17 December 2001, 15:24 Duisenberg says ECB favours 'gradualist' rate response to external shocks
FRANKFURT (AFX) - European Central Bank president Wim Duisenberg
said the ECB favours a "gradualist" monetary policy response to
external shocks, rather than adjusting interest rates directly in
response to changes in inflation forecasts.
"In response to certain shocks, a gradualist and measured monetary
policy response aimed at price stability over the medium term is more
appropriate than a response to an inflation forecast at a fixed
horizon," Duisenberg said in a letter to Christa Randzio-Plath,
chairwoman of the European Parliament economic and monetary affairs
committee.
The letter follows a request from Randzio-Plath for clarification
on the ECB's monetary policy strategy compared with that of other
central banks, at Duisenberg's last appearance before the committee on
Sept 12. He is due to appear before the committee again tomorrow.
Duisenberg said a policy of inflation targeting -- under which
rates are changed in response to changes in inflation forecasts --
would not be appropriate for the ECB.
"A policy of mechanical feedback from inflation forecasts may
introduce unnecessary volatility in output and realised inflation," he
said.
Duisenberg said the ECB's own projections are an important tool for
the
central bank's analysis of inflation risks, but they are only one
source of
information and are not officially endorsed by the decision-making
governing
council.
"We deem it important... to clearly separate the production of
forecasts, as
carried out under the responsibility of the staff, from the monetary
policy
decisions taken under the responsibility of the governing council," he
said.
"We believe that the full-information and diversified approach we
have
adopted is conducive to policy decisions that reduce the risk of
policy-related
mistakes in an uncertain environment," he said.
The ECB published its latest staff projections last week. These
pointed to
annual average inflation of 1.1-2.1 pct in 2002 and 0.9-2.1 pct in
2003.
The ECB defines its goal of price stability as a euro zone
inflation rate
of less than 2 pct, and Duisenberg rejected Randzio-Plath's suggestion
that a
point inflation target might be more effective than the 0-2 pct range.
"A range definition honestly reflects the degree of uncertainty
attached to
the meaning and measurement of the concept of price stability," he
said.
He added: "The ECB's definition is precise enough to provide a
clear
yardstick for accountability, ie, to evaluate the ECB's performance
over
time... our policy can be considered successful only if price
stability,
according to our definition, has prevailed for most of the time and if
variability of inflation has remained low."
Euro zone inflation has been above 2 pct for much of 2000 and 2001,
peaking
at 3.4 pct in May. It has slowed recently, however, and reached 2.1
pct in November.
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