Moreover, a strategy that assigns a prominent role to the monetary aggregates emphasises the responsibility of the ESCB for the monetary impulses to inflation, which a central bank can control more readily than inflation itself. These monetary impulses are the most important determinants of inflation in the medium term, while various other factors, such as terms of trade or indirect tax shocks, may influence the price level over shorter horizons.
Second, there is the monthly longer term refinancing operation, which has a maturity of three months and will always take the form of an interest rate tender. This is because the ECB will avoid signalling its monetary policy stance through these particular operations.
Building its reputation, and the associated credibility of monetary policy, is vital. But the process of doing so is complicated by the relatively high level of uncertainty surrounding the transition to Monetary Union itself. The transition to Stage Three is a unique event, and will create unique opportunities for many - but it will also create some unique problems for monetary policy makers. At the ECB, we are addressing these problems and are confident that the risks can be managed successfully. Many of the difficulties we face will be overcome through our own efforts over the coming months.
In addition, a set of risk control measures has been elaborated to ensure that, for any counterparty, the amount of assets provided is always sufficient. Risk control measures cover the assets' price and credit risks, taking account of the asset type, its characteristics and the maturity of the transaction. The ECB's risk control measures have been elaborated with careful attention to the best market practices in this area. They include the deduction of haircuts from the assets and the imposition of initial margins to the credit amount. Another feature of the risk control framework is the regular revaluations of the assets, which will, in most cases, take place daily and may trigger margin calls, most often to be settled through delivery of additional assets.
Reserve requirements will be calculated by applying a reserve ratio of 5 % to 5 % to the deposits, debt securities and money market paper issued by credit institutions, except for residual maturities above two years. Although repurchase agreements are included in the reserve base, they will be subject to a zero reserve ratio. Inter-bank liabilities and liabilities vis-et-vis the ESCB will not be subject to reserve requirements. An allowance of the order of E 100,000 will be deducted from reserve requirements, so that credit institutions with a small reserve base will not have to hold minimum reserves.
Against this background, the ESCB will have to design a monetary policy strategy of its own. The chosen strategy will show as much as possible continuity with the successful strategies that participating NCBs conducted in the Stage Two. At the same time the ESCB's strategy will take into account to the extent needed the unique situation created by the introduction of the euro.
In many respects, a strategy giving a prominent role to monetary aggregates has considerable advantages over direct inflation targeting. Monetary aggregates are published. They are clearly not subject to various kinds of ' judgmental manipulation ' by policy makers or central bank staff that might be possible with inflation forecasts. To the extent that policy makers wish to depart from the signals offered by monetary growth because of ' special factors ' or ' distortions ' to the data - including those distortions arising from the transition to Monetary Union itself - they will have to do so in a public, clear and transparent manner.
Being a new institution, the European Central bank must be prepared to come under intense scrutiny right from the start. In particular, the international financial markets will monitor its every decision like hawks. Facing this environment in the run-up to Monetary Union, the ESCB must ensure that everything possible is done to make the launch of Stage Three as tension-free as is possible. Choosing and announcing an appropriate monetary strategy is crucial.