be
exceeded, in view of the potential for growth to catch up in the medium
term. The Monetary Policy Council has decided to simultaneously
monitor the main narrow and broad money aggregates in order to obtain a
concise estimate of all monetary developments.
3. Total domestic debt is an important indicator. It helps the Banque de France
make sure that the economy is supplied with enough financing to grow, and it enables us to track
developments in financing for businesses, households and general government simultaneously.
The Monetary Policy Council will keep a close eye on other indicators, including
all leading indicators of changes in prices, such as capacity utilization rates, production costs,
developments in incomes and commodity prices. The Monetary Policy Council will also monitor
and the
long-term interest rates current account balance.
*
* *
These decisions call for two remarks.
First, on a technical level, the Monetary Policy Council has decided to monitor
several narrow and broad money aggregates simultaneously in order to obtain a concise estimate
of all monetary developments. As we have seen, certain data, and particularly, but not
exclusively, M3 data, have been severely disrupted recently by several factors, such as the very
substantial fall in short-term rates and the ensuing large-scale reallocation of investment flows
towards non-monetary assets, higher taxes on money market mutual funds, and the continuing
very high level of interest paid on housing saving plans.
We will therefore keep a very close eye on the M1, M2, M3, and M3+P1
aggregates as expressions of the underlying growth of the money supply. Particular attention
will be paid to the growth of the M3+P1 aggregate covering monetary assets and contractual
savings.
A very large proportion of the outflows from M3 in the past year was directed
towards investments covered by P1, and particularly housing savings plans with a residual
maturity of one year or less. In fact, this type of investment at present constitutes a very close
substitute for monetary assets.
Second, the Monetary Policy Council has set monetary policy against the
background of potential growth for the French economy of around 2.5% per year. We consider
the average growth of our economy in the medium-term, and it could be exceeded given that we
have a potential to catch up in the medium term. We reckoned with a maximum price increase of
2% and potential real growth of between 2.5% and 3% in the medium term to arrive at a figure
of 5% for the medium-term growth trend of the money supply.
*
* *
It is very important to bear in mind the essence of the policy implemented by the
Monetary Policy Council.
Parliament confers on the Banque de France an objective, namely the objective of
price stability. Maintaining the value of the currency preserves the purchasing power of the
currency, and therefore that of French citizens.
In addition, Parliament has sought to create the conditions for growth and for job
creation, via the stability of the currency. This is also the goal of the Monetary Policy Council.
To achieve this goal, we use two means.
First, by preserving the value of the currency, we enhance its credibility in
France, in Europe and in the world and allow our economy to benefit from financing at
favourable market interest rates. It is very important for future French growth, for investment
and for job creation that we have the lowest medium- and long-term market rates in the
European Union today and the third lowest interest rates in the world.
Second, price stability curbs cost increases in our productive sector. In doing so,
the competitiveness of our economy-other things being equal-is preserved and enhanced.
This is good for future French growth and for job creation. It is important to note that we
currently have a dynamic export sector and, according to the latest forecasts for 1996, the third
highest current account surplus in the world.
One other indicator of competitiveness is encouraging, namely the flow of foreign
direct investment into France. It stood at FRF 120 billion in 1995. The latest figures for the first
nine months of 1996 show inward foreign direct investment totalling FRF 74 billion. In all,
since the beginning of 1995, a total of FRF 194 billion, the equivalent of USD 39 billion, has
been invested directly in France, making us the third-ranking industrialized economy in terms of
inward foreign direct investment, behind the United States and the United Kingdom.
Thus, when the Monetary Policy Council makes interest-rate decisions, it bears in
mind first the objective of preserving the purchasing power of the currency, for and on behalf of
all French people, and second, its corollary, namely the creation of monetary, financial and
competitive conditions that will allow our economy to achieve its full potential for sound and
sustained growth, for job creation and therefore for combating unemployment.
Central Banks cannot "command" growth. Growth is the fruit of the labour of
men and women, of the efficiency of employees, workers and engineers, of the imagination and
skill of business leaders, and also, more broadly, of the influence of European and international
business conditions. It is stimulated, in the medium and long term, by structural reforms that
liberate initiative, strengthen the dynamism of the economy, combat unemployment effectively
and encourage the creation of the greatest possible number of jobs for a given level of wealth
and growth.
However, it is up to Central Banks to create the best possible monetary and
financial conditions, through the credibility and stability of the currency.
These conditions now exist in our country and the Monetary Policy Council is
convinced that the time has come for firms and households to invest. In many sectors and firms,
the financing exists. The self-financing rate of the entire French productive sector is above 100%
overall. Interest rates as a whole are at historic lows. The French economy has substantial
potential for growth in the medium term. In the last three years, potential growth has averaged a
little more than 2% a year for the years 1994, 1995 and 1996. We can do better. We believe that
our economy's potential non-inflationary growth is around 2.5% in the medium term, and this
can be exceeded given the capacity for growth to catch up. The requirements for investment are
financing terms, self-financing, competitiveness, and medium-term growth. We believe these
requirements exist today.
If I had to sum up briefly the message of the Monetary Policy Council, I would
say: "The investment plans exist. The time has come today to implement them. Let us invest. It
is the surest way for us to contribute to non-inflationary growth that creates jobs and thus to help
in the fight against unemployment."
*
* *
French monetary policy is in line with the European strategy of the President of
the Republic and the Government, and therefore with the creation of an economic and monetary
union on 1 January 1996.
The advance towards the single currency was decisively confirmed at the
European Summit in Dublin, where an agreement was reached on the legal status of the euro, on
the new European Monetary System and on the stability and growth pact intended to guarantee
fiscal discipline in the Monetary Union.
The Banque de France's monetary policy contributes directly to our country's
success in meeting three of the five criteria for entry into Monetary Union: the criterion of price
stability, which is the ultimate goal of our monetary policy; that of the stability of the franc
visà-vis the most solid European currencies, which is an intermediate objective to which the
Banque de France is steadfastly committed, and that of the level of long-term interest rates,
which is a result and an important indicator of our monetary strategy.
l) Today, the Monetary Policy Council is happy to note that we fully meet these
three entry criteria. The Council will continue to make sure that we abide by them throughout
1997 so that the Heads of State and Government can draw up the list of countries eligible for the
euro in the best possible conditions, in accordance with the terms of the Dublin decision of the
Heads of State and Government, "as soon as possible in 1998".
The euro will be created on 1 January 1999. Our market interest rates on
maturities of more than two years already incorporate the credibility and soundness of the euro,
the future single currency of European citizens. The agreement on the stability and growth pact
drawn up in Dublin is a decisive element in inspiring confidence in the euro in French citizens
and investors from around the world that is at least equal to the confidence in the French franc.
This will give us low market interest rates in the euro area, which is good for growth, job
creation and the fight against unemployment.