In addition, the SMP had unintended side effects such as a perceived preferred creditor status of the ECB vis-à-vis other creditors. The Governing Council therefore decided last Thursday to terminate the SMP. Nevertheless, the current situation in sovereign bond markets continues to be characterised by a)  heightened aversion of non-resident investors to hold sovereign bonds of some euro area countries,  b)  extreme illiquidity and yield volatility in these bond markets and  c)  widespread concerns over redenomination risks. This all reflects a general fragmentation in financial markets; but excessively high and volatile risk premia hinder the effective working of monetary policy. In this environment, monetary policy signals do not reach all parts of the euro area in the same way. In light of these continued severe malfunctionings and to counter the risks of redenomination, last Thursday the Governing Council established Outright Monetary Transactions – or OMT – as an additional monetary policy tool. The OMT is introduced to contribute in safeguarding the monetary policy transmission mechanism to the entire euro area to ensure the singleness of monetary policy. The OMT is in no way a substitute for continued efforts in structural reforms and fiscal consolidation on the side of governments. They are essential steps to regain trust and to ensure the sustainability of the euro area in the long-run. This is also the reason why strict and effective conditionality and adherence to an appropriate EFSF or – later hopefully – ESM programme is a necessary condition to activate the OMT purchases.

Only recently, the Fed and the Bank of Japan have announced a numerical inflation goal. The second element: central banks should be independent on legal and operational grounds. Indeed, the independence of central banks is enshrined into primary law in a number of advanced and emerging countries and has been key for a stability oriented monetary policy. For crisis management, the so-called Jackson Hole consensus 2 of the 1990s and early 2000s foresaw only a limited role for central banks. Following the logic of the consensus, monetary policy should react to financial imbalances only to the extent that they affect the inflation forecast. Yet, as asset price build-ups are often accompanied by relatively contained inflation rates, 3 “ex-ante” monetary policy reactions were considered difficult. Effectively the consensus implied that central banks would only intervene “ex-post” to counter potential deflationary risks and risks to financial stability. The dot-com bubble of the beginning of the century was an illustration of such strategy. The ECB with a special emphasis on monetary developments The ECB’s standpoint differed from the Jackson Hole consensus. We have always emphasised that focusing on money and credit developments provides for a medium- to long-term perspective. It was believed that the monetary pillar would release warning signals and hedging against the building up of financial imbalances. 4 Indeed, as of 2005, on the basis of its monetary pillar, the ECB has repeatedly warned on the observed strong credit growth and the accompanied under-pricing of risk.