ECB monetary policy strategy fuels debate

Date: 15/10/1998

By Chris Johnstone

ECONOMIC analysts are divided over whether the strategy agreed by the European Central Bank this week to guide its monetary policy once the euro is launched marks victory or defeat for the champions of the German Bundesbank's approach.

The ECB's governing council finally settled a long-running debate over its future strategy at a meeting earlier this week, opting for a pragmatic approach to achieving its primary objective of 'price stability'.

The bank's President Wim Duisenberg outlined a policy which will be mainly guided by money supply figures, but will also keep a careful eye on the actual rate of price rises in the 11-nation euro area and the prospects for future inflation.

Tools to guide future policy will include a reference value for monetary growth, to be announced in December, with price stability already defined as a rise of less than 2&percent; in the annual consumer price index.

Duisenberg gave mixed signals on how far the bank will be guided by money supply figures, whose use is traditionally a signal of a tight economic policy.

He said that money supply figures would be given more weight than inflation, but added that monetary policy would not respond “mechanistically to deviations from a single target or changes to a specific variable”.

After scrutinising Duisenberg's words, experts disagreed over the extent to which the ECB's future monetary policy had been fashioned in the image of Germany's powerful Bundesbank or departed from it. Some said the priority given to money supply was a victory for the Bundesbank, while others argued that the ECB's decision not to rely solely upon it marked a significant break with the German approach.

One central bank source put a different perspective on the outcome of the debate in the ECB governing council. “The main loser from this was not the Bundesbank, but the Anglo-Saxons, who were not even at the table,” he said.

Central bank insiders said Duisenberg's overall message was that the ECB would use a range of instruments and be pragmatic in setting its course during the early days of the single currency.

The new bank will have to wrestle with a developing range of figures for the euro zone with little experience of how to interpret them and little insight into which statistics will provide the best signals for trends.

“It is significant that Duisen-berg's speech avoids the word target but instead refers to reference values, and bank policy has not crystallised its focus on any one of these,” said a central bank source. Duisenberg also rejected calls for a coordinated world-wide round of interest rate cuts, insisting that would be “inappropriate”.

He added that although inflationary pressure did not appear to be building up in Europe at the moment, the figures available were preliminary and needed to be treated with caution.

He said the signals about European growth were mixed, with industrial production down in the second quarter of the year but new car and retail sales still buoyant.