## Mr. Duisenberg reports at a press conference on the outcome of the meeting of the Governi Council of the ECB.
Introductory statement by the President of the European Central Bank, Mr. Wim Duisenber Frankfurt on 8 April 1999.
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Ladies and gentlemen, the Vice-President and I are here today to report on the outcome o meeting of the Governing Council.
Let me start with the Governing Council's discussion of recent economic developments an decisions that the Governing Council has taken today in the field of monetary policy. Af depth review of recent monetary, financial and economic developments, the Governing Co decided that the interest rate for the ECB's main refinancing operations will, from next w set at 2.50%. In addition, the interest rate on the marginal lending facility will be low and the interest rate on the deposit facility to 1.50% with effect from tomorrow.
Let me report in some more detail on the reasons for which the Governing Council, in the c the ECB's monetary policy strategy, deemed it appropriate to lower interest rates.
As regards monetary developments in the euro area, the acceleration of monetary aggregates January 1999 was partly reversed in February. The 12-month growth rate of M3 declined from in January to 5.2% in February. This largely reflected a slowdown in the high pace of g overnight deposits, presumably reflecting the unwinding of the influence of some specia related to the start of Stage Three and the introduction of the euro. As the February f somewhat higher than those observed in late 1998, the three-month moving average of M3 g covering the period from December 1998 to February 1999 still increased by 0.2 percentage 5.1%. The Governing Council does not regard current monetary trends as constituting a si future inflationary pressures, taking into account that the rate of growth of M3 is stil reference value of 4½% and considering that it may to some extent mirror the specific env related to the start of Stage Three.
The Governing Council noted that the Harmonised Index of Consumer Prices (HICP) rates of inc for the euro area have now been below 1% for several months, and even though some increas likely to be seen in coming months owing to the reversal of energy price trends, the mo effect on the outlook for future prices comes from the economic environment. Indeed, refle economic environment, many projections for future consumer price increases in the euro ar been revised downwards. In our current assessment of the situation, it appears unlikely increases will be out of line with the Eurosystem's definition of price stability.
With regard to financial indicators, both bond and foreign exchange markets were lately influence of global factors. After having risen somewhat in February 1999, in tandem with yields, during March euro area government bond yields remained broadly unchanged. At the time the US dollar strengthened further in recent weeks in the light of international develo
When looking in some more detail at the evolution of the world economy, positive signs rela continuously strong growth of the US economy, the gradual recovery in some Asian countrie indications of a stabilisation in Latin America. However, there is no noticeable evidence turnaround in Japan.
In the euro area, overall growth prospects worsened towards the end of last year, as report met in early March. In the meantime, official data confirm that real GDP growth in the weakened in the fourth quarter of 1998, when compared with the previous quarter. The weak particularly apparent in the manufacturing sector, where confidence deteriorated furthe information covering a substantial part of the euro area appears to confirm this picture. data on total employment in the euro area point to a certain deceleration in net job creati quarter of 1998.
As regards the latest available data on the HICP, the annual increase in consumer prices ha unchanged at 0.8% over several months up to February 1999. Underlying this stable rate o increases have been offsetting developments at the level of services and goods prices. In services price increases moderated further slightly, mainly owing to downward adjustments i
in the telecommunication area. At the same time, goods prices contributed slightly more to ove HICP increases than before, due both to price developments for unprocessed food and a decelerat in the fall in energy prices. It may be worth noting that goods prices may continue to move upw temporarily, in particular as oil prices increased strongly from mid-February onwards. S movements reflect the higher volatility of price changes of some categories of goods, in part imported oil and other commodities.
The interest rate decision has been taken in a forward-looking perspective, focusing on the med term trends in inflation and the compatibility of these trends with the Eurosystem's definition stability. In the view of the Governing Council, monetary growth is - at the current juncture risk for future price stability.
