(RTTNews) - The recent intensification of the financial market crisis has affected the outlook for economic growth and price stability in the euro area, the Executive Board member of the European Central Bank, Jos� Manuel Gonzalez-Paramo said in a speech late Thursday. He added that the current crisis increases downside risks to growth and at the same time, it diminishes the upside risks to price stability and bring inflation expectations back to levels consistent with price stability.

Justifying the ECB’s decision to cut its key interest rate by 50 basis points to 3.75% in a coordinated move by world’s major central banks to control the financial market crisis and its impact on the global economy, the policymaker said, “The decision to ease monetary conditions in the euro area and, more generally, at the global level was warranted by the recent moderation in inflationary pressures and inflationary expectations, partly reflecting weakening economic activity, a marked decline in the prices of energy and other commodities and increasing downside risks to future economic growth.”

He added that the coordinated interest rate cut was unprecedented by historical standards and was very much welcomed as a sign of the strong commitment of the international central banking community to addressing the macroeconomic implications of the financial market turmoil.

Further, Gonzalez-Paramo said, in responding to the financial market turmoil the ECB has consistently stuck to the principle of a clear separation of tasks between monetary policy and liquidity policy. According to him, monetary policy must define the appropriate level of the policy rate in order to achieve and maintain the primary objective of price stability, thereby supporting long-term economic growth and employment creation.

Gonzalez-Paramo stated that the central bank’s liquidity policy must aim to keep the very short-term money market rates in line with the chosen policy rate and to guarantee the smooth functioning of the market, thereby delivering the desired monetary policy stance and contributing to preserving financial stability.

Further, he said the best contribution that the ECB can provide in order to preserve the purchasing power of citizens over the medium term and to support sustainable growth and employment in the euro area is delivering medium term price stability at home and maintaining expectations firmly anchored at levels consistent with price stability.

With regard to the current uncertainty in the financial markets across the globe, Gonzalez-Paramo said, “We are certainly witnessing challenging times.” He noted that the provision of financing to the economy, which is one of the core functions of the financial system is put at risk due to financial turmoil and the episodes of extreme volatility.

“In the early stages of the turmoil - that were every much dominated by liquidity concerns-, central banks occupied the central stage by addressing liquidity tensions through a host of measures aiming to provide short-term funding to illiquid but solvent institutions,” he said.

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