Co-operation between the European central banks was always very close. In the last few months of 1998 the countries participating in the third stage of Monetary Union co-operated more and more closely. The co- ordinated reduction in leading rates at the beginning of December 1998 clearly showed that the currency union had begun de facto before the start of Stage Three. This co-ordinated measure contributed substantially - as we now know - to the stabilisation of market expectations.

For more than five weeks the ECB has been conducting monetary policy operations, mainly in the form of reverse open market operations. The main operation will be carried out at a weekly frequency with a maturity of two weeks. So far, five such operations have been conducted successfully, at a fixed interest rate of 3%.

Besides the reverse transactions which constitute the main instrument for liquidity control and targeting interest rates, the Eurosystem offers two "standing" facilities: the marginal lending facility and the deposit facility. These can be accessed by credit institutions via the national central banks. The marginal lending facility is primarily a safety valve for short-term liquidity shortages in the banking system and thereby limits upward movements in money market rates. To some extent, its counterpart is the short-term deposit facility, which is used to absorb short-term liquidity surpluses. This forms the lower limit for money market rates. For the start of Monetary Union the interest rate on the deposit facility was set at 2% and the rate on the marginal lending facility was set at 4.5%.

As a transitional measure, the Governing Council decided to establish a narrow corridor of 2.75-3.25% between the rates on the marginal lending facility and the deposit facility from 4 to 21 January 1999. The intention was to facilitate the necessary adjustment to the new institutional environment brought about by the transition to Stage Three. As already announced, on 21 January 1999 it was decided to return to the rates on the two "standing" facilities that were set for the start of the single monetary policy. Since 22 January 1999, therefore, the rate on the deposit facility has been 2% and the rate on the marginal lending facility has been
4.5%.

A critical factor in this decision was the behaviour of the money market for the euro area as a whole since the beginning of the year. The
Governing Council established that over time there had been a marked reduction in the difficulties experienced by some market participants with the introduction of the integrated money market and, in particular, with cross-border liquidity flows. All in all, the integration of the money market in the euro area reached a satisfactory stage only three weeks after its implementation. In analysing the money market it should be noted that, inter alia, there can be a marked difference between ECB interest rates and short-term market rates. On the one hand, market rates may include credit risk premia, and on the other, expectations may lead to differences between the two rates.

At its meeting last Thursday the Governing Council confirmed its earlier assessment of the outlook for price stability. Therefore it was decided to leave the conditions for the next main refinancing operations, on 10 and 17 February 1999, unchanged. They will be carried out as volume tenders at a fixed rate of 3%, the same conditions as the last such monetary policy operations.

In addition, in recent weeks the first longer-term open market operations were also conducted, in the form of reverse transactions. These were carried out on 14 January 1999 in three parallel tender procedures with maturities of one, two and three months. The fixed rate tender procedure was used. By contrast with the regular main refinancing operations, the Eurosystem does not use these longer-term operations to send signals to the market and therefore usually acts as a price-taker. The
ECB thus gives advance indication of the planned allocation. The interest rates which arise from these monetary policy operations should therefore be seen as indicators of prevailing market conditions.

Regular assessment of the monetary, financial and economic situation

To conclude, I should like briefly to report on the Governing
Council’s current assessment of the monetary, financial and economic situation. On the basis of these assessments the Governing Council decided last Tuesday to leave interest rates unchanged.

Taking into account the latest monetary data for December 1998, the three-month moving average of the 12-month growth rate of the monetary aggregate M3 (for the period from October to December 1998) remained more or less stable at 4.7%. This value is very close to the reference value set by the Governing Council. According to our analysis, the evolution of the money supply shows no risks to price stability. Credit to the private sector also grew strongly in December last year. Although at present we do not perceive any inflationary signals, further developments will be very carefully monitored.

With regard to the broadly based assessment of the outlook for price developments and the risks to price stability in the euro area, monetary and financial developments can be seen to indicate a favourable assessment of the latest monetary policy decisions of the Eurosystem. They indicate that market participants expect a continuation of the environment of price stability. Long-term rates fell to new historical lows at the beginning of
1999 and there was an overall downward shift in the yield curve. Therefore, financing conditions for investment are currently exceptionally favourable.

