ANNUAL REPORT 2008 - Polymer Bank Notes of the World

anking and financial system. At the same time, the macroeconomic conditions steadily worsenedand significantly burdened the already fragile financial markets. Consequently, the money markettensions in the fourth quarter of 2008 were much stronger and had a more lasting impact on moneymarket rates. Nevertheless, the Eurosystem stepped up its efforts to ensure that market participantshad access to liquidity, which – combined with government measures – helped to avoid anyfurther deterioration in the banking sector. In this regard, throughout the year the ECB made fulluse of the flexibility provided by its implementation framework and continued to emphasise in itscommunication the importance of separating monetary policy decisions from the implementationof liquidity policy in order to ensure the smooth functioning of the markets. The monetary policystance was aimed at achieving the price stability objective, while liquidity management measureswere aimed at supporting continuity and the smooth functioning of the money markets.In 2008 short-term deposits other than overnightdeposits (i.e. M2-M1) remained the mostdynamic component of M3. However, followingsustained strengthening as of mid-2004, whichcontinued – albeit more moderately – in the firsthalf of 2008, the annual growth rate of short-termdeposits other than overnight deposits declinedin the second half of the year, falling to 13.3%in December 2008 (see Chart 5). These deposits’contribution to annual M3 growth continuedto increase in the course of 2008, reaching7.4 percentage points in the third quarter, partlyoffsetting the declines observed for the othercomponents of M3. It lost momentum, though,in the fourth quarter of the year in line with thedecline in the growth rate. However, this stronggrowth masks divergent developments across thevarious sub-components, as the ongoing stronginflows for short-term time deposits (i.e. depositswith an agreed maturity of up to two years),which grew at an annual rate of around 40% in2008, were accompanied by a continued declinein the holdings of deposits redeemable at noticeof up to three months, which fell by more than2% on average in the course of the year.Up until the fourth quarter of the year theremuneration of short-term time depositsbroadly followed the rise in short-termmoney market interest rates. Thus, the spreadvis-à-vis the remuneration of short-termsavings deposits and overnight depositswidened, as the remuneration of these depositsgenerally increased more slowly and modestly(see Chart 6). This supported shifts within M3,namely from M1 and savings deposits into timedeposits. At the same time, with a relativelyflat yield curve, short-term time deposits offera rate of remuneration that is similar to that oflonger-term assets. Since longer-term assets areless liquid and holding them typically impliessomewhat greater risk, a flat yield curve tendsto increase the attractiveness of shifting fundsinto monetary assets from outside M3. Theintensification of the financial tensions in thefourth quarter of the year further increasedChart 5 Main components of M3(annual percentage changes; adjusted for seasonal and calendareffects)24201612840M1other short-term deposits (M2-M1)marketable instruments (M3-M2)2002 2003 2004 2005 2006 2007 2008Source: ECB.24201612840ECBAnnual Report200835