That led in December 2005, and in March and June 2006, to respective quarterpoint rises in official interest rates from the historically low level of 2% at which they had held since  BIS Review 60/2006  3  June 2003. Despite these rises in official rates, the Eurosystem's monetary policy stance has remained propitious to the firming of the pick-up in activity and job creation. Nonetheless, the ECB is closely monitoring developments in the euro area to ensure inflation expectations remain in line with price stability over the medium term. Budgetary policies adopted a moderately contractionary stance in the area as a whole, although the persistent fiscal imbalances in several Member States continued. Consequently, the current firming of higher growth rates should drive more resolute action to correct these imbalances, the persistence of which may, in some Member States, have dented agents' confidence and may thus affect their spending decisions. The reform of the Stability Pact appears to have successfully concluded a phase of uncertainty over the application of regulations relating to the fiscal policy discipline of the euro area countries. However, preserving the credibility of the new framework requires an unequivocal and ongoing commitment by the national authorities to strict compliance with the Pact. The recent persistence of sluggish growth rates, despite highly favourable financial conditions, highlights the pressing need to see through the European structural reform agenda with firmer resolve. The revision of the Lisbon strategy in 2005 may contribute to driving this process.
However, the successful battle against inflation and the related reduction in macroeconomic volatility – also known as the “Great Moderation” – were not able to prevent serious instabilities within the globalised financial system. Alongside its evident benefits, the “Great Moderation” thus seems to have produced a number of damaging by-products. In combination with low real interest rates, financial  BIS Review 121/2010  1  innovations and liberalised capital markets provided enormous credit-creation potential. Together with a reduced perception of risk, this fostered a rapid rise in asset prices which ultimately led to excesses and imbalances in some markets. Through contagion effects, the bursting of a credit and asset price bubble can bring the entire global financial system to the brink of collapse within a very short period of time. In view of the interaction with the real economy, this also has serious implications for the world economy and global growth. This raises a number of questions about the future role of central banks. Can and should monetary policy be used to actively counter the development of imbalances or financial bubbles? Does it make sense to use monetary policy instruments for this? Will the new instruments used during the crisis also play a more important role in monetary policy in the future? To answer these questions, I would like to look specifically at two aspects. First, I will examine the measures used by central banks during the crisis and briefly outline the possibilities and limitations on their future use in monetary policy.