ANNUAL REPORT 2008 - Polymer Bank Notes of the World

on the main refinancing operations of theEurosystem by 25 basis points, before cutting itsmain policy rate in the last quarter of the yearin three steps by a total of 175 basis points.Given their currency board arrangements,Българска народна банка (Bulgarian NationalBank), Lietuvos bankas and Eesti Pank have noofficial policy rates; they automatically adjust tothe rates set by the ECB. In addition, in view ofdiminishing confidence among domestic banksand liquidity pressures in the interbank markets,the former two central banks lowered theirminimum reserve requirements to ease liquidityconstraints.Turning to the countries participating inERM II and not operating under a currency boardarrangement, Latvijas Banka, which maintainsa ±1% fluctuation band around the central rateof the lats as a unilateral commitment, kept itsmain interest rate at 6% throughout the year.However, it increased the deposit facility rateby 100 basis points to 3% and applied differentmarginal lending facility rates depending on thenumber of days the lending facility had beenused within the previous 30-day period. LatvijasBanka also reduced its minimum reserve ratiofor bank liabilities of over two years in five stepsby a total of 500 basis points to 3%, and for otherliabilities by a total of 300 basis points to 5%,in order to ease the liquidity constraints in thebanking sector. In December it entered into aswap agreement with Sveriges Riksbank andDanmarks Nationalbank, enabling it to borrowup to €500 million as short-term funding topreserve macroeconomic and financial stability.Danmarks Nationalbank increased its mainpolicy interest rate in four steps by a total of 125basis points between May and October 2008.While one decision (in July) followed a25 basis point rate increase by the ECB, theother measures were taken when the interestrate on the main refinancing operations ofthe Eurosystem was left unchanged or evendecreased, and were aimed at increasing thespread in policy rates vis-à-vis the euro area.The interest rate increases by DanmarksNationalbank were intended to support theweakening krone in periods of tension inthe foreign exchange markets. In October,Danmarks Nationalbank and the ECB announcedthe establishment of a swap line amounting to€12 billion to improve liquidity in short-termeuro markets. This followed the conclusion of asimilar arrangement by Danmarks Nationalbankwith the Federal Reserve System in September.Following some easing of tensions in Danishfinancial markets, Danmarks Nationalbankfollowed the ECB in November and December2008 and decreased its main policy interest ratein two steps by a total of 125 basis points.In light of Slovakia’s coming adoption of theeuro, Národná banka Slovenska followed themonetary policy decisions of the ECB fromOctober 2008 and reduced its repo rate in threesteps by a total of 175 basis points to 2.5%. Italso narrowed the corridor of overnight ratesaround the repo rate to 100 basis points.Most NCBs with inflation targets and notparticipating in ERM II tightened their monetarypolicy stance at the beginning of 2008, withthe aim of containing inflationary pressuresstemming in large part from food and energyprice increases, and in some countries also fromrobust wage growth. In the first three quarters of2008 Sveriges Riksbank, the Magyar NemzetiBank and Narodowy Bank Polski each increasedtheir main policy rates by a total of 100 basispoints in several steps, while Banca Naţionalăa României increased its key interest rate insix steps by 275 basis points. Česká národníbanka increased its main policy rate only once,by 25 basis points in February, a move whichwas reversed in August. Having already startedto lower policy rates in December 2007, theBank of England continued to cut interest ratesthroughout the first three quarters of 2008.As inflationary pressures diminished on the backof declining commodity prices, a weakeningeconomic outlook and an intensification ofthe global financial crisis, most NCBs with aninflation target decreased their policy interestrates in the fourth quarter of 2008. On 8 October94 ECBAnnual Report2008