Mr. Duisenberg's opening statement at the press conference covering the latest meeting of the Governing Council of the European Central Bank Introductory statement by the President of the European Central Bank, Dr. W.F. Duisenberg, at th conference held in Frankfurt on 13/10/98.
Ladies and gentlemen, in line with our stated intention, the Vice-Presiden are here today to report on the outcome of today's meeting of the Governing Council European Central Bank. The length of my introductory statement reflects the importance matters dealt with today.
As usual, the Governing Council devoted part of its meeting to an exchang views on recent economic, monetary and financial developments. This discussion took against the background of conflicting messages. Clearly, on the one hand, the data economic situation in the United States and Europe, especially in the euro area, mainly continuation of real GDP growth, though possibly at a somewhat slower pace. On the othe however, the global macroeconomic environment has deteriorated. In particular, the num signs suggesting that the world economy will slow down in 1999 is increasing. At the sa uncertainty in the financial markets has been heightened by news of the near-collapse hedge fund, losses by individual financial institutions, and the large movements in wo bond and foreign exchange markets.
In the view of the Governing Council, in responding to recent econo developments and current market conditions it is of the utmost importance that pr inspired by policy activism that do not take due account of the complexity of the issu are avoided. This would only contribute to compounding the uncertainties which under prevailing global financial market volatility. Against this background, the Governing of the view that proposals for a reassessment of capital controls as an acceptable poli recent calls for world-wide, uniform interest rate reductions, are inappropriate as address the very nature of the problems. At the same time, the Governing Council co structural improvements at the global level to be warranted. These should focus, in first on enhancing the transparency of both the public and private sectors; se strengthening domestic banking systems, primarily in emerging markets and economie transition; and, third, on improving financial crisis prevention and management, in through the increased involvement of the private sector. A number of proposals have been developed on these issues, which should now be finalised with a view to their e forceful implementation.
In addition, the Governing Council stressed that such structural improveme the global level would have to be accompanied by sound policies at home. In this respe the size of the euro area and its global role, it is of crucial importance that price hence a climate conducive to growth and employment - should be maintained in the euro Achieving this will also be of vital importance for the world economy as a whole.
With this in mind, the Governing Council reviewed the monetary, financial macroeconomic situation in the euro area.
First, the Council discussed the monetary situation with reference to prel data on the basis of the new harmonised reporting system for money and banking statisti internal work has been completed, these monetary statistics will be made available to t When looking at various definitions of broad money, our preliminary data show broadly
and stable annual growth rates of between 3 and 5% in 1997 and the first half of 1998. to our initial analysis, these data do not appear to signal inflationary pressures money at this juncture. However, given the preliminary nature of the new data, caution exercised with regard to their interpretation.
Second, as regards other financial indicators, although long-term intere have risen recently, they are still at low levels by historical standards and the yi levelled off relative to the situation some months ago. A substantial part of devel bond markets during recent months reflects a 'flight into quality'.
Third, the Governing Council discussed the broad outlook for prices in the c of the overall macroeconomic environment. With respect to price developments, intern factors continued to exert downward pressure. HICP rates in the euro area fell to 1.2% after having remained unchanged at 1.4% from April to July. This mainly reflected a de energy prices, which were almost 4% lower in August than a year earlier, and in commodity prices. For the euro area as a whole, price pressure as indicated by industr prices and labour costs also remained modest. In 1999 average inflation in the eur expected to remain subdued, according to the projections available.
Fourth, considerable difficulties are encountered in precisely assessi quantifying the impact of recent international developments on prices and, equally, on Recent data seem to suggest that real GDP growth in the euro area, which reached 0.6% first quarter of 1998, has slowed down somewhat in the second quarter. We need to aw release of more complete and thereby more reliable data for the euro area as a whole final view can be taken. Other recently released data on industrial production, the retail sales and passenger car registrations appear to point to continued growth. This supported by EC survey data, although some indicators have remained constant or have back slightly in recent months; nonetheless, all these indicators remain well above term averages.
The Governing Council welcomed recent interest rate reductions by a number euro area national central banks. As a result, euro area-wide three-month interest rate reached a level of 3.8%, which implies a decrease of around 15 basis points since th August. These changes underline the fact that the process of convergence of central ban rates in the euro area, which is to be concluded by the end of this year, is clearly un Governing Council considered further interest rate convergence towards the lower end current range prevailing in the euro area as being appropriate, given our current kno monetary trends and the prospects for price developments and taking account of an envi characterised by risks of downward pressures. The Governing Council will continue to m closely monetary, financial and economic developments within the euro area with a v determining the appropriate level of money market interest rates for the euro area.