At present the growth prospects for the euro area are, however, still marked by the uncertainties relating to the development of the world economy in 1999. These uncertainties have had a negative impact on indicators of the economic climate in the euro area. There are widespread expectations of an economic slowdown in the near future. This deterioration in the external economic environment can be linked, above all, to the financial crises in Asia, Russia and Latin America. However, there is a mixed picture. While the growth rate for industrial production fell up to
November 1998, retail sales figures and consumer confidence have recently shown positive trends. Furthermore, growth in real gross domestic product in the euro area was relatively robust in the third quarter of 1998. In the
United States real growth in the fourth quarter actually turned out higher than expected. Measured against the Harmonised Index of Consumer Prices, the HICP, consumer prices in the euro area rose by 0.8% in December 1998.
This is a tenth of a percentage point lower than in November. This development is in line with earlier trends. It can be linked, in particular, to a further decline in energy prices and a weakening in price increases in industrial goods.

All in all, the above-mentioned economic development and the available forecasts for 1999 do not indicate any noticeable upward or downward pressure on prices. Potential upward risks could arise from a change in the external global economic situation and any associated effects on the euro area, via import and producer prices. These developments must be carefully monitored. There is concern that inflationary pressure might develop in the event of a strong increase in wage prices and an easing of fiscal policy. Developments in the exchange rate will also be closely monitored in view of their significance for price developments.

Finally, let me emphasise that the current level of real interest rates is exceptionally low. If real interest rates are taken simply as the difference between nominal rates and the current increase in consumer prices (HICP), short-term real interest rates in January 1999 stood at
2.3%, i.e. around 80 basis points lower than one year ago. Long-term real rates have fallen even more, by 110 basis points, and stood at 3% in
January. These levels are very low, both compared with other countries and with historical data. In line with the safe-guarding of price stability, the current monetary and financial conditions thus clearly support future economic growth. Monetary policy can do no more than this without jeopardising the great overall economic advantages of price stability and its own credibility.

Real structural reforms which increase the flexibility of the labour markets, as well as a continuation of the moderate increase in wage prices, would not only ease the burden on monetary policy but would also support employment growth. This will be all the more true if the deterioration in the economic situation this year is worse than expected owing to the negative aspects of the external economic environment.

The statistical requirements of the ESCB

Speech delivered by Eugenio Domingo Solans,

Member of the Executive Board of the European Central Bank on the occasion of a visit to the Banque Centrale du Luxembourg

Luxembourg, 25 March 1999

The booklet introducing statistical requirements for Stage Three, which the EMI published in July 1996, began with the bold statement:
"Nothing is more important for the conduct of monetary policy than good statistics." These challenging words show the importance which the EMI attached to this area of preparations for Monetary Union, and I must say this has been fully justified by our experience in the first few weeks of the life of the euro.

The statement of requirements

But let me start back in 1996. Because of the time it takes to implement statistical changes in reporting institutions and central banks, a statement of prospective statistical requirements could be delayed no longer. But that statement had to be made with very imperfect knowledge.
Nobody knew at that stage (for example) what definitions of monetary aggregates would be chosen for the single currency area, or what their role would be. Given the differences in financial structures in our countries, it was not clear how to identify the financial institutions from whose liabilities the money stock would be compiled. It was decided to define them in functional terms, and in such a way that money-market funds as well as banks of the traditional type would be included. It was not clear at that stage whether minimum reserves would be applied, and, if they were, what form they would take - although it had been decided that the banking statistics data would provide the basis for any such system. Implementation had to start quickly for the statistics to be ready in time for a Monetary
Union starting in 1999, but no one knew which Member States would adopt the single currency - though it was clear that the distinction between business inside and outside the euro area, would be of critical importance for monetary and balance of payments statistics, and would have to be planned for in statistical systems.

In mentioning monetary and balance of payments statistics, I do not want to suggest that the statistical requirements set out in 1996 were confined to these areas. On the contrary, they covered a wide range of financial and economic data, including financial accounts, prices and costs
- relating directly to the ESCB's main responsibility under the Treaty, namely to maintain price stability - government finance data, national accounts, labour market statistics, production and trade data and other conjunctural statistics, and more besides. These areas are, or course, under Eurostat's responsibility.

