In this respect, when forming their expectations, economic agents should count on the commitment of the Governing Council of the ECB to maintaining price stability, defined as HICP inflation below 2%, in the medium term. Monetary policy will not accommodate inflationary tendencies in the euro area. It will be critical to ensure that the temporary upward pressure on HICP inflation is not followed by more lasting upward pressure from domestic factors. The interest rate measures taken by the ECB over the past few months were aimed at containing the emergence of inflation expectations and convincing the social partners, as well as the public at large, that price stability in the euro area will be maintained. By ensuring that wages continue to grow at a moderate pace in 2001 and, may I add, beyond next year, wage-setters would facilitate the ECB’s task of maintaining price stability. They would at the same time make an important contribution to maintaining the current strong employment growth in the euro area. The maintenance of robust non-inflationary growth is a challenge faced in many policy areas, as well as by the social partners. Many euro area countries have embarked on a path of structural reform, which they now need to adhere to strictly. Increasing the flexibility of labour markets and deregulating product markets will enhance the growth potential of the euro area by allowing for a better exploitation of the opportunities which are offered, for instance, by the single currency and the new information and communications technologies.
Forecasts by international and private organisations currently project euro area real GDP growth in the coming one to two years to be somewhat lower than this year’s more than 3%, but to remain at around 3%. The exchange rate of the euro has remained a cause for concern. The depreciation of the euro during 1999 and 2000 has added to upward pressures on consumer prices in the euro area. The exchange rate of the euro has now remained out of line with economic fundamentals for a prolonged period of time. The G7 expressed concern about the global repercussions of the current level of the euro exchange rate. In order to support the euro, concerted interventions by all G7 members, on the initiative of the ECB, took place on 22 September, and the Eurosystem intervened several times in November. Recent Harmonised Index of Consumer Prices (HICP) inflation rates have been higher than could have been expected only a few months ago. Current inflation reflects the unexpected sharp rise in oil prices 1  BIS Review 109/2000  in recent months. Notwithstanding a possible decline in oil prices, annual HICP inflation rates are likely to remain above 2% for some time to come. It needs to be recognised that current upward pressures on consumer prices can be alleviated most smoothly if economic agents see them for what they are, namely one-off or temporary price increases resulting from external factors.