The second pillar of the Eurosystem’s strategy therefore consists of a broadly based assessment of the outlook for price developments and the risks to price stability in the euro area as a whole. This broadly based assessment takes into account, inter alia, the information provided by wage developments, exchange rates, fiscal indicators, real economic activity, and asset and commodity prices. Forecasts of economic activity and prices in the euro area can certainly also contribute to the success of an appropriately forwardlooking monetary policy. Thus we take into account forecasts available from international organisations such as the IMF and the OECD as well as internal forecasts. 3  BIS Review 60/1999  We are aware that forecasts have to be interpreted with great caution. Given behavioural, institutional and structural uncertainties, forecasting price and other developments in the euro area is inevitably difficult. Moreover, a forecast cannot encompass all the indicator variables that are important for monetary policy. Nor can it always incorporate indicators in a timely manner. Furthermore, by the time the forecast has been finalised, the original assumptions may have become less realistic, requiring a careful interpretation of the results. Therefore, a thorough analysis of individual indicator variables plays an important role in our monetary policy strategy, in addition to any role that these variables may have in the forecast. Within the stability-oriented monetary policy strategy, the Eurosystem also takes into account the external value of the euro as an important determinant of the outlook for price stability.

I should like to take this opportunity to explain the current assessment, which is in line with the Governing Council’s expectations at the beginning of April. With regard to the first pillar of the Eurosystem’s monetary policy strategy, monetary growth cannot be seen as signalling upcoming inflationary pressures at this stage. Since the beginning of this year, the three-month moving average of M3 growth has been close to the reference value of 4.5%. For the period from January to March 1999 the average growth rate increased somewhat to 5.2%. This observation may, however, have been affected by special factors prevailing at the start of stage three. Therefore, in its current assessment the Governing Council does not regard current monetary trends as constituting a signal of future inflationary pressures. With regard to the second pillar of the Eurosystem’s monetary policy strategy, the broadly based outlook for price developments and risks to price stability and various indicators of future price developments and economic activity in the euro area indicate a favourable outlook for price stability. Financial indicators such as the very low level of long-term interest rates point to low inflation expectations and the credibility of monetary policy. Following the cut in short-term interest rates, long-term rates decreased somewhat initially, which confirms that the market considered the cut in interest rates by the ECB to be appropriate. More BIS Review 60/1999  4  recently these rates have risen somewhat, mainly as a reflex to the strong increase in longterm interest rates in the United States.