ANNUAL REPORT 2008 - Polymer Bank Notes of the World

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Despite moderating, the annual growth rate ofthe monetary aggregate M3 remained vigorous.A number of temporary factors, particularlythe relatively flat yield curve, suggested thatM3 growth was overstating the pace of theunderlying monetary expansion. Even takingsuch effects into account, a broad-basedassessment of the monetary data confirmed thatthe underlying rate of money and credit growthremained strong. The growth of householdborrowing had moderated somewhat, reflectingthe impact of the increases in key ECB interestrates as of December 2005 and the coolinghousing markets in several parts of the euro area.However, the growth of loans to non-financialcorporations remained robust.In this context, the Governing Council consideredthat the risks to price stability remained clearlyon the upside and had increased further. Thoserisks stemmed in particular from the possibilityof second-round effects on wage and pricesetting,but also from the potential for furtherrises in oil and food prices. The possibility ofincreases in administered prices and indirecttaxes that exceeded those foreseen at the timealso constituted an upside risk to the inflationoutlook. This assessment was supported bycross-checking with data on money and creditgrowth. Given the strong growth seen in moneyand credit aggregates, the monetary analysisconfirmed the indications from the economicanalysis that upside risks to price stabilityprevailed over the medium to longer term. TheGoverning Council stressed its determination tofirmly anchor medium and long-term inflationexpectations in line with price stability.In order to prevent broad-based second-roundeffects and counteract the increasing upsiderisks to price stability over the medium term, theGoverning Council decided to raise the key ECBinterest rates by 25 basis points on 3 July 2008,having kept rates unchanged since June 2007in view of the heightened level of uncertaintyin the context of the ongoing financial turmoil.The Governing Council emphasised its strongdetermination to keep medium and longterminflation expectations firmly anchored inline with price stability. This would preservepurchasing power in the medium term andcontinue to support sustainable growth andemployment in the euro area.Moving into the third quarter of 2008, the realGDP growth figures that were to be releasedfor the second quarter of 2008 were expectedto be substantially weaker than those for thefirst quarter of the year. While this was partlya technical reaction to the strong growth seen inthe first few months of the year, it also reflecteda weakening of GDP growth owing to slowerexpansion at the global level and the dampeningeffects of high and volatile oil and food prices.Uncertainty regarding the outlook for economicactivity remained considerable, owing, amongother things, to the very high and volatilecommodity prices and the ongoing tensionsin financial markets. Overall, downside riskscontinued to prevail.At the same time, information available inAugust and September confirmed that annualinflation rates were likely to remain wellabove levels consistent with price stabilityfor a protracted period of time. The data alsosuggested that risks to price stability over themedium term remained on the upside. Havingreached 4.0% in June, inflation had remained at4.0% in July and stood at 3.8% in August, largelyas a result of both the direct and the indirecteffects of previous strong increases in energyand food prices at the global level. Moreover, itwas confirmed that wage growth had acceleratedsignificantly. With labour productivity growthslowing, this resulted in sharp increases in unitlabour costs.WEAKENING INFLATIONARY PRESSURES LED TOMONETARY POLICY EASING IN THE LATTER PARTOF 2008The financial tensions intensified in September,dominated by events in US markets, particularlyfollowing the bankruptcy of Lehman Brotherson 15 September. This led to substantialvolatility in all financial market segments, lowlevels of liquidity across a number of marketsegments, significant restructuring at severalECBAnnual Report200819
large financial institutions, a financial crisisin Iceland and contagion effects for othercountries, and unprecedented policy action bygovernments. The financial market turmoilalso resulted in a significant increase in riskaversion. This could be seen, inter alia, in thesubstantial widening of corporate and sovereignbond spreads, which had a significant downwardimpact on the real economy. At its meeting on2 October the Governing Council discussedextensively the recent intensification of thefinancial market turmoil and its possible impacton economic activity and inflation, recognisingthe extraordinarily high level of uncertaintystemming from recent developments. As theworld economy as a whole was feeling theadverse effects of this prolonged and intenseperiod of financial market turmoil, economicactivity was also weakening in the euro area.Inflationary pressures had begun to moderate inthe euro area, as well as in a number of othermajor countries in the world economy, mainlyreflecting a marked decline in energy andother commodity prices. Inflation expectationshad declined, returning to levels consistentwith the ECB’s definition of price stability.By increasing the downside risks to growth, theintensification of the financial crisis had alsoreduced the upside risks to price stability.In a coordinated move, the Bank of Canada, theBank of England, the ECB, the Federal ReserveSystem, Sveriges Riksbank and the SwissNational Bank announced reductions in policyinterest rates on 8 October. In this context, theGoverning Council lowered key ECB interestrates by 50 basis points, acknowledging thatupside inflationary risks in the euro area hadrecently decreased and inflationary pressures hadbegun to moderate. The Governing Council alsoadopted two temporary measures to support theimplementation of monetary policy, narrowingthe corridor formed by the rates on the standingfacilities and announcing full allotment at fixedrates in its tender operations.Tensions increasingly spilled over from thefinancial sector to the real economy and fromadvanced economies to emerging marketeconomies. The outlook for global growthdeteriorated sharply, implying a contractionin foreign demand that would have a negativeimpact on euro area activity. Business confidenceindicators, which had started to decline inmid-2007, began to fall faster and reachednew record lows every month. The fourthquarter was marked by a broad-based economicslowdown with a high level of uncertainty, andgovernments announced substantial economicstimulus packages. Incoming informationon current economic developments justifiedthe more pessimistic outlook, which was duenotably to the materialisation of previouslyidentified risks stemming from the financialmarket tensions. Looking ahead, globaleconomic weakness and very sluggish domesticdemand were expected to persist in the followingfew quarters. In fact, the December 2008Eurosystem staff macroeconomic projectionsfor the euro area indicated that the outlook hadsignificantly deteriorated. Annual real GDPgrowth was projected to lie between -1.0% and0.0% for 2009 and between 0.5% and 1.5%for 2010. These figures represented substantialdownward revisions relative to the previous staffprojections. The economic outlook continued tobe surrounded by an exceptionally high degreeof uncertainty, and risks to economic growthremained on the downside.With regard to price developments, annualHICP inflation had declined substantially,falling to 2.1% in November, down from 3.2%in October and 3.6% in September. Inflationrates were expected to continue to decline inthe coming months. The intensification andbroadening of the financial market turmoil waslikely to dampen global and euro area demandfor a protracted period of time. In such anenvironment, taking into account the strongdeclines observed in commodity prices in recentmonths, price, cost and wage pressures in theeuro area were also expected to moderate. TheDecember 2008 Eurosystem staff projectionsforesaw annual HICP inflation of between 1.1%and 1.7% for 2009 and between 1.5% and 2.1%for 2010. For 2009, these projections constituted20 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 18 and 19: Chart 1 ECB interest rates and mone
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
Page 68 and 69: Box 5LABOUR MARKET DEVELOPMENTS IN
Page 70 and 71:
Chart C Breakdown of employment gro
Page 72 and 73:
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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Page 256 and 257:
Page 258 and 259:
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
Page 280 and 281:
Financial stability: condition in w
Page 282 and 283:
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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