Meanwhile, the Governing Council will continue to monitor closely fis intentions in the euro area Member States. The structural budgetary positions in severa States are still far from being close to balance or in surplus as required by the Growth Pact. Therefore, these Member States are not yet sufficiently prepared to automatic stabilisers to function in the event of a slowdown in real GDP growth, wh respecting the 3% reference value set out in the Treaty and ensuring a decline of debt appropriate pace. Moreover, in a number of Member States, against the background of
favourable and partly better than expected growth performance, short-term budgetary appear not to represent structural improvements.
In addition to the review of economic developments, a number of decisions taken with regard to various aspects of the preparatory work for Stage Three.
## (a) Monetary policy issues
First and foremost, let me turn to the issue of the monetary policy strate inform you that at today's meeting the Governing Council reached agreement on the features of the stability-oriented monetary policy strategy that the ESCB will pursu Three of Monetary Union.
Before explaining our decision on the strategy, let me emphasise certain im characteristics of the environment in which the single monetary policy will operate a January. Of most concern to the ESCB are some uncertainties which will inevitably ari result of the move to Stage Three. These relate, in particular, to the way in which the Stage Three of Monetary Union will affect economic behaviour and institutional and fi structures in the euro area. They also relate to statistical issues.
Against this background, the Governing Council has chosen a distinct mone policy strategy, one that reflects the special circumstances it faces at present. This ensure continuity with the successful strategies pursued by participating national cent recent years, while taking into account - to the extent needed - the unique situation c transition to Monetary Union.
With this context in mind, the Governing Council today agreed on the m elements of the stability-oriented monetary policy strategy of the ESCB. These elements
- the quantitative definition of the primary objective of the single m policy, price stability;
- a prominent role for money with a reference value for the growth o monetary aggregate; and
- a broadly-based assessment of the outlook for future price developments.
First, let me stress that, as mandated by the Treaty establishing the E Community, the maintenance of price stability will be the primary objective of the Therefore, the ESCB's monetary policy strategy will focus strictly on this objective.
In the interest of transparency and in order to give clear guidance with expectations regarding future price developments, the Governing Council of the ECB has to announce a quantitative definition of price stability. In this context, the Governin the ECB has adopted the following definition: 'Price stability shall be defined as a y increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%
Let me emphasise the fact that price stability is an objective which i maintained over the medium term. The current rate of HICP inflation in the euro area with this objective.
Three features of this definition should be highlighted:
- First, the HICP is the most appropriate price measure for the ESCB's defini price stability. It is the only price index that will be sufficiently harmo the euro area at the start of Stage Three.
- Second, by defining price stability using the HICP 'for the euro area Governing Council of the ECB makes it clear that it will base its decisi monetary, economic and financial developments in the euro area as a whol should like to emphasise the fact that the single monetary policy will adop area-wide perspective; it will not react to specific regional or developments.
- Third, this definition is very much in line with most current definitions a national central banks in the euro area.
Furthermore, the statement that 'price stability is to be maintained o medium term' reflects the need for monetary policy to have a forward-looking, medium orientation. It also acknowledges the existence of short-term volatility in prices whic controlled by monetary policy.
In order to maintain price stability, the Governing Council of the ECB agr adopt a monetary policy strategy which will consist of two key elements.
- First, money will be assigned a prominent role. This role will be signalle announcement of a quantitative reference value for the growth of a b monetary aggregate. The reference value will be derived in a manner whic consistent with - and will serve to achieve - price stability.
Deviations of current monetary growth from the reference value would, un normal circumstances, signal risks to price stability. The ESCB will asse best to counter these risks. However, the concept of a reference value d imply a commitment on the part of the ESCB to mechanistically correct deviat of monetary growth from the reference value over the short term.
The relationship between actual monetary growth and the pre-announce reference value will be regularly and thoroughly analysed by the Gover Council of the ECB; the result of this analysis and its impact on monetary decisions will be explained to the public. The precise definition of the aggregate and the specific value of the quantitative reference value for m growth will be announced by the Governing Council of the ECB in December 1998.
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However, while the monetary aggregates contain important and releva information for monetary policy-making, monetary developments will constitute a complete summary of all the information about the economy needs to be known for an appropriate monetary policy to be set.
- Second, there is also a clear need to look at other indicators. Conseque parallel with the analysis of monetary growth in relation to the reference broadly-based assessment of the outlook for price developments and the ris price stability in the euro area will play a major role in the ESCB's stra assessment will be made using a wide range of economic and financial varia as indicators for future price developments.
Thus the Governing Council will systematically analyse all the informa available regarding the prospects for, and the risks to, price stability area as a whole.
