Advice on Legislation
ECB Opinion on Slovak legislation relating to dual display and rounding rules
On 1 July 2008, at the request of the Slovak Ministry of Labour, Social Affairs and Family, the Governing Council adopted an Opinion on dual display and rounding rules in the labour and social security sectors (CON/2008/27). The Opinion is available on the ECB’s website.
ECB Opinion on the introduction of the euro in Slovakia
On 3 July 2008, at the request of the Council of the European Union, the Governing Council adopted an Opinion on the introduction of the euro in Slovakia and on the conversion rate to the euro for the Slovak koruna (CON/2008/28). The Opinion was published in the Official Journal of the EU on 17 July 2008 and is also available on the ECB’s website.
ECB Opinion on Bulgarian legislation on statistics
On 9 July 2008, at the request of the Bulgarian Prime Minister, the Governing Council adopted an Opinion on the amendments to the law relating to statistics (CON/2008/29). The Opinion is available on the ECB’s website.
Corporate Governance
Participation of Národná banka Slovenska in Governing Council meetings before 1 January 2009
In line with past practice the Governing Council invited the Governor of Národná banka Slovenska to participate in its meetings as an observer. It also decided to grant observer status to experts from Národná banka Slovenska with respect to all Eurosystem/ESCB committees and their sub-structures whenever they meet in the Eurosystem composition. This decision entered into effect following the decision of the EU Council of 8 July 2008 to abrogate the derogation of Slovakia.
Decisions taken by the Governing Council of the ECB (in addition to decisions setting interest rates)
Operational Issues
ECB Guideline on the management of foreign reserve assets
On 20 June 2008, the Governing Council adopted a Guideline on the management of the foreign reserve assets of the European Central Bank by the national central banks and the legal documentation for operations involving such assets (recast) (ECB/2008/5). The Guideline will be published in the Official Journal of the EU on 19 July 2008 and will also be available on the ECB’s website.
Payment Systems and Market Infrastructure
Second public consultation on CCBM2 (Collateral Central Bank Management)
On 10 July 2008 the Governing Council authorised the publication of the outcome of the second public consultation on the draft CCBM2 User Requirements.
TARGET2-Securities – launch of the project
On 17 July 2008 the Governing Council decided to launch the TARGET2-Securities project and to provide the resources required until its completion. This is the result of the feedback received in response to the invitation issued by the Governing Council to all European central securities depositories inviting them to join the TARGET2-Securities initiative. The Governing Council also decided to assign the development and operation of TARGET2-Securities to the Deutsche Bundesbank, the Banco de España, the Banque de France and the Banca d’Italia. A press release was published yesterday on the ECB’s website.
CCBM2 – launch of the project
On 17 July 2008 the Governing Council decided to launch the CCBM2 project. It also assigned the development and operation of CCBM2 to the Nationale Bank van België/Banque Nationale de Belgique and De Nederlandsche Bank, with a view to commencing live operations earlier than – or at the latest together with – TARGET2-Securities, subject to the outcome of further detailed analysis of the synergies with TARGET2-Securities. The Governing Council also approved the revised CCBM2 User Requirements and authorised their publication on the ECB’s website. This version of the User Requirements takes due account of the input received in the context of the second public consultation on CCBM2 and will form the basis for drafting the detailed specifications for CCBM2. A press release was published yesterday on the ECB’s website.
Objective of monetary policy
To maintain price stability is the primary objective of the Eurosystem and of the single monetary policy for which it is responsible. This is laid down in the Treaty establishing the European Community, Article 105 (1).
"Without prejudice to the objective of price stability", the Eurosystem will also "support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community". These include a "high level of employment" and "sustainable and non-inflationary growth".
The Treaty establishes a clear hierarchy of objectives for the Eurosystem. It assigns overriding importance to price stability. The Treaty makes clear that ensuring price stability is the most important contribution that monetary policy can make to achieve a favourable economic environment and a high level of employment.
