ECB monetary policy plans are proving trickier than expected

Date: 30/07/1998

By Tim Jones

THE European Central Bank will be hard-pressed to devise a detailed policy strategy in time for the first two post-summer meetings of its governing council, say senior monetary officials.

With just three working months to go until the beginning of economic and monetary union, the ECB is racing against the clock to establish a target for the setting of short-term interest rates.

To cope with its huge workload, the 17-member governing council, made up of central bank governors of the 11 participating nations plus the ECB's six directors, will convene again ten days after their scheduled meeting on 1 September.

However, even with the depleted research department under chief economist Otmar Issing working flat out to define the bank's targeting tools, officials fear a quick decision may be beyond them.

ECB President Wim Duisenberg has made it clear that the main 'intermediate' target for the bank will be a 'broad' measure of the types of money in circulation. This will almost certainly include banknotes and coins used by the public and various kinds of short-term deposits (M3).

However, accurate and timely measures of this 'aggregate' are proving difficult to pin down for the whole euro-11 area.

Last month, Duisenberg revealed that M3H, a measure the bank is using now while it devises a permanent target, had grown 6.0% in the year to April, compared with annual growth of 5.5% in March.

Although Issing remarked that such growth rates were "already being given serious attention", he admitted that setting interest-rate policy on the basis of three-month-old money supply data was "risky".

Officials are running into a series of problems in establishing a common and up-to-date measurement of money growth, including differences in adjusting data for seasonal variations.

Even if the data were reliable, said one official, the governing council would still have difficulties in accurately forecasting 'money demand' (the popular preference for money over other stores of wealth), particularly at the start of monetary union.

"It is hard to find a strategy which includes a publicly announced target, but is robust enough to deal with unexpected developments in 1999," said a source.

Officials believe that, at least at the beginning of EMU, the bank's directorate is more likely to opt for a mixture of monetary targeting and keeping a close eye on forecast inflation.

When they discuss inflation trends on 1 September, ECB governors are likely to conclude that the outlook is, as Issing remarked last week, "extremely favourable".

The governors from countries where short-term interest rates are still well above the 3.3% rates operating in Germany and France will be quizzed as to when they feel they can relax their monetary policy further.

Last week, Issing said of short-term interest rates: "There will be increasing pressure towards convergence."

Rates in Ireland are over 6% while those in Spain and Italy are still over 4%.