"At the Governing Council meeting held on 4 January 2001, the Governor of the Bank of Greece participated as a member of the Governing Council for the first time, since Greece adopted the euro on 1 January 2001. At the meeting, the Governing Council decided to leave the minimum bid rate on the main refinancing operations of the Eurosystem at 4.75%. The interest rates on the marginal lending facility and on the deposit facility were also left unchanged, at 5.75% and 3.75% respectively. "These decisions were based on the following considerations. Starting with the first pillar of the monetary policy strategy of the ECB, the three-month average of the annual growth rates of M3, covering the period from September to November 2000, declined to 5.1%, from 5.4% in the period from August to October 2000. The slowdown in M3 growth which has been observed over recent months is mainly attributable to a considerable dampening of the expansion of the most liquid components of M3. This dampening probably reflects the gradual increase in ECB interest rates since November 1999. The annual growth rate of total credit to euro area residents has also declined over recent months; in November 2000 there was a decrease in the annual rates of growth of both credit to general government and credit to the private sector. Overall, the further moderation in money and credit seems to confirm the assessment that the risks to price stability stemming from the monetary side have become more balanced when compared with the situation some months ago. However, caution is still warranted given the upward deviation of M3 growth from the reference value of 4.5%. Turning to indicators relating to the second pillar, recent information on economic activity in the euro area points to a picture of continuing robust, albeit slightly lower, growth rates. Data up to October 2000 indicate that euro area industrial production growth may have seen a peak in the second quarter of the year and moderated slightly thereafter. This picture is confirmed by recent business survey data. At the same time, positive developments in the labour market have contributed to the stabilisation of consumer confidence at high levels over the past few months, after the decline which occurred in September 2000. With regard to the external environment, there is increasing uncertainty surrounding the economic growth performance in the United States which may also have implications for the economic performance of other areas of the world. Pointing to a weakening in economic activity in the United States, the Federal Open Market Committee of the U.S. Federal Reserve System decided, on 3 January 2001, to reduce its target for the federal funds rate by 50 basis points to 6%. In Japan recent economic developments have also been less favourable than anticipated some months ago. Developments in financial markets reflect this general outlook for sustained growth in the euro area in a global environment of heightened uncertainty. Bond yields suggest that markets expect economic growth in the euro area to remain strong in both relative and absolute terms, and inflation to develop in line with the ECB's definition of price stability over the medium term. The nominal effective exchange rate of the euro appreciated significantly between end-November 2000 and 3 January 2001, by approximately 7%. With regard to short-term developments in euro area consumer prices, HICP inflation in November 2000 rose to 2.9%, up from 2.7% in the previous month. While a rise in the annual rate of change was recorded for most HICP components, it was most pronounced for energy prices. In this respect, the pattern of inflation continued to mainly reflect developments in oil prices which increased up to mid-November. The subsequent significant fall in oil prices and the pronounced appreciation of the exchange rate of the euro which have occurred since late November should lead to a decline in annual consumer price inflation as from December 2000. However, some further gradual pass-through of earlier rises in oil and import prices via non-energy HICP components should be expected. Over the medium term, there are still elements of upward risks to price stability which warrant close monitoring. One risk relates to wage developments in the period ahead. It is important that wage moderation continue. Economic growth can be best sustained, and the reduction in unemployment extended, if wage bargainers take into account the ECB's firm determination to maintain price stability in the euro area over the medium term. The continuation of wage moderation should be facilitated by the decline in consumer price inflation which is expected to occur over the coming months. A second important factor which may involve upward risks to price stability relates to fiscal policy in the euro area. The tax reforms which are being implemented in several euro area countries and the resulting reduction in the tax burden are a welcome development. However, in many countries the reduction in taxation will need to be accompanied by a structural reduction in expenditure, in order not to contribute to inflationary pressures and threaten the progress in fiscal consolidation made thus far. Further fiscal consolidation and structural reforms would contribute to sustained non-inflationary growth in the euro area over the medium term. In addition to these much needed fiscal policy measures, further progress in the area of structural reform will be a key factor in supporting economic growth in the euro area. In this respect, the need for further structural reform was also highlighted in the Employment Guidelines for 2001 as endorsed by the Nice European Council in December 2000. These Employment Guidelines reiterate the goal of strengthening the conditions for full employment in a knowledge-based society, as mentioned in the Conclusions of the Lisbon European Council of March 2000, and stress the need to strengthen the flexibility and adaptability of EU labour markets. This issue of the Monthly Bulletin contains three articles. The first reviews the completion of the Greek convergence process in the second half of 2000 and provides an overview of key structural economic features of the euro area including Greece. The second article discusses in conceptual terms how uncertainty factors - concerning, for example, current economic developments or the structure of the economy - should be taken into account in the conduct of monetary policy and the formulation of a monetary policy strategy. A third article presents an overview of the ECB's relations with international organisations (such as the IMF, the OECD and the BIS) and fora (such as the G7, the G10 and the G20)." // Market News