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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