To develop a more complete view of the impact of financial market developments on bank balance sheets, financing conditions and money and credit growth, further analysis will be required. The ECB’s Governing Council stands ready to counter upside risks to price stability, in line with its mandate. Against this background, on 6 December 2007 we decided to leave the key ECB interest rates unchanged. The Governing Council will monitor very closely all developments. In particular, as I said on behalf of the Governing Council after our last meeting, for the recent increase in inflation to remain temporary, it is essential that the price and wage-setting behaviour remains unaffected by current inflation rates, so as to avoid the emergence of second-round effects. By acting in a firm and timely manner on the basis of its assessment, the Governing Council will ensure that such second-round effects and risks to price stability over the medium term do not materialise. To firmly anchor inflation expectations in line with price stability is even more important at times of financial market volatility and increased uncertainty. In this respect, the Governing Council has decided to continue to pay great attention to financial market developments. Liquidity operations Ladies and gentlemen, once the Governing Council has defined the monetary policy stance necessary for maintaining price stability in the medium term, in line with its mandate as defined by the Treaty, the ECB has the responsibility to also ensure the smooth functioning of the segment of the money market that we influence.
I should like to underline – once again – that these two responsibilities are clearly distinct and should not be mixed. Since early August last year, tensions have been observed in money markets and during the last months banks expressed particular concerns about their liquidity needs over the yearend. The year-end period is traditionally a period of scarce liquidity, as market activity is subdued and banks are preparing their year-end balance sheets. In its open market operations, the ECB therefore pursued its endeavour to contribute to the smooth functioning of the euro money market. In early August, we responded to the sudden  2  BIS Review 3/2008  upward pressures on the overnight interest rate by lending significant amounts of liquidity through overnight fine-tuning operations. We also carried out, and later renewed, two supplementary longer-term refinancing operations in order to reduce banks’ concerns over their longer-term funding during a period when the longer-term repo and deposit markets turned illiquid. In the main refinancing operations the ECB has allotted larger amounts of liquidity than under normal circumstances with an aim to limit the volatility of very short term rates around the ECB’s minimum bid rate. These large amounts of liquidity have always been absorbed later on during the maintenance period, so that the ECB has only provided banks with the liquidity needed for the fulfilment of their reserve requirements on average over the maintenance periods. Let me also underline that we only provide such operations against solid collateral, as always.