As a consequence, conduits and structured investment vehicles (SIVs), which were borrowing in this market to finance their holdings of asset-backed securities, started facing difficulties to refinance themselves. Tensions spread to the interbank markets of most OECD countries, as banks began hoarding liquidity to meet their liquidity support commitments with conduits and to put the underlying assets on their balance sheets. Moreover, banks curtailed interbank lending because of uncertainty surrounding the potential exposures of their counterparties. Since the summer, the global economy and the euro area have entered a period of increased financial market volatility, significant re-appraisal of risks and market nervousness. The Governing Council of the ECB is paying great attention to these market developments and, in particular, has acted swiftly to provide the liquidity that was needed to permit an orderly functioning of the money market, to reduce the volatility of very short-term interest rates around the minimum bid rate of the main refinancing operations, and to contain the risk that tensions in these markets would propagate through the banking system. The Eurosystem will continue to play its part to consolidate a smooth return to a normal functioning of markets. The Governing Council is also monitoring very closely the macroeconomic effects that the recent episodes of financial unrest may have on the prospects for the euro area economy. Sound fundamentals and the expected robust global growth should support a relatively favourable medium-term outlook for economic activity.

The second element of the strategy is a comprehensive analysis of the risks to the outlook for price stability, according to two perspectives: economic analysis and monetary analysis. These two perspectives offer complementary analytical frameworks to support the Governing Council’s overall assessment of risks to price stability. The economic analysis aims at identifying those factors that have a bearing on risks at short- to medium-term horizons. It includes, inter alia, projections of key macroeconomic variables and an analysis of shocks hitting the euro area economy. In turn, the monetary analysis – which has been broadened and deepened over time – draws on a wide range of tools, techniques, models and frameworks, complemented by the use of informed judgment, in order to identify risks at longer horizons. After the evaluation of the strategy in 2003, the Governing Council of the ECB explained that the monetary analysis mainly serves as a means of cross-checking the short to medium-term indications coming from the economic analysis. When compared to the strategy of inflation targeting, the Eurosystem’s Monetary Policy Strategy shares the essentials: that is, the importance of price stability and the need for monetary policy to act pre-emptively and make comprehensive use of all available information. The strong belief that institutional independence must necessarily be supplemented by high standards of accountability and transparency is also shared by both camps. This is reflected in the growing weight that central banks, in industrial countries and beyond, place on the importance of communication.