ANNUAL REPORT 2008 - Polymer Bank Notes of the World

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substantial downward revisions in relation to theprevious staff projections, mainly reflecting thelarge declines observed in commodity prices andthe impact of weakening demand. Risks to pricestability at the policy-relevant medium-termhorizon were considered to be more balancedthan in the previous quarter.Turning to the monetary analysis, dataavailable towards the end of 2008 showed thatthe annual growth rates of broad money andcredit aggregates, while still remaining strong,continued to decline. The intensification ofthe financial market turmoil observed sincemid-September had been seen as a potentialwatershed in the evolution of monetarydevelopments, with money and credit data forOctober indicating a significant impact on thebehaviour of market participants. However, inNovember there were some signs of a returnto the pattern of monetary developments seenprior to Lehman Brothers’ default. Overall, boththe broad aggregate M3 and, in particular, thecomponents of M3 most closely related to theongoing financial tensions – such as holdingsof money market funds – showed considerablemonth-to-month volatility in the final monthsof 2008. Looking through this volatility,the underlying pace of broad money growthcontinued to gradually decline from the peak seenin 2007. However, the intensification of financialtensions observed as of September 2008 led tosignificant substitution among the componentsof M3. Monetary analysis also indicated thecontinued moderation of the growth rate ofloans to the non-financial private sector. Priorto December this was largely on account ofweakness in loans to households, especiallyfor house purchase, but by the turn of the yeara clear decline was also observed in the growthrate of loans to non-financial corporations. Thesesubdued developments in loans seem mainly toreflect the slowdown in real economic activity,although the Eurosystem’s bank lending surveysuggests that supply factors may also haveplayed a role. The heightened level of stressin the financial system remained apparent inthe monetary data towards the end of the year.Overall, monetary trends supported the view thatinflationary pressures were weakening further.These revisions to the outlook for economicactivity, and therefore also for inflation, warrantedsignificant monetary policy easing. On the basisof its regular economic and monetary analyses,the Governing Council decided to reduce thekey ECB interest rates by a further 50 basispoints at its meeting on 6 November, in line withthe reduction in upside risks to price stabilityarising from the materialisation of downsiderisks to growth. At its meeting on 4 Decemberthe Governing Council then decided to reducethe key ECB interest rates by a further 75 basispoints. Evidence obtained since its last meetingshowed that inflationary pressures had weakenedfurther and, looking ahead, inflation rates wereexpected to be in line with price stability overthe policy-relevant horizon.ECBAnnual Report200821
2 MONETARY, FINANCIAL AND ECONOMICDEVELOPMENTS2.1 THE GLOBAL MACROECONOMICENVIRONMENTREPERCUSSIONS OF THE FINANCIAL MARKETTURMOIL ON GLOBAL ACTIVITYIn 2008 the financial market turbulenceintensified and reached levels not seen indecades, with severe consequences for the realeconomy in the latter part of the year. In thefirst half of the year, the economic weakness inthe United States extended beyond the housingsector, and the global repercussions of thefinancial turmoil translated into a slowdownin economic growth in major developedeconomies. Overall, global economic activityremained relatively well supported by theresilience in the economic conditions ofemerging markets. However, from mid-September, when the financial crisis resultedin the collapse of a major US investment bankand the unravelling of a number of large actorsin the global financial system, the challengesfacing economic activity intensified. Globaleconomic conditions deteriorated rapidlyin view of faltering consumer and businessconfidence, tighter credit conditions worldwideand adverse wealth effects stemming fromdeclining house prices and equity valuations.While important and unprecedented measureswere taken by governments and central banksaround the world to limit systemic risks and torestore financial stability, the financial marketturmoil led to the global downturn becomingincreasingly synchronised, which amplifiedthe adverse feedback between the financialcrisis and real economic activity. Towardsthe end of the year, most advanced economieswere already in or on the brink of recession.Moreover, the economic weakness began tospread more forcefully to emerging economies.In particular, economic conditions in countrieswith large external and domestic imbalancesdeteriorated rapidly, and economic growth insmall open economies moderated significantlyin a very short space of time.Global inflation developments were stronglyaffected by the sharp movements in commodityprices and global economic conditions. Inthe first half of the year, global inflationarypressures mounted. In the OECD countries,annual headline inflation peaked at 4.8%in July 2008. This was mostly due to risingfood and energy prices. On 11 July 2008Brent crude oil prices surged to a record levelof USD 147.5 per barrel. Emerging economies,with a higher weight of food in the consumptionbasket, experienced even stronger inflationarypressures. In the second half of the year,however, a sharp reversal in commodity pricesassociated with the global economic slowdownsignificantly alleviated global inflation rates.Oil prices plummeted in the second half of theyear and stood close to USD 40 per barrel by theend of 2008. Accordingly, after passing its peakChart 2a Main developments in majorindustrialised economies543210-1-2-3-4-56543210-1-2euro areaJapanUnited StatesUnited KingdomOutput growth 1)(year-on-year percentage changes; quarterly data)1999 2000 2001 2002 2003 2004 2005 2006 20072008Inflation rates 2)(consumer prices; annual percentage changes; monthly data)543210-1-2-3-4-5-21999 2000 2001 2002 2003 2004 2005 2006 2007 2008Sources: National data, BIS, Eurostat and ECB calculations.1) Eurostat data are used for the euro area and the UnitedKingdom; national data are used for the United States and Japan.GDP figures have been seasonally adjusted.2) HICP for the euro area and the United Kingdom; CPI for theUnited States and Japan.6543210-122 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 20 and 21: Despite moderating, the annual grow
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
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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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