john hurley : the monetary and financial environment in the euro area speech by mr john hurley, governor of the central bank and financial services authority of ireland, to the aci ireland, dublin, 11 april 2005. * * * introduction first, let me say how pleased i am to have the opportunity to speak to you tonight. the aci plays an important role in bringing together participants in financial markets and in actively promoting the education and professional development of its members. i would like to begin tonight by talking about euro area monetary policy and the factors which are shaping the current environment. i will then talk briefly about monetary policy implementation. finally, i will devote some time to the important topic of financial integration in europe. the economic background beginning with monetary policy, a key feature of both the euro area and global economies in recent years has been the unusually high degree of economic and financial uncertainty which has accompanied economic recovery. as a result, particularly in the euro area, growth has ebbed and flowed and the recovery has not evolved in the smooth and sustained fashion that would be normal for this stage of the economic cycle. while the recovery of economic activity in the euro area which started in 2003, continued in 2004, it was a year of two quite different halves. relatively strong growth in the first - half of 2004 was followed by a slowdown in activity in the second - half. this reflected both the impact of higher oil prices and exchange rate developments. thus, while growth of 1. 8 per cent was recorded in 2004, the highest rate since 2000, the euro area economy lost some momentum during the second - half of the year. while a somewhat similar pattern was also observed in the wider international economy, the global growth performance has been a good deal more impressive than that of the euro area over the past 18 months. last year the global economy grew by 5 per cent, its fastest rate of growth in almost three decades ; this was two and one - half times the rate of growth of the euro area. driven by the strength of economic activity in the us and asia, the global economy grew rapidly in the four quarters to mid2004. the strength of global growth during this period was supported by favourable financial conditions and stimulative macroeconomic policies in many countries. in the us, growth acquired considerable momentum from the sizeable fiscal and monetary policy stimulus which had been put in place earlier. in addition, supportive wealth effects from equity and housing markets also helped propel growth. the improvement in the global

consultation, in which irish institutions were among the most prominent in the number and comprehensiveness of their responses. the new arrangements involved a change in the timing of the reserve maintenance period and shortening the maturity of the main refinancing operations from two weeks to one week. the intention of these two revisions was to eliminate the effects of expectations of interest rate changes on bidding behaviour. the ecb also enhanced its communications with market participants and increased transparency by publishing a benchmark allotment for each main refinancing operation. the benchmark allotment is the amount that allows for neutral liquidity conditions and the market can now compare the actual allotment with this benchmark amount. the implementation of the recent changes went smoothly and counterparties quickly adapted their bidding behaviour to the increased allotment amounts in the weekly operations. a favourable outcome has been an overall stabilisation of the spread between the overnight rate and the minimum bid rate during the reserve maintenance period. another, almost inevitable, consequence of the changes has been the increased incidence of liquidity imbalances at the end of the reserve maintenance period, which has been reflected in increased volatility in the overnight rate on the last day of the period. the ecb has responded with more frequent fine - tuning operations and it recently consulted with market participants, via its money market contact group, on other possible approaches that might help to reduce volatility. the eurosystem institutional set - up, involving centralised decision - making on monetary policy issues and decentralised implementation of policy presents special challenges in the area of communication. such arrangements demand that the eurosystem keeps in touch with local market participants and opinion. i would like to outline a few examples of how this achieved. local market views are collected by the bank and provided to the ecb on a daily basis. together with the views of the rest of the euro - area market, these play a part in the ecb's management of the euro - area money market. we in the bank also conduct annual money market surveys and periodic bond market studies, which feed into wider euro - area market studies and these in turn are published by the ecb. another communication forum is the dublin markets contact group. this group of banks, representative of the local market, meets under the auspices of the bank's financial market department. we use this forum to provide feedback from similar groups established at eurosystem level while local issues that arise in the dublin market are fed