For this reason, we entered a tightening cycle in January 2014, which has so far brought the repo rate 100 basis points higher, to 6 per cent. The real rate has been slightly negative and is now about zero, relative to an historical real rate averaging around 3 per cent.
The key policy prescription is to improve the funding liquidity of financial institutions in order to prevent solvent institutions from being driven out of business by protracted illiquidity. This policy has been followed extensively by the Eurosystem over the recent past. Liquidity spirals also create an important pro-cyclical mechanism in the financial system.