The decision taken today keeps monetary policy on a longer-term stability-oriented course and, doing so, contributes to creating an economic environment in which the considerable growth poten of the euro area could be exploited. Those responsible for other policy areas are urged now even to take the necessary steps to improve longer-term growth prospects for the euro area through st and decisively adhering to the aims of the Stability and Growth Pact and through convinci structural reforms in the economy.
I should now like to inform you about some of the other matters considered today.
The Governing Council examined the outcome of a test run of the production of euro banknotes. Th so-called zero production run involved the printing works of the participating countries. The purposes of this test were, first, to check the compliance of the test banknotes against the t specifications and, second, to prove that all printing works are in a position to produce t banknotes to the same high quality standards. The result of this test was positive, as only some technical specifications need to be modified slightly. The printing works will now start thei preparations for the commencement of the mass production of the euro banknotes.
The Governing Council also decided to establish an Analysis Centre for Counterfeit Euro Banknote As is already indicated by its name, the main purpose of this Analysis Centre will be to techn analyse and classify new types of printed counterfeits, and to store the related technical da database. The Analysis Centre will be located at the ECB in Frankfurt.
We are now at your disposal should you have any questions.
## Transcript of the questions asked and the answers given by Dr. Willem F. Duisenberg, President of the ECB, and Christian Noyer, Vice-President of the ECB
Question: I would be very interested if you had anything to say about the exchange rate of the e the central bankers of Europe seem comfortable with it. It seems that the strategy of the ECB is in light of today's actions, a double strategy to re-invigorate the European economy. On the one you got the exports boosted by the euro and, on the other hand, you got an interest rate cut to l the economy as well.
Duisenberg: First of all, as far as the exchange rate of the euro is concerned, I always like slightly longer term perspective than is normally done in articles and considerations about it. like to point out that, if you look at the rate of the euro, and look back to what we - in our j the synthetic euro, the euro that you can calculate before the euro was in existence, then y observe that the rate of the euro to the dollar has been more or less stable at around a level 1.08 to USD 1.10 from the middle of 1997 until early September 1998. In the middle of September started to rise to reach a level of 1.16 at the end of the year, and that was the level at which the euro era. After 1 January it gradually declined again in a few weeks to a level of around 1.08. So, we have no reason at all to be dissatisfied with that level. It is about the level at euro had stood for more than a year. And now - to take a very short outlook, between 6.15 and today - the euro rose from USD 1.08 to USD 1.0865. I hope that answers your question.
Question: I have a question concerning your inflation target. Can we draw the conclusion that now we have some kind of informal bottom on your inflation target?
Duisenberg: No, you cannot draw this conclusion. We are sticking to our definition of price sta which says that we regard price stability as being an increase in the rate of inflation of below
what I said today is that the present situation and the prospects for the increase in the r are such that they seem, for as far as we can look forward, also to remain well below tha 2%. So, inflation is not a danger, which enabled us to, let me say, to pay more attention t area of objectives of the European Central Bank - that is to support the general economic the European Community.
Question: In your meeting today, could you describe what the mood was of the meeting and w there was much debate about your move and much debate about the level of the move and whether it was an unanimous vote in the end.
Duisenberg: The mood was good. We had a very long and, I must say, very interesting disc today. There were a few who were not very inclined to do something about the rate - but h about a very few - and a very large majority was inclined to do something and supported the as we put it before the Council. And so, we had a very good discussion. For the final dec afraid I have to tell you that we did not take a vote. But we know all the different v finally, I could conclude as follows: the Governing Council decides that the main refinancin be lowered from 3% to 2.5%.
Question: You said there were no monetary risks of inflation at the moment. Can we inf today's decision that there were monetary risks of deflation or is it purely a growth-orien that you have taken today?
