ANNUAL REPORT 2008 - Polymer Bank Notes of the World

1 MONETARY POLICY OPERATIONS, FOREIGNEXCHANGE OPERATIONS AND INVESTMENTACTIVITIES1.1 MONETARY POLICY OPERATIONSThe monetary policy operations of theEurosystem comprise on the one hand openmarket operations, such as main refinancingoperations (MROs), longer-term refinancingoperations (LTROs) and fine-tuning operations,and on the other hand standing facilities.Within the operational framework for theimplementation of monetary policy, whichis based on a system of minimum reserverequirements, these instruments are used tomanage liquidity conditions in the interbankmoney market with a view to steering veryshort-term interest rates close to the ECB’s keypolicy rate.During 2008 Governing Council decisionsaffecting the key ECB interest rates were takenon four occasions. On 3 July the GoverningCouncil decided to increase the key ECB interestrates by 25 basis points to 4.25%. On 8 October,6 November and 4 December it decided to lowerthe key ECB interest rates to 3.75%, 3.25% and2.50% respectively. In addition, on 8 Octoberthe Governing Council decided to narrow thecorridor around the MRO interest rate formedby the rates on the standing facilities, from200 to 100 basis points, as of 9 October. As aconsequence, the marginal lending facility ratewas set at 50 basis points above the MRO interestrate, and the deposit facility rate at 50 basispoints below the MRO rate. On 18 December theGoverning Council decided to restore the widthof the corridor to its pre-October levels witheffect from 21 January 2009.The implementation of monetary policy during2008 was driven by the Eurosystem’s effortsto address the tensions in the money marketsrelated to the financial turmoil. In a first waveof measures, in the period up to September, theEurosystem frontloaded the supply of liquidityat the beginning of the reserve maintenanceperiod, allowing the banks to fulfil theirminimum reserve requirements somewhatearlier in the maintenance period, and reducedit later, thus leaving the total supply of liquidityChart 40 Key ECB interest rates and theEONIA5.505.255.004.754.504.254.003.753.503.253.002.752.502.252.001.751.50deposit ratemarginal lending rateinterest rate on main refinancing operations 1)EONIAJan. Feb.Mar.Apr.MayJuneJulyAug.Sep. Oct.Nov.Dec.20085.505.255.004.754.504.254.003.753.503.253.002.752.502.252.001.751.50Source: ECB.1) Minimum bid rate until 14 October 2008; fixed rate from15 October 2008.over the entire maintenance period unchanged.At the same time, the average maturity of openmarket operations was lengthened by increasingthe share of liquidity provided via longer-termoperations.In October 2008, following a markeddeterioration in financial market conditionsafter the failure of Lehman Brothers, the ECBlaunched a second wave of measures. Thesemeasures included a move to a fixed rate tenderprocedure with full allotment for open marketoperations, the reduction of the corridor ofstanding facility rates from 200 to 100 basispoints and the expansion of the list of assetseligible to be used as collateral in Eurosystemcredit operations.All these measures aimed to ensure the continuedaccess of solvent banks to liquidity, thus helpingto improve the impaired functioning of themoney market, while at the same time alsosteering short-term interest rates (see Box 10 formore details).98 ECBAnnual Report2008