Since 2008, we have seen the Fed come to the rescue of the US commercial paper market and the mortgage backed securities market; we have seen the Bank of England purchase in the space of a few months GBP 200 billion in government securities, representing around 15% of the United Kingdom’s GDP; the Eurosystem, for its part, has conducted massive oneyear refinancing operations with euro area banks and has kick started the covered bond market, via its EUR 60 billion purchase programme. Next May, it also start intervening in the government securities market. This calls for further clarification in the light of my earlier analysis because its motives are highly illustrative of the interactions between markets and central banks. What was the situation in May and how has it changed?   Price stability was not and is still not in question in the euro area; following a period in which prices declined, largely due to developments in energy prices, we are steadily returning to a configuration that is more consistent with our definition of stability, i.e. price increases below, but close to, 2%. However, all indicators have shown continuously, since the beginning of the year, that the upside risks to inflation are very limited. The Commission published for example in early May euro area inflation forecasts of 1.5% for 2010 and 1.7% for 2011. ECB inflation forecasts published in early September project inflation at 1.6% in 2010 and 1.7% in 2011.
Each situation may call for an appropriate response and we now know that this includes massive and direct interventions in markets, to some extent similar to foreign exchange interventions. It is plain that this type of action has no constraints in terms of amounts or timeframes; such amounts are unlimited because central banks can absorb the liquidity injected and they inherently have no liquidity problems in their currency. Moreover, I believe that the fact that central banks have shown that they are able to take such action is in itself likely to limit the emergence of asset price disruptions by limiting speculation. Some recent modest purchases under our Securities Market Programme have acted as a strong reminder that we were still monitoring very closely the evolution of key markets. But this does not mean that markets and market participants should always expect central banks to make such interventions. Similar to its lender of last resort function, the role of buyer of last resort that central banks can take on must not extend to insolvent issuers and must not, at the risk of causing a very dangerous moral hazard, be systematic each time a problem arises. Such interventions must result, as rapidly as possible, in a return to normal market functioning, which is the only way to ensure a truly efficient allocation of capital and which enables us to determine economic agents’ expectations. Thank you very much for your kind attention.