and financial stability. over the next few minutes i would like to share with you some reflections on the policy actions that central banks in general – and the ecb in particular – have undertaken and on the challenges that we are likely to face in each of these three areas. liquidity policy before discussing liquidity management interventions, it is useful to recall that the ecb ’ s measures to provide support to money markets have been based on the fundamental principle of the separation between monetary policy decisions and their implementation. this principle is important in order to reduce the risk that economic agents may mistakenly interpret volatility in short - term money market rates, triggered by temporary and unpredictable fluctuations in liquidity conditions, as containing information on the desired monetary policy stance ( which is instead given by the rate applied to the main refinancing operations ). the separation principle has proved to be particularly effective during the financial market turmoil and at times of high volatility in the short - term money market rates. ( i ) addressing liquidity risk through increased intermediation let me now try to explain in somewhat greater detail the rationale behind the operational measures of the eurosystem during the financial market turmoil. from the start of the turmoil until the collapse of lehman brothers in mid - september 2008, the ecb engaged in active liquidity management by adjusting the temporal and quantitative distribution of its liquidity provision within the maintenance period. 5 besides, from october 2007, the eurosystem has engaged in increasing international cooperation to ease tensions in global money markets, particularly by facilitating the access of euro area banks to us dollar liquidity. through the adjustments to its euro operations, the ecb responded to the perceived change in the pattern of banks ’ demand for liquidity over the maintenance period, in particular for illustration, one may adapt the poole 1970 - paradigm to liquidity management during a financial turmoil : when the demand for liquidity becomes unstable ( different demand pattern ), the central bank focuses on stabilising interest rates directly, rather than stabilising interest rates by managing the quantity ( “ excess ” allotments above benchmark ). responding to the increasing evidence that interest rates were no longer necessarily linked to liquidity conditions on the last day of the maintenance period ( as postulated by the so - called “ martingale hypothesis ” ). indeed, unlike in normal times, banks seemed to no longer regard reserve holdings on different days of the maintenance period as substitutes. by contrast, there was evidence of the emergence of

deviate from this target by more than 1½ percentage points in either direction, the bank is to provide the government with a written public account explaining what has caused this deviation, how the bank intends to respond and how long it expects that it will take for inflation to once again return to within the targeted inflation limits. the central bank has only one instrument at its disposal to achieve this objective : interest rates. the significant interest rate here is that used in the bank ’ s repurchase transactions with credit institutions, sometimes referred to as the central bank ’ s policy interest rate. such transactions in fact represent the bank ’ s liquidity facility for these institutions. the commercial and savings banks subsequently set their own rates of interest, having regard to the central bank ’ s policy rate, and short - term market interest rates generally change in phase with the central bank rate. if other factors remain constant, changes in the central bank interest rate also affect long - term interest rates, but here other aspects also enter the picture. the response of these rates to changes in the central bank rate is therefore not always predictable and tends to occur with a certain time lag. inflation forecasting plays a crucial role in central bank policy. it produces four forecasts annually, which are published in its quarterly monetary bulletin. the inflation forecast extends just over two years into the future, on a quarter - by - quarter basis. as in other countries, interest rate changes by the central bank take quite some time to have an impact throughout the economy. this makes it necessary to have a forward - looking policy, with the inflation forecast based on state - of - the - art methodologies. in addition to its inflation forecast, the central bank publishes a quarterly assessment of the economic and monetary situation and prospects, including a national economic forecast, and their probable impact on price level developments. if inflation looks likely to exceed the bank ’ s target limits in a long - term perspective, the bank will raise its policy interest rate, or cut this rate if inflation is heading below the target limit. in preparing its inflation forecasts and regular assessment of the economic situation and outlook, the central bank examines a wide variety of indicators. these include both statistical data and information obtained from interviews with representatives of industry, special interest groups, credit institutions and others. much of this statistical data is available on the bank ’ s website. decisions by the central bank ’ s board of governors are made following in - depth examination of these indicators, based on the bank ’