ANNUAL REPORT 2008 - Polymer Bank Notes of the World

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Chart 1 ECB interest rates and money market rates(percentages per annum; daily data)6.0minimum bid rate/fixed rate in the main refinancing operationsdeposit ratemarginal lending rateovernight interest rate (EONIA)6.05.05.04.04.03.03.02.02.01.01.00.01999 2000 2001 2002 2003 2004 2005 2006 2007 2008Source: ECB.Note: The last observation relates to 27 February 2009.0.0before declining to reach 1.6% in December.These inflation developments were drivenmainly by global developments in commodityprices, especially energy and food prices.In particular, oil prices increased from aroundUSD 100 per barrel in January to peak at almostUSD 150 in July, before falling to aroundUSD 40 per barrel in December. For most of2008 the inflation rate stood significantly abovethe ECB’s definition of price stability, mainly onaccount of those commodity price developments.Unit labour cost growth remained strong, drivenby stronger wage increases in the presence oftighter labour markets and some second-roundeffects, but also a cyclical slowdown in labourproductivity growth later in the year. Signs of anupward drift in long-term inflation expectationsderived from financial market instruments wereapparent towards the middle of the year, butthese disappeared after the interest rate increasein July and the reversal observed in the price ofcommodities, in particular oil, which reducedconcerns regarding the emergence of secondroundeffects. Overall, in spite of the sharpmovements observed in inflation owing to largechanges in commodity prices, survey-basedmeasures of long-term inflation expectationsremained broadly anchored at levels consistentwith price stability, in line with the mediumtermorientation of the ECB’s monetary policy.The underlying pace of monetary expansionmoderated over the course of 2008, but remainedvigorous. While M3 growth tended to overstatetrend monetary dynamics owing to the impactof the flat yield curve and other temporaryfactors, particularly in the first half of the year, abroad-based assessment of the components andcounterparts of M3 confirmed that underlyingmoney growth remained strong. The growth ofloans to the non-financial private sector alsomoderated in the course of the year, in linewith the tightening of financing conditions andweaker economic activity. The increased stressobserved in the financial system as a result ofthe intensification of the financial tensionsin September was apparent in the monetarydata towards the end of the year. As regardsmonetary aggregates, that increased stressmainly triggered shifts between the componentsof M3, rather than having an impact on M3itself. The subdued developments in loans at theend of the year confirmed that corporate credithad weakened significantly following a longECBAnnual Report200817
period of dynamic growth. Those developmentsmainly reflected the slowdown in real economicactivity, although supply factors may also haveplayed a role, as indicated by the Eurosystem’sbank lending survey. Overall, monetary trendssupported the view that inflationary pressuresweakened towards the end of 2008.INFLATIONARY PRESSURES LED TO AN INCREASEIN KEY ECB INTEREST RATES IN JULY 2008Looking more closely at the monetary policydecisions taken in 2008, the year can be dividedinto two parts: the period up until summer 2008,when the data available at the time indicatedincreasing upside risks to price stability; andthe post-summer period, when new informationindicated that the ongoing financial turmoil andthe global economic slowdown were having astronger impact on euro area activity and thatinflationary pressures were weakening.In the first half of the year economic conditionswere characterised by high levels of uncertaintyregarding the ongoing reappraisal of risk infinancial markets and its potential impact onthe real economy. Quarterly growth had begunto moderate in the course of 2007. Indicatorsof business and consumer confidence had alsobegun to decline, but in early 2008 remainedat levels that pointed to sustained growth. Theoutlook for economic growth had moderatedsomewhat, but was still relatively favourableat the beginning of 2008. It was expected thatdomestic and foreign demand would moderate,but continue to support ongoing growth. Despitethe dampening effect of higher commodityprices, consumption growth was expected tocontribute to economic expansion, in line withrising employment, as unemployment rateshad fallen to levels not seen for 25 years. Withresilient economic activity in emerging marketeconomies expected to mitigate the impact thatthe US economic slowdown would have on theeuro area’s foreign demand, external demandwas expected to provide sustained support toeuro area exports.Indeed, in the first half of the year incomingmacroeconomic data suggested that realGDP growth would moderate, but only slightly.The June 2008 Eurosystem staff macroeconomicprojections foresaw average annual realGDP growth of between 1.5% and 2.1% in 2008and between 1.0% and 2.0% in 2009. While theprojections for 2008 remained at the lower endof the range published in December 2007, theprojections for 2009 were revised downwardssomewhat. The uncertainty surrounding theoutlook for economic growth was considerable,and risks were considered to lie on the downside.Those risks related mainly to the potential forfinancial market developments to have a broaderthan expected impact on financing conditionsand economic sentiment, with a negative impacton world and euro area growth. Further downsiderisks stemmed from the scope for additionalincreases in oil and other commodity prices,concerns regarding protectionist pressuresand the possibility of disorderly developmentsowing to global imbalances.At the same time, the euro area was experiencinga period of rising annual rates of inflation, mainlyas a result of sharp increases in energy and foodprices at the global level. Annual HICP inflationwas above 