It aims to address disruption in monetary policy transmission by tackling one of its root causes: unfounded fears about a break-up of the euro area. By providing a fully effective backstop against disaster scenarios, it sends a clear message to investors that their fears are baseless. This should restore confidence and help normalise the  7  See EU Commission (2012) “The ageing Report”, May. 8  See EU Commission (2012) Autumn Economic Forecasts, October. 9  Svensson, L, “Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets,” European Economic Review 41 (1997) 1111–1146. BIS central bankers’ speeches  5  pass-through of interest rates. Indeed, the mere announcement of the programme approval by the ECB Governing Council led to substantial declines in yields and spreads of stressed countries whose net private capital outflows also decreased significantly since July. However, countries can only qualify for OMTs if they implement an ESM adjustment programme with strong conditionality. This ensures that they continue to improve their economic fundamentals while the ECB is active. In this way, we aim to set the right incentives for governments and create a framework where the positive effects of our actions are sustainable. Taken together, these measures will help unwind the euro area’s imbalances and stabilise the financial situation over the near term. Member States are correcting the excesses of the last decade in terms of weak public finances, unsustainable credit growth and competitiveness losses.

In these circumstances, monetary policy in maintaining price stability on a medium term perspective, contributes also to reduce the output gap, as the literature on flexible inflation targeting has shown long ago. 9 With risks to inflation well-contained, the ECB has lowered its policy interest rate to the historic low level of 0.75% and provided banks with access to unlimited liquidity at this price. However, before September this year, the transmission of our policy rate to the real economy was seriously disrupted across countries. For instance, when the ECB cut interest rates by 125 basis points between November 2002 and August 2003, lending rates to non-financial corporations across euro area countries responded homogeneously. By contrast, following the 75 basis point cuts implemented between October 2011 and July 2012, the range of bank lending rates across the euro area widened significantly. Indeed, in some countries interest rates for non-financial corporations actually increased. In an economy like the euro area where more than two thirds of firms’ financing comes from banks, a disruption in monetary policy transmission has material effects for investment and employment. But this effect is particularly exaggerated when countries are simultaneously undertaking large fiscal and structural adjustment. Indeed, it was the countries with the greatest adjustment needs that were being most cut off from monetary policy support. They were at risk of entering a vicious circle of rising interest rates, falling growth and deteriorating public finances. It was against this background that the ECB introduced its programme of Outright Monetary Transactions, or OMTs.