In particular, the insufficient consolidation of public finances in certain countries in the previous upturn has considerably eroded the stabilising capacity of fiscal policy in the current cyclical phase. Therefore, a number of countries had to curtail the operation of the automatic stabilisers and some had to run budget deficits above 3% of GDP, which triggered the related excessive deficit procedures. Evidently, the unfavourable economic situation is testing the multilateral surveillance mechanisms of budgetary policies. But the report drafted by ECOFIN, based on a proposal by the Commission and recently taken up by the European Council, has contributed to reinforcing the validity of the Stability and Growth Pact and to clarifying its application. The single monetary policy has also reacted to the cyclical slowdown, maintaining conditions propitious to the growth of economic activity while bolstering the credibility of its commitment to price stability. However, continuing inflationary pressures, linked in part to the aforementioned rigidities in price- and wage-formation mechanisms, have naturally limited the scope of the more relaxed monetary policy stance. In any event, the key ECB interest rate stands today at 2%, 125 basis points down on a year ago. That constitutes a tailored response to the weakness of economic activity and to the improved inflation outlook over the period to date, brought about by the substantial appreciation of the euro. The economic environment has been appreciably alleviated in recent months by the rapid outcome of the Iraq war and, in particular, by the favourable impact of this on oil and stock market prices.
This included more frequent reporting on transactions, data, and information from market participants on Monday. Although conditions remained calm on that Friday, the simultaneous increase and widening dispersion in repo rates and, importantly, federal funds rates on Monday indicated that markets were not effectively distributing liquidity across the system. The New York Fed’s Markets team 1/5  BIS central bankers' speeches  built a timeline and implementation plan in case the Open Market Desk at the New York Fed (Desk) would need to operate on Tuesday. Early Tuesday morning, it became clear that this situation had persisted and had the potential to become more acute. In response to these developments, and in keeping with the FOMC’s standing directive to the Desk to conduct open market operations as necessary to keep the federal funds rate within the target range, on Tuesday morning the Desk announced and conducted a repo operation. Although such operations were common before the financial crisis, this was the first non-test repo operation in many years. This was followed by repo operations each day since. These actions had the desired effect of reducing strains in markets, narrowing the dispersion of rates, and lowering secured and unsecured rates to more normal levels relative to other benchmarks. The experience of the past week drew attention to the possibility of the development of strains in funding markets around the upcoming end of the quarter.