3% at the start of 2008 and increasedfrom 3.2% in January to 3.7% in May, withstrong upward pressure on headline inflationin the short term. Consequently, the GoverningCouncil noted in June that risks to price stabilityover the medium term had increased further.HICP inflation was expected to remain highfor a more protracted period than previouslythought. There were also signs of an upwarddrift in long-term inflation expectations. TheJune 2008 Eurosystem staff projections foresawaverage annual HICP inflation of between 3.2%and 3.6% in 2008 and between 1.8% and 3.0% in2009. The ranges projected for inflation in 2008and 2009 were thus markedly higher than thosein previous staff projections, mainly reflectinghigher oil and food prices and increasinginflationary pressures in the services sector.There was also a concern that wage growthmight turn out to be stronger than expected,taking into account the high levels of capacityutilisation, the tight labour market conditionsand the risk of second-round effects.18 ECBAnnual Report2008
Page 1 and 2: EN2008EUROPEAN CENTRAL BANK ANNUAL
Page 3 and 4: © European Central Bank, 2009Addre
Page 5 and 6: CHAPTER 4FINANCIAL STABILITY AND IN
Page 7 and 8: 7 Statistical accounting consequenc
Page 9: ABBREVIATIONSCOUNTRIESOTHERSBE Belg
Page 12 and 13: in the course of the year, in line
Page 14 and 15: currencies, T2S will be a major ste
Page 16 and 17: CHAPTER 1ECONOMICDEVELOPMENTS ANDMO
Page 20 and 21: Despite moderating, the annual grow
Page 22 and 23: substantial downward revisions in r
Page 24 and 25: in July, annual inflation in the OE
Page 26 and 27: As regards the Chinese economy, rea
Page 28 and 29: generally tighter financing conditi
Page 30 and 31: were recorded in December, but thes
Page 32 and 33: was driven mainly by developments i
Page 34 and 35: market tensions, particularly for l
Page 36 and 37: anking and financial system. At the
Page 38 and 39: cash flows to compensate for a redu
Page 40 and 41: quarter of 2008 and -0.1% in Decemb
Page 42 and 43: whereby investors’ uncertainty su
Page 44 and 45: September onwards, amid the great u
Page 46 and 47: Chart C Trading volumes for governm
Page 48 and 49: sponsored rescue plans were initiat
Page 50 and 51: The annual growth rate of consumer
Page 52 and 53: end of 2007. By December 2008 this
Page 54 and 55: calculated as the balance between g
Page 56 and 57: commodity prices (see Box 4). Conve
Page 58 and 59: Chart D Longer-term inflation expec
Page 60 and 61: apidly to 1.7% in December, mainly
Page 62 and 63: productivity slowed to 0.2% in the
Page 64 and 65: Table 3 Composition of real GDP gro
Page 66 and 67: Corporate investment, which had exp
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Box 5LABOUR MARKET DEVELOPMENTS IN
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Chart C Breakdown of employment gro
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Box 6DEVELOPMENTS IN THE ISSUANCE A
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Chart B Government bond yield sprea
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Box 7STATISTICAL ACCOUNTING CONSEQU
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warranted because of the need to co
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sharp depreciation of the euro was
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prices in the first eight months of
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focused more on the production rath
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segments and, in turn, affected eur
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and Bulgaria registered robust grow
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In the remaining non-euro area EU c
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Estonian kroon and the Lithuanian l
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Table 10 Official monetary policy s
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the Bank of England and Sveriges Ri
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CHAPTER 2CENTRAL BANKOPERATIONSAND
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Box 10MONETARY POLICY OPERATIONS DU
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Chart A Liquidity supply through op
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franc funding needs of banks with n
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MINIMUM RESERVE SYSTEMCredit instit
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with the ample allotments in the fi
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2008. By contrast, the average shar
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and SDR holdings increased by aroun
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and the ECB). As a result of carefu
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cross-CSD settlement. T2S will thus
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ELIGIBLE LINKS BETWEEN NATIONAL SEC
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Chart 48 Number of euro banknotes i
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3.3 BANKNOTE PRODUCTION AND ISSUANC
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4 STATISTICSThe ECB, assisted by th
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iii) payments statistics and iv) de
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5 ECONOMIC RESEARCHThe main functio
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were organised to disseminate resea
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the Financial Collateral Directive,
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on the Banque centrale du Luxembour
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standards by individual Eurosystem
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CHAPTER 3ENTRY OF SLOVAKIAINTO THE
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Table 13 Main economic indicators f
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As of January 2009 Slovakia is thus
