Mr Duisenberg explains the thinking of the European Central Bank on the issue of whether markets need guidance  Introductory statement delivered by Dr Willem F Duisenberg, President of the European Central Bank, at the Frankfurt European Banking Congress Session I: “Do markets need guidance?” held in Frankfurt on 19 November 1999. *  *  *  Thank you very much for giving me the opportunity to explain the thinking of the European Central Bank (ECB) on this important issue. Let me start by summarising my answer to your question: yes, the markets need guidance from the ECB. This guidance should mainly focus on reducing uncertainty in the markets. This requires above all a clear and credible commitment on the part of the ECB and sound economic analysis. Thus, guidance should be given through a credible monetary policy strategy and a transparent ongoing assessment of euro area developments in line with this strategy. Reducing uncertainty also implies that in our communication we do not pretend that we know more than we really do. Obviously, our knowledge of the future course of the euro area economy will always be subject to uncertainties and limitations. It thus goes without saying that guidance certainly cannot be given in such a way that the ECB indicates a path for future ECB interest rates far in advance. This leads me directly to the second part of your question. (“Is any particular mode of guidance preferable?”) How should the ECB give guidance to the markets?
At the heart of the answer to this question is the Eurosystem’s monetary policy strategy. Indeed, this strategy is designed to make both our objective and the monetary policy aimed at achieving this objective credible, transparent and comprehensible, and thus make our decisions predictable. However, let me be very clear. Being predictable in no way implies that the central bank intends to follow the market. On the contrary, the causality should run in the other direction. Markets should be in a position to anticipate monetary policy decisions based on a credible strategy of the central bank. This does not exclude that certain monetary policy decisions may sometimes surprise the markets, but this is not our aim. As was argued in an article in the most recent issue of the ECB Monthly Bulletin, a stability-oriented monetary policy contributes to reducing certain risk premia in interest rates and thereby to increasing the efficiency of the allocation of capital, thus enhancing overall welfare. This shows that it is very important to give clear guidance to the markets by conducting a credible monetary policy focused on price stability. As you know, the strategy selected by the Governing Council of the ECB comprises a quantitative definition of price stability, which should contribute to anchoring long-term inflation expectations, as well as the two so-called pillars. The quantification of the primary objective, combined with the transparency and the credibility of the Eurosystem, provides the most important guidance to financial markets. Our monetary policy should contribute to keeping inflation expectations safely below 2%.