The focus on the euro area as a whole

In formulating and implementing statistical requirements, it was important to realise that the ESCB's attention would have to focus on the euro area as a whole. Monetary policy cannot discriminate among different areas of the Monetary Union - although in practice it may have different effects because of different national economic and financial structures.
Focus on the area as a whole has important implications. The data must be sufficiently comparable for sensible aggregation; they must also be available to a comparable timeliness and to the same frequency. In some cases (monetary and balance of payments statistics) they had to be available in a form permitting appropriate consolidation. In short, with a few exceptions, it was realised that adding together existing national data would not be adequate. Important initiatives were already under way, such as the adoption of a new European System of Accounts [ESA95] and the implementation at national level of a new IMF Balance of Payments Manual.
However, wide-ranging statistical preparations would be necessary for the
ECB to have the sort of statistical information that the national central banks have traditionally used in conducting monetary policy.

How far the provision meets the current need

I arrived at the ECB about 2 years after these requirements had been released and 7 months before the start of Monetary Union. I must confess that I doubted many times in those early weeks whether statistics could be ready in time to sustain monetary policy decisions. There were anxious moments too in the late stages of finalising the monetary policy strategy: would the requirements set out in 1996 correspond to the need perceived in autumn 1998?

I am now sure that the decisions made in 1996 were correct. In practice, one choice in autumn 1998 was almost automatic: thanks to the work of Eurostat and the national statistical offices in the context of the convergence criteria (with active involvement of the EMI), there was no plausible rival to the Harmonised Index of Consumer Prices (HICP) for the purpose of defining price stability. I am aware that national consumer price indices are sometimes criticised for overstating inflation, because they take insufficient account of quality improvements and use outdated weights. While further development of the HICP is to come, and at present there is no satisfactory treatment of expenditure on housing, I believe that every effort has been made to apply the lessons from experience with national consumer price measures. The other choices for statistical elements in the strategy were less obvious. In fact the banking statistics reporting structure announced in 1996 proved able to provide the monetary aggregates and the counterpart analysis required, and - with a little fine- tuning - to meet the needs of a statistical basis for reserve requirements, details of which were also finalised in the autumn. We were thus able to begin publishing monetary statistics only a few days after the final decisions were taken (at the Council meeting on 1 December), and were able to publish with some estimation last month back data on the three monetary aggregates monthly to 1980, and a note urging caution on users of the earlier data.

However, the monetary strategy avoids putting too much weight on one area or type of information. This is only partly for statistical reasons.
The formation of the euro area is a substantial structural change, which may in time affect monetary and financial relationships. So the ECB also examines a range of economic data for the light they shed on the assessment of the economic situation and, in particular, prospects for inflation. The editorial and economic developments sections of the Monetary Bulletin show the way the ECB draws on this information; the statistical information itself is set out in tables in the statistical section. Thus, in addition to money and credit and the HICP, the editorial typically touches on GDP, industrial output, capacity utilisation, orders, the labour market, business and consumer confidence, costs and prices other than the HICP, earnings and wage settlements, fiscal positions - naturally placing the emphasis on what are judged to be the most important developments at the time. All these areas were covered by the statement of requirements made in
1996.

I do not need to say that, at present, an accurate assessment of the economic situation in the euro area is of vital importance. The editorial section of the March Bulletin concludes that the overall outlook for price stability remains favourable, with no major risk that HICP inflation will exceed 2% in the near future, but there is nevertheless a balance of conflicting influences. To reach this judgement, the Bulletin assesses the latest GDP data (slower growth in the provisional Eurostat figures for GDP in the 4th quarter of 1998; declining manufacturing output), the labour market (unemployment falling slightly; some signs of rising pay settlements), and confidence indicated by opinion surveys (business confidence weak; the consumer mood rather optimistic). The economic developments section supports the overall conclusion, and analyses in more detail price and cost developments and of output, demand and the labour market. It concludes with analysis of the fiscal position in the euro area in 1998, and a preview based on fiscal plans for 1999. I am drawing your attention to this to show the variety of material supporting the ECB's assessment of the economic and financial position and prospects. Although we pay particular attention to certain items - the monetary statistics, with an emphasis this time on influences contributing to recent faster growth, and to the rather rapid growth of credit, and the HICP - we draw on a wide range of information in a continuous monitoring exercise. The establishment of an institution responsible for monetary policy in the euro area has caused a fundamental change in the use of macroeconomic statistics at European level, very much as anticipated by the Implementation Package nearly 3 years ago.

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