These Treaty provisions reflect the broad consensus that
the benefits of price stability are substantial (see benefits of price stability). Maintaining stable prices on a sustained basis is a crucial pre-condition for increasing economic welfare and the growth potential of an economy .
the natural role of monetary policy in the economy is to maintain price stability. Monetary policy can affect real activity only in the shorter term (see the transmission mechanism). But ultimately it can only influence the price level in the economy.
The Treaty provisions also imply that, in the actual implementation of monetary policy decisions aimed at maintaining price stability, the Eurosystem should also take into account the broader economic goals of the Community. In particular, given that monetary policy can affect real activity in the shorter term, the ECB typically should avoid generating excessive fluctuations in output and employment if this is in line with the pursuit of its primary objective.
4：Benefits of price stability：2008/07/27(日) 07:32:07 HOST:228.23.100.220.dy.bbexcite.jp
The objective of price stability refers to the general level of prices in the economy. It implies avoiding both prolonged inflation and deflation. Price stability contributes to achieving high levels of economic activity and employment by
improving the transparency of the price mechanism. Under price stability people can recognise changes in relative prices (i.e. prices between different goods), without being confused by changes in the overall price level. This allows them to make well-informed consumption and investment decisions and to allocate resources more efficiently;
reducing inflation risk premia in interest rates (i.e. compensation creditors ask for the risks associated with holding nominal assets). This reduces real interest rates and increases incentives to invest;
avoiding unproductive activities to hedge against the negative impact of inflation or deflation;
reducing distortions of inflation or deflation, which can exacerbate the distortionary impact on economic behaviour of tax and social security systems.
preventing an arbitrary redistribution of wealth and income as a result of unexpected inflation or deflation.
While the Treaty clearly establishes the maintenance of price stability as the primary objective of the ECB, it does not give a precise definition of what is meant by price stability.
Quantitative definition of price stability
The ECB’s Governing Council has defined price stability as "a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%. Price stability is to be maintained over the medium term".
The Governing Council has also clarified that, in the pursuit of price stability, it aims to maintain inflation rates below, but close to, 2% over the medium term.
5：Role of monetary policy：2008/07/27(日) 07:33:42 HOST:228.23.100.220.dy.bbexcite.jp
The central bank is the sole issuer of banknotes and bank reserves. That means it is the monopoly supplier of the monetary base. By virtue of this monopoly, it can set the conditions at which banks borrow from the central bank. Therefore it can also influence the conditions at which banks trade with each other in the money market.
In the short run, a change in money market interest rates induced by the central bank sets in motion a number of mechanisms and actions by economic agents. Ultimately the change will influence developments in economic variables such as output or prices. This process – also known as the monetary policy transmission mechanism – is highly complex. While its broad features are understood, there is no consensus on its detailed functioning. back to top
Long-run neutrality of money
It is widely agreed that in the long run – after all adjustments in the economy have worked through – a change in the quantity of money in the economy will be reflected in a change in the general level of prices. But it will not induce permanent changes in real variables such as real output or unemployment.
This general principle, referred to as "the long-run neutrality of money", underlies all standard macroeconomic thinking. Real income or the level of employment are, in the long term, essentially determined by real factors, such as technology, population growth or the preferences of economic agents. back to top
Inflation – a monetary phenomenon
In the long run a central bank can only contribute to raising the growth potential of the economy by maintaining an environment of stable prices. It cannot enhance economic growth by expanding the money supply or keeping short-term interest rates at a level inconsistent with price stability. It can only influence the general level of prices.
Ultimately, inflation is a monetary phenomenon. Prolonged periods of high inflation are typically associated with high monetary growth. While other factors (such as variations in aggregate demand, technological changes or commodity price shocks) can influence price developments over shorter horizons, over time their effects can be offset by a change in monetary policy.
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Operational Framework
In order to achieve its primary objective, the Eurosystem uses a set of monetary policy instruments and procedures. This set forms the operational framework to implement the single monetary policy (see Implementation). back to top
Monopoly supplier of monetary base
The Eurosystem is the sole issuer of banknotes and bank reserves in the euro area. This makes it the monopoly supplier of the monetary base, which consists of
currency (banknotes and coins) in circulation,
the reserves held by counterparties with the Eurosystem, and
recourse by credit institutions to the Eurosystem’s deposit facility.
