Brussels, 12/09/2002 (Agence Europe) - Despite repeated signs of economic recovery in the Eurozone petering out, the European Central Bank decided at the meeting of its Governing Council in Frankfurt on Thursday to leave interest rates unchanged at 3.25%. The marginal loan facility rate was kept at 4.25% and the deposit facility at 2.25%. At a press conference, Wim Duisenberg said that the ECB's current interest rates were appropriate in that "risks to price stability appear rather balanced".
The ECB is predicting "ongoing, albeit modest, growth in real GDP in the second half of this year, with growth rates in line with potential growth in 2003" (between 2 and 2.5%), said Duisenberg, adding: "this delay in the acceleration of economic activity in the euro area broadly corresponds with the world economic outlook, given that the expected pace of the recovery has been scaled down over recent months… the strength of the upturn in economic activity has become more uncertain, both inside and outside the euro area." The ECB President commented that "on the domestic side, private consumption should particularly benefit from lower inflation and improved real disposable income". Duisenberg pointed out that "the latest data confirm a modest recovery in real GDP growth in the euro area in the first half of this year. In the second quarter of this year real GDP growth is estimated to have grown by 0.3% quarter on quarter, following upwardly revised growth of 0.4% in the first quarter."
Duisenberg said that "for inflation rates to come down to levels below 2% in 2003, as currently projected by most forecasts, it is crucial that oil prices do not escalate and that wage moderation prevails…. With regard to the devastating floods which have hit three member countries in particular… the overall macroeconomic impact… should be limited and have no lasting effects. Certain food prices could temporarily rise as a result… and while real GDP growth could initially be dampened slightly, it may subsequently be stimulated by reconstruction.
On the subject of the M3 money supply (which grew to 7.3% in the period from May to July 2002), Duisenberg said there was "concern that more liquidity is available in the euro area than would be needed to finance sustainable, non-inflationary economic growth."
Commitment to Stability Pact more important than ever
"Against the background of recent developments, it seems to be more warranted than ever to call on member countries to remain committed to the Stability and Growth Pact", noted Duisenberg: "Countries with sound fiscal positions should safeguard their achievements, while countries with remaining imbalances must avoid deficits in excess of 3% of GDP and implement determined policies in order to progress towards budgets close to balance or in surplus." Responding to questions from the press, the ECB President said: "On the Stability and Growth Pact, I hear the voices here and there who want to change the rules of the game. The ECB sticks to its policy and its says don't change the rules of the game when you only just have begun playing."
A summary of Duisenberg's answers to questions from the media:
- Impact of possible war on Iraq. "The chance of a war or military action with Iraq of course adds greatly to the uncertainty we are confronted with", explained Duisenberg, remaining at this stage "totally unpredictable". He explained: "What precise impact an eventual (sic) military adventure might have on the monetary policy of the ECB or inflationary developments depends very much on the nature and the size of the activities to be deployed, the effects on the oil markets and on the rest of the region in the Middle East."
- Banking supervision. On the recent discussions at the ECOFIN Council in Copenhagen (see Europe of 9/10 September, p.9), Duisenberg said "nothing has been decided yet and I regard it as crucial if there are more level committees. And it is crucial that the ECB and all national central banks are in some way involved in the world of all committees because there is a close synergy between central banking and supervision". (The idea has been mooted of setting up two separate committees.)
- Growth in 2002. Duisenberg said he "absolutely" agreed with forecasts that economic growth may even be below 1% this year.