It was precisely under the extreme pressure that the financial system proved its stability. The market participants mastered the crisis situation spontaneously and networked their efforts: for example, the tasks that would normally have been performed in downtown Manhattan were carried out in New Jersey or in London. Or they agreed to extend the settlement period to five days and to conclude general money market trades at the official Fed rate (instead of fixing prices via brokers, some of whom could not be reached due to the collapse of technology). Furthermore, market participants practised restraint in stock sales and abstained from taking personal advantage of the general state of emergency. Creditors, notably the banks, also endeavoured to fulfil merely implicit commitments as far as possible and to ensure the functioning of the markets. All this would not have been possible without the tireless creative and networked efforts of thousands of shocked and grieving staff of the enterprises concerned and of the international financial community. The private measures for overcoming the crisis were also actively supported by the central banks, first and foremost by the Fed, which had fully retained its capacity to act from the outset despite being located in the immediate vicinity of "Ground Zero". It injected additional liquidity into the market and allowed the rate for one-day repos to fall to 1%. It also opened its counters to foreign banks operating in the United States and, when necessary, offered foreign central banks one-month dollar swaps.
In other words, the critical point for the Bank is to assure that the impacts of the above-mentioned developments are confined to 2006 and avoid any deterioration in expectations, which stand as a significant determinant of the inflationary process, for the sake of achieving medium-term targets. At this point, I would like to draw your attention to a few important points about the interest rate policy of the Bank and underline some issues once again. Short-term interest rates are the main policy instrument of the Central Bank. The Central Bank makes its policies and interest rate decisions in line with its main goal of achieving price stability and inflation targets. The Bank makes all its policies and decisions in view of medium-term trends rather than daily or shortterm ones, and these policies and decisions are grounded on main trends. In this framework, while making its interest rate decisions, the Bank uses a very wide data set including supply-demand conditions, costs, model forecasts, expectations, domestic and external developments; and evaluates all these data with a forward-looking perspective. This process is certainly a dynamic one, and every new piece of data and development is being closely monitored within the framework of the Bank’s inflation forecasts. Another significant fact about the interest rate decisions of the Bank is that the impacts of these decisions are observed with a time lag. The impact of the decisions on economic activity becomes evident within a period of 3-9 months, while their impact on inflation is observed within a period of 9-18 months.