Brussels, 30/08/2001 (Agence Europe) - The Governing Council of the European Central Bank (ECB) decided on Thursday to reduce its key rates by a quarter of a point. The main refinancing operations minimum bid (key rate) thus moves to 4.25%, against 4.50% so far, the marginal lending facility moves from 5.50% to 5.25% and the interest rate on the deposit facility is reduced from 3.50 to 3.25%. This is the second time since the beginning of the year that the ECB has dropped the rent on money.
By doing so, the institution has taken note of the slowdown in the European economy "deeper than initially expected", according to the President of the ECB, Wim Duisenberg. For some months now, growth in the Twelve has brutally retrograded, making a softening of the monetary policy desirable. Stagnation in activity, especially felt in Germany where the GDP stagnated in the second quarter, has affected other large countries of the euro zone, beginning with Italy and France. Even though it is not their primary mission, as they like to point out, the central bankers could no longer be indifferent to the slowdown having an effect on the level of inflation. This has indeed relaxed strongly over the past two months. The rise in prices stood at 2.8% in July, whereas it reached 3.4% in the spring. Certainly, inflation is still far higher than the 2% preferred by the ECB for defining price stability, but the fall in the price of oil and the increase in the euro should enable inflation to approach this psychological threshold in the coming months.
Duisenberg justified this decision, at a press conference, by the fact that "elements at our disposal" indicate "an improvement in prospects regarding inflation". According to the ECB President, different technical consideration led them to play down the significance of the recent tension in the M3 money supply, indicator that should have played in favour of a stability of the interest rates. This "transitional" increase in the M3 is said to reflect both "a relatively flat yield curve and the recent weakness in stock markets, both of which made the holding of short-term deposits and marketable paper included in the M3 attractive". Households have, moreover, "needed a higher level of transaction balances to finance the past rise in energy and food prices".
We are, however, he insisted, seeing "clear signals" of lower inflationary pressures from the external demand side, illustrated by the "slow growth" in economic activity in the United States, and the "persistent economic weakness" in Japan, he states. In addition, European consumption growth has been dampened by losses in real disposable income related to past increases in consumer prices. "All these factors also had negative impact on investment", Mr. Duidenberg summarises.
Among the encouraging signs, the President of the ECB points to: - expected drop in consumer prices that should support the growth in domestic demand; - tax reductions in several countries; - good financing conditions; - wage moderation observed in the first quarter 2001. He expressed concern at the possibility that economic slowdown could incite Member states not to strictly respect their commitments made in the framework of the Stability and Growth Pact. "Under the present circumstances, the automatic stabilisers should only be allowed to work fully in those countries whose budget positions are close to balance or in surplus, he recalled. Duisenberg also renewed his traditional call for structural reforms in the fields of tax, pensions and the labour market.
The ECB for the first time on Thursday unveiled the banknotes in euro that will begin to circulate in Europe, from 1 September, gradually to be handed to banks and retailers. The 303 million consumers of the euro zone will , for their part, have to wait until 1 January 2002 to be in possession of the new banknotes. The timetable for the pre-supply of banks and traders in euro notes (close to 15 million will be produced in the EMU) varies according to country. Germany, Austria, Luxembourg, Ireland and Finland will lead the way by distributing the new banknotes to commercial banks from September. In the first three countries, retailers and security companies will also be pre-supplied in September, in the other two countries the following month. In Greece and Portugal, banks will receive their first notes from October, and traders in December. In Belgium and Spain, the distribution of notes to banks will begin from November and to traders in December. In Italy, notes will be delivered to banks mid-November, and traders will only have them in the last days of December. Those lagging behind are France and the Netherlands, which will only deliver notes, to banks and traders, from 1 December. The distribution of some 50 billion coins to banks, which poses more arduous logistical problems die to the weight of the metal, will begin in most of the twelve countries in September.