FOCUS-ECB policy choice vital for trust-Issing
12:14 p.m. May 08, 1998 Eastern
By Mark Thompson
VIENNA, May 8 (Reuters) - The European Central Bank faces a tough task
establishing its credibility before the euro's launch, making the right
choice of monetary policy absolutely vital, ECB board nominee Otmar
Issing said on Friday.
The Bundesbank chief economist, who has been nominated for a full
eight-year term on the board of the Frankfurt-based ECB, said it was
extremely difficult to predict the reaction of global financial markets
and capital flows in January.
''We are confronted with so many uncertainties to which there are no
simple answers...gaining credibility in these circumstances is extremely
tough,'' Issing said at a conference organised by the Austrian National
Bank (OeNB).
He said the start of the third stage of EMU, in which 11 countries will
swap their currencies for the euro, would take place against a
''particularly difficult backdrop.''
''The ECB must generate trust in its policy without having the
opportunity to present a track record of many years,'' Issing said.
''How much the accumulated credibility of the national central banks
will be transferred to the ECB is an open question.''
The senior German central banker said the ECB's choice of which monetary
targets to set to achieve its primary aim of price stability could prove
crucial to creating trust.
''One has to do everything to ensure that the monetary union begins as
tension-free as possible. From this point of view the choice of monetary
policy strategy plays a decisive role,'' he said in his speech.
Issing, who has argued for a mixture of money supply targeting with
inflation monitoring, said that according to the Bundesbank, the Bank of
France and several other central banks, a money supply target should be
the core of ECB policy.
But given possible instability and turbulence at the launch of monetary
union, inflationary targeting should be used as an additional tool.
Differences between ECB board nominees have already begun to emerge over
where the policy emphasis should lie.
Bank of Finland governor Sirrka Hamalainen said on Friday it was her
personal view that the ECB should put an inflation target ahead of a
money supply goal.
But she said the issue required further analysis and she did not want to
take a final view on the matter at this stage.
Issing told bankers in Vienna that he wanted to see the ECB continue the
Bundesbank's policy of open dialogue to see ''how we can manage this
extremely difficult starting period.''
''The gap between what we know and what we have to do was never greater
-- I am fully aware of the problem,'' he said.
''What we need is as much information as possible.''
The 11 states taking part in EMU had to start converging on a common
euro interest rate that had not yet been determined. Trying to predict
that that would be based on the current average of the 11 countries'
national rates was misleading.
''I don't find that very helpful. Average calculations are redundant and
they are also misleading -- nobody yet knows the benchmark,'' he told
reporters on the fringes of the OeNB conference.
Issing said the effectiveness of ECB efforts to achieve price stability
would only be truly assessed after one or two years.
''In 1999 and well into 2000 the inflation rate in the EMU area will
still reflect the monetary policies of the national central banks,'' he
said.
National central banks had to act as if EMU had begun on Monday, after
the weekend EU summit at which the starting line-up was agreed and
bilateral exchange rates fixed, to prevent ''any build up in inflation
in the interim period so as not to make the life of the ECB more
difficult,'' he said.
''I am convinced this period will be managed in the proper way.''
((Vienna Newsroom 43-1-531 12274,
vienna.newsroom+reuters.com))
REUTERS
Copyright 1998 Reuters Limited. |