These items are liabilities in the Eurosystem’s balance sheet. Reserves can be broken down further into required and excess reserves.
In the Eurosystem’s minimum reserve system, counterparties are obliged to hold reserves with the national central banks (NCBs). Beyond that, credit institutions usually hold only a small amount of voluntary excess reserves with the Eurosystem.
By virtue of its monopoly, a central bank is able to manage the liquidity situation in the money market and influence money market interest rates. back to top
Signalling the monetary policy stance
In addition to steering interest rates by managing liquidity, the central bank can also signal its monetary policy stance to the money market. This is usually done by changing the conditions under which the central bank is willing to enter into transactions with credit institutions. back to top
Ensuring proper functioning of the money market
In its operations, the central bank also aims to ensure a proper functioning of the money market and to help credit institutions meet their liquidity needs in a smooth manner. This is achieved by providing both regular refinancing to credit institutions and facilities that allow them to deal with end-of-day balances and to cushion transitory liquidity fluctuations. back to top
Guiding principles
The operational framework of the Eurosystem is based on the principles laid down in the Treaty on European Union. Article 105 of the Treaty states that in pursuing its objectives, the Eurosystem "(…) shall act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources (…)".
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In addition to the principles set out in the Treaty on European Union, the operational framework follows several guiding principles.
Operational efficiency
The most important principle is operational efficiency. It can be defined as the capacity of the operational framework to enable monetary policy decisions to feed through as precisely and as fast as possible to short-term money market rates. These in turn, through the monetary policy transmission mechanism, affect the price level.
Equal treatment and harmonisation
Another principle is that credit institutions must be treated equally irrespective of their size and location in the euro area. The harmonisation of rules and procedures helps to ensure equal treatment by trying to provide identical conditions to all credit institutions in the euro area in transactions with the Eurosystem.
Decentralised implementation
One principle specific to the Eurosystem is the decentralised implementation of monetary policy. The ECB coordinates the operations and the national central banks (NCBs) carry out the transactions.
Simplicity, transparency, continuity, safety and cost efficiency
Simplicity and transparency ensure that the intentions behind monetary policy operations are correctly understood. The principle of continuity aims at avoiding major changes in instruments and procedures, so that central banks and their counterparties can draw on experience when participating in monetary policy operations. The principle of safety requires that the Eurosystem’s financial and operational risks are kept to a minimum. Cost efficiency means keeping low the operational costs to both the Eurosystem and its counterparties arising from the operational framework.
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Transmission mechanism of monetary policy
This is the process through which monetary policy decisions affect the economy in general and the price level in particular. The transmission mechanism is characterised by long, variable and uncertain time lags. Thus it is difficult to predict the precise effect of monetary policy actions on the economy and price level.
The chart below provides a schematic illustration of the main transmission channels of monetary policy decisions.
Change in official interest rates
The central bank provides funds to the banking system and charges interest. Given its monopoly power over the issuing of money, the central bank can fully determine this interest rate. back to top
Affects banks and money-market interest rates
The change in the official interest rates affects directly money-market interest rates and, indirectly, lending and deposit rates, which are set by banks to their customers. back to top
Affects expectations
Expectations of future official interest-rate changes affect medium and long-term interest rates. In particular, longer-term interest rates depend in part on market expectations about the future course of short-term rates.
Monetary policy can also guide economic agents’ expectations of future inflation and thus influence price developments. A central bank with a high degree of credibility firmly anchors expectations of price stability. In this case, economic agents do not have to increase their prices for fear of higher inflation or reduce them for fear of deflation. back to top
9：Lucas Papademos, Vice President of the ECB：2008/07/27(日) 07:44:45 HOST:228.23.100.220.dy.bbexcite.jp
Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to today’s press conference. Let me report on the outcome of our meeting, which was also attended by the President of the Eurogroup, Prime Minister Juncker, and Commissioner Almunia.