This strategy underlines the strong commitment of the Governing Council of ECB to its primary objective and should facilitate the achievement of this overriding g also ensure the transparency of the ESCB's decision-making and its accountability. Base strategy, the Governing Council of the ECB will inform the public regularly and in det its assessment of the monetary, economic and financial situation in the euro area reasoning behind its specific policy decisions.
This strategy is designed to avoid giving the impression that monetary responds 'mechanistically' to deviations from a single target or changes to a specifi The monetary policy strategy that has been selected by the Governing Council of the ECB that monetary policy in the euro area will be determined in a manner which will maint stability, responding to new developments in or disturbances to the economy in an app manner which is consistent with this overriding objective.
The strategy therefore offers a clear and transparent framework within whi Governing Council of the ECB will be able to assess and present monetary policy decisio
Please note that the main features of the strategy are also summarised in release to be distributed to you.
Still in the context of preparing for the single monetary policy, you may re in July I informed you about the range of institutions subject to reserve requiremen liabilities included in the reserve base. I also gave you indications regarding th allowance to be deducted from an institution's reserve requirement and the reserve which the Governing Council envisaged a range of 1.5-2.5%. Today, the Governing Cou discussed the last remaining open issues regarding the ESCB's minimum reserve system confirmed that, first, the lump-sum allowance will be set at a level of 100,000 euros a the reserve ratio will be set in the middle of the indicated range, i.e. at 2%. Finally that a credit institution will be allowed to deduct from the reserve base 10% of its de with a maturity of up to two years and of its money market paper if it cannot provide e the corresponding interbank liabilities.
An ECB Regulation laying down the features of the ESCB's minimum reserve system will be published shortly. In the meantime, further details are provided in a se release which is to be issued to you this evening.
## (b) Foreign exchange policy issues
The Governing Council agreed on a set of legal documentation setting out respective roles of the ECB and the euro area national central banks (NCBs) in the man of the ECB's foreign reserve assets. The legal documentation specifies, inter alia, th NCBs in carrying out operations involving the foreign reserve assets of the ECB and inco master netting agreements to be signed by the ECB and market counterparties.
## (c) Payment systems issues
As you are aware, TARGET will not be the only system available for cross-bo payments. For non-monetary policy transactions it will, for instance, also be possible payments via the EBA Euro Clearing System (currently the ECU Clearing and Settlem System). While TARGET is a real-time gross settlement system, the EBA alternative clearing system, i.e. the payments have to be settled at the end of the day. In thi Governing Council has agreed that the ECB will be involved. The EBA Euro Clearing Sys will, therefore, open a central settlement account at the ECB for its settlements wit area and may also open settlement accounts with those NCBs which agree to do so. The will also hold the account on which the EBA Euro Clearing System's liquidity pool w maintained. Agreements between the ECB and the EBA covering the operation of these acco are currently being finalised.
## (d) The euro banknotes
With a view to increasing efficiency in combating counterfeiting, the Gove Council confirmed the agreement reached by the EMI Council that a Currency Analysis Ce and a Counterfeit Currency Database will be set up, which will store technical data r counterfeit euro banknotes. I should point out that the intention is to continue t counterfeits of other currencies (e.g. the national currencies of participating or non Member States and the US dollar) at the national level. All EU Member States will h option of full participation in the database system. Although a decision on the loca Currency Analysis Centre will not be taken until the early part of 1999, the Governin today approved the principles governing the way in which counterfeit euro banknotes handled. Further details are provided in a separate press release which is to be issue evening.
The Governing Council has also agreed on the approach to be used for estima the number of euro banknotes to be printed before the launch date of 1 January 200 quantity of euro banknotes to be printed will be determined by the number required to r stocks of national banknotes in circulation (launch stocks) in the participating EU Mem together with the volume of the logistical stocks needed to ensure that the banknote c operates smoothly. It is currently estimated that up to approximately 13 billion euro will need to be printed before the issue date for the eleven participating Member St estimate will be updated regularly as we approach 2002.
A separate press release on banknotes is to be issued to you this evening.
Finally, the Governing Council also addressed the following matters.
First, with regard to statistics, it was agreed to publish an Addendum document entitled the 'Money and Banking Statistics Compilation Guide - Guidance provid NCBs for the compilation of money and banking statistics for submission to the ECB' Addendum covers the treatment of both money market paper and bill-based lending withi harmonised framework for money and banking statistics. The original Compilation Guide published by the EMI in April 1998.
Second, the Governing Council took stock of the current state of affair regard to the testing of critical ESCB systems and procedures in the run-up to the sta Three. The ESCB has just commenced a general 'dress rehearsal', i.e. a final testing pha ESCB systems and procedures.
Finally, looking a little further ahead to beyond the start of Stage T Governing Council also agreed that a series of tests should be conducted during the 1999 in order to ensure that all ESCB-wide systems and applications are Year 2000 compli