Duisenberg: No, we also see no risks of deflation emerging. We see that inflation has now on a euro area-wide basis, constant at a rate of 0.8% four months in a row up to now. We risks on the upside, i.e. mainly the impact of rising energy prices, but that is by defini when it was on the downside, a temporary factor. We see some risks deriving from some settlements here and there in Europe, those are the upside risks. We see some downside ris rather subdued outlook for general economic development in the entire euro area. But as main thing is that we do not see the situation of price stability in which we entered the e which prevails until this moment, would be in any way endangered in the future. That gav leeway to take the measure I have just announced.
Question (translation): Mr. President, would you say you have admitted today that you are p business cycle-oriented monetary policy, which would constitute a change in model, compare the Deutsche Bundesbank, which has always maintained that it does not pursue a business oriented monetary policy, but rather that 'we have a monetary target or a potential-oriente policy, which is geared to the medium term'. Are you not facing the danger that such an relaxation of your monetary policy could, instead of stimulating reform in other areas of and labour market policy, reduce pressure for such reforms?
Duisenberg: With the greatest emphasis I am capable of, I want to deny that we have in switched our strategy or our approach to monetary policy. It is not a cyclically inspired p quote from my statement again; the interest rate decision 'has been taken in a forwar perspective focusing on the medium-term trends in inflation and the compatibility of these t the Eurosystem's definition of price stability.' That is something totally differe 'konjunkturgetriebene Politik'.
Question (translation): Mr. Duisenberg, this interest rate move has turned out to be un large. Do you believe that you are now at the limit which you can justify in terms of stab and how long will this interest rate remain in place if economic activity in the euro zone pick up in the second half of the year?
Duisenberg: This is something we have, of course, considered in depth. We wanted the move t convincing as possible and we were afraid that a smaller move would only have led to expectations for the future, that this would only be a first step in a series. We have possible tried to avoid that impression. In very parochial words, I am inclined to say - and 'do not quote me' here, I realise that - but I am inclined to say that we moved from 3% to 2 is maybe a slightly, unexpectedly large fall, but I would like to add, and now you be sure:
Question: Mr. Duisenberg, I just want to ask if you could elaborate a little bit on the con structural reforms that you said you would like to see from euro zone governments and also if you that by cutting the rates in such a large step that you actually reduce the pressure on governments to make these reforms?
Duisenberg: We hope that the contrary will emerge over time. Convincing structural reforms relat the following: We, and most other observers, are very convinced that the phenomenon of a unacceptably high rate of unemployment across the euro area, but particularly in the larger cou in the euro area, is due to structural factors and to inflexibility in markets for labour and for goods and services and that monetary policy is neither the cause of that structural unemplo nor is it the solution to it. The solution to that problem has to be found in measures of a conv reformist nature in the labour and in the goods markets and we do hope that taking the monet policy stance we have taken today will in the ensuing months increasingly focus the attentio policy-makers and the public on the real causes of the unemployment problem, because it wi demonstrably become clear that monetary policy is not the answer to solve those problems.
Question: Do you feel completely certain that this interest rate cut represents no danger of inf any part of the euro zone, I am thinking, in particular, of smaller, more dynamic economies, su the Irish one. And secondly, is it fair to conclude that the opposition to a rate cut came f representatives of those countries?
Duisenberg: I will not allude to any opposition by anyone in the Governing Council. We do beli that this rate cut, otherwise we would not have done it, will not pose any additional thr inflationary pressures arising either in small or in large countries.
Question (translation): President Duisenberg, with regard to risks and side-effects. First quest you keep the interest rate at 2.5% even if a recession occurs? Have we understood you correctl this respect? Second, is it indeed so that too much capital flowing to the United States at high rates flows could become a problem for the external stability of the euro? I mean, the higher i rates in the United States indicate that, at the moment, still more capital will be flowing to t States. Third question: did you intend to increase the pressure on lenders, i.e. also on the because your impression was that, in the light of the official rate of 3%, they were not ans borrowers' demands for cheaper loans?