On the basis of our regular economic and monetary analyses, we decided at today’s meeting to increase the key ECB interest rates by 25 basis points. This decision was taken to prevent broadly based second-round effects and to counteract the increasing upside risks to price stability over the medium term. HICP inflation rates have continued to rise significantly since the autumn of last year. They are expected to remain well above the level consistent with price stability for a more protracted period than previously thought. Moreover, continued very vigorous money and credit growth and the absence thus far of significant constraints on bank loan supply in a context of ongoing financial market tensions confirm our assessment of upside risks to price stability over the medium term. At the same time, while the latest data confirm the expected weakening of real GDP growth in mid-2008 after exceptionally strong growth in the first quarter, the economic fundamentals of the euro area are sound. Against this background and in full accordance with our mandate, we emphasise that maintaining price stability in the medium term is our primary objective and that it is our strong determination to keep medium and long-term inflation expectations firmly anchored in line with price stability. This will preserve purchasing power in the medium term and continue to support sustainable growth and employment in the euro area. On the basis of our current assessment, the monetary policy stance following today’s decision will contribute to achieving our objective. We will continue to monitor very closely all developments over the period ahead.
10：Lucas Papademos, Vice President of the ECB：2008/07/27(日) 07:45:15 HOST:228.23.100.220.dy.bbexcite.jp
Allow me to explain our assessment in greater detail, starting with the economic analysis. Information that has become available since the June press conference confirms our previous expectation of rather weak real GDP growth in the second quarter of 2008, in part as a technical counter-reaction to the strong quarter-on-quarter increase of 0.8% in the first quarter. As we have stressed previously, the quarterly growth rates for the first half of this year have been subject to strong temporary and compensatory factors, notably weather-related effects on the profile of construction activity. Therefore, in order to assess the underlying momentum of euro area economic activity and to avoid being misguided by highly volatile quarterly outturns, it is necessary to evaluate the first two quarters of 2008 together. Interpreted on this basis, the information available remains broadly in line with our expectation of moderate ongoing growth.
Looking ahead, both domestic and foreign demand are expected to support real GDP growth in the euro area in 2008, albeit to a lesser extent than during 2007. While moderating, growth in the world economy is expected to remain resilient, benefiting in particular from continued robust growth in emerging economies. This should support euro area external demand. As regards domestic developments, the fundamentals of the euro area economy remain sound and the euro area does not suffer from major imbalances. In this context, investment growth in the euro area should continue to support economic activity, as rates of capacity utilisation remain elevated and profitability in the non-financial corporate sector has been sustained. Moreover, employment rates and labour force participation have increased significantly in recent years, and unemployment rates have fallen to levels not seen for 25 years. However, these developments, which support household disposable income and consumption, are unlikely to fully compensate the loss of purchasing power caused by higher energy and food prices.
In the view of the Governing Council, the uncertainty surrounding this outlook for economic activity remains high, owing not least to the very high levels of commodity prices, and downside risks prevail. In particular, risks stem from the dampening impact on consumption and investment of further unanticipated increases in energy and food prices. Moreover, downside risks continue to relate to the potential for the ongoing financial market tensions to affect the real economy more adversely than anticipated. Concerns about the emergence of protectionist pressures and the possibility of disorderly developments owing to global imbalances also imply downside risks to the outlook for economic activity.
With regard to price developments, annual HICP inflation has remained well above the level consistent with price stability since last autumn, reaching 3.7% in May 2008 and – according to Eurostat’s flash estimate – 4.0% in June. This worrying level of inflation rates results largely from sharp increases in energy and food prices at the global level in recent months.
Looking ahead, on the basis of current futures prices for these commodities, the annual HICP inflation rate is likely to remain well above 2% for quite some time, moderating only gradually in 2009. We are thus currently experiencing a protracted period of high annual rates of inflation, which is likely to be more persistent than anticipated some months ago.