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3 OPERATIONAL ASPECTS OF THE INTEGR
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4 THE CASH CHANGEOVER IN SLOVAKIATH
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Willem F. Duisenberg accepting the
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1 FINANCIAL STABILITYThe Eurosystem
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With regard to merger and acquisiti
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with the principles set out in Octo
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2.2 BANKINGCAPITAL REQUIREMENTS DIR
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3 FINANCIAL INTEGRATIONThe Eurosyst
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The market for short-term paper in
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de France and the Banca d’Italia.
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and the Eurosystem’s business con
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4.2 RETAIL PAYMENT SYSTEMS ANDINSTR
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for Clearing and Settlement, and th
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Willem F. Duisenberg at his farewel
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1 EUROPEAN ISSUESIn 2008 the ECB co
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for financial institutions, to faci
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1.3 DEVELOPMENTS IN AND RELATIONS W
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On a number of occasions in 2008, t
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countries have voiced support for t
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Former Italian President Carlo Azeg
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1 ACCOUNTABILITY VIS-À-VIS THE GEN
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implementation of the steps foresee
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CHAPTER 7EXTERNALCOMMUNICATION
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2 COMMUNICATION ACTIVITIESThe ECB a
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Panel at the Fifth ECB Central Bank
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1 DECISION-MAKING BODIES AND CORPOR
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Council decided on the main aspects
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1.3 THE EXECUTIVE BOARDThe Executiv
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1.4 THE GENERAL COUNCILThe General
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The Eurosystem/ESCB committees have
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members of the Executive Board. 13
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for their current position. On the
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statistical office (Statistisches B
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4 ANNUAL ACCOUNTS OF THE ECB212 ECB
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function, and by the Governing Coun
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BALANCE SHEET AS AT 31 DECEMBER 200
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PROFIT AND LOSS ACCOUNT FOR THE YEA
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mid-market prices on 30 December 20
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The defined benefit obligation is c
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NOTES ON THE BALANCE SHEET1 GOLD AN
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Eurosystem (see “Banknotes in cir
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(see “Banknotes in circulation”
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values at which the transactions we
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15 CAPITAL AND RESERVESCAPITALPursu
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epresenting the remainder of its ca
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NOTES ON THE PROFIT AND LOSS ACCOUN
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individual circumstances. Basic sal
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5 CONSOLIDATED BALANCE SHEET OF THE
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ANNEXES
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Number Title OJ referenceECB/2008/1
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Number Title OJ referenceECB/2009/1
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Number 2 Originator SubjectCON/2008
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Number 4 Originator Subject OJ refe
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oth the marginal lending facility a
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OVERVIEW OF THE ECB’S COMMUNICATI
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y the respective NCBs will also be
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OPEN MARKET OPERATIONS BY CURRENCYE
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USD operationsType oftransaction 1)
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DOCUMENTS PUBLISHED BY THEEUROPEAN
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95 “Financial stability challenge
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1012 “Petrodollars and imports of
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GLOSSARYThis glossary contains sele
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Economic analysis: one pillar of th
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Financial stability: condition in w
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MFIs (monetary financial institutio
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Reserve base: the sum of the eligib
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ANNUAL REPORT 2008 - Polymer Bank Notes of the World

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