Duisenberg: I am not going to speculate about a potential recession if we do not see one coming. see a slowdown in economic development., We do not see, or do not yet see, a recession to be on hands. So I will not speculate about what we would do if there really were a recession. We will that bridge when we come to it or, as my mother used to say: if the skies fall down, all the bi dead. Interest rates in the United States are higher, but you have to realise that the United Sta totally different phase of the cycle than we are and whether that will in any way induce capita to move differently from what they are moving today remains to be seen. And the third part of question was, have we in any way made the conclusion that the banks, when the rate was 3 %, wer not giving in enough to the demand for credit. No, on the contrary, as you know, the developmen credit to the private sector has been quite buoyant over the past few months, although its b increase has come down somewhat. The last time I was here, I reported that credit to the private was growing at an annual rate of nearly 10%; the latest figure we have now is that it has come to a rate of slightly over 9%. But then, when you analyse that credit to the private sector development, it is also very clear that those high rates of growth are particularly present in th countries of Europe and not too much in the larger countries, although there is quite a diff between the various countries. So, in itself, that rate of growth of credit, which is already mo somewhat, is not a cause of inflationary concern for us, and neither is the move today any induc to the banks to be more forthcoming in giving credit. They are already quite forthcoming.
Question (translation): Mr. Duisenberg, the situation in Europe at the moment, especially this interest rate move by the ECB, now reminds me somewhat of Japan. You reduce interest rates tim and again, yet on the other hand, no progress is being made in the areas of politics and restruct
Europe. In December, although I cannot quote you directly, you stated, much in the same today, that following the cut in interest rates the situation with regard to interest r would be settled. It is now the beginning of April and we see obviously a further cut in i
Is there not the danger, Mr. Duisenberg, that this process is about to begin again and certain period, owing to a lack of willingness in Europe and in Germany, in particular, to structural reforms, the whole rigmarole will begin once more and you will be forced, yet ag interest rates?
Duisenberg: Well, we do not see that danger arising from the level which we now have reach hope that our call - as I expressed it today - to governments to pursue a reform-oriente adopt structural reform measures in all markets, that that policy will get a new incenti measures we have taken today. If they do not do that - and it will take time, I admit tha can pursue and effect policies like I have in mind - if they do not do that, then indeed mo is no alternative.
Question (translation): Those who are not au fait with the intricacies of monetary policy mean Joe Soap , the man on the street, could get the impression that Oskar Lafontaine was making his demands. Has your decision anything to do with his resignation or could it be i in another way, as a welcoming gift for the new Federal Minister of Finance in Bonn?
Duisenberg: The interest rates which we have established today are valid for the entire eu they have been founded on considerations related to the entire euro area and not to any country or finance minister.
Question: Mr. President, it sounds like you are meeting the governments halfway here with cut. Especially the German government was calling for the rate cut to help with the unemp problem. Now you are saying: here is your rate cut, fix the unemployment problem. Is that p decision to cut rates?
Duisenberg: No, it is not part of the decision, but I do not have that much difficulty with
Question (translation): President Duisenberg, as yet, people do not have euro money in th What is your message for Europeans in general with this interest rate cut?
Duisenberg: Well, I had 'Eurogeld in der Hand' today. It looked quite good, as I told you message to the people who will have euro money in their hands in two years time and who are in the process today of getting used to it, more and more, as everybody can notice who trav across Europe, the message I have is that, today's measures should increase the confiden people, of the 'Otto Normalverbraucher' in the institution that manages their money, in the Central Bank as the guardian of their values.
Question: Until now we did not speak of Kosovo, we have war here at our doors, was this w possible impact on economy or the psychological impact on Europe - part of your decision o your concerns?
Duisenberg: No, it was not. It neither induced nor deterred us from taking the decisions we today. Of course, we are fully aware of the dramatic turmoil that is taking place in Europe not leave us untouched, by no means, but we have also noted with gratitude that all this tu far not had any impact at all on the financial markets or exchange rates.