The absence to date of underlying inflationary pressures is also seen in the moderate evolution of labour costs and of the indicators of long-term inflationary expectations. However, the upside risks to inflation have been growing in step with the improvement in activity and employment, which might drive the pass-through to consumer prices and wages of past rises in energy product prices. Faced with this, the ECB decided to readjust monetary conditions by raising its official interest rates on five occasions since December 2005. These measures have proved necessary to keep inflationary expectations anchored at lower levels, against a background of strengthening aggregate demand and a gradual move closer towards the potential level of output. In any event, I should stress that at present, even following these interest rate rises, the financial conditions in place remain conducive to economic activity. Having a monetary policy geared to ensuring price stability is a vital requirement for economic dynamism to be sustainable. However, monetary policy can in no way supplant the other economic policies which, in fact, are of paramount importance for the growth of our economies. In particular, the European authorities must strive more resolutely to eliminate the structural obstacles holding back growth potential. The relatively disappointing results in terms of economic expansion in the euro area in the past decade are due, above all, to the scant dynamism of labour productivity which, in turn, is largely a response to the relatively modest pace of innovation, and its spread and application to the rest of the economy.

Yet despite this narrowing of the gap between the contributions of national and external demand to growth that I have referred to before, the expansion of the Spanish economy in 2006 has essentially been underpinned by the buoyancy of domestic spending. In particular, gross capital formation has retained considerable strength, while only private consumption and government consumption have slowed slightly in the year to date. The somewhat less dynamic behaviour of private consumption in the first three quarters of 2006 is a result of the interplay of numerous factors whose effects, in some cases, have tended to counter each other. The losses of purchasing power caused by the high inflation rates in the first half of the year have affected household disposable income and, therefore, they will have tended to reduce consumer  2  BIS Review 117/2006  spending. Further, the increase in borrowing costs following the successive rises in official interest rates by the ECB must have curtailed the spending capacity of some sectors of households. Conversely, intense job creation - running at a rate of over 3% - and the notable rise in household wealth are factors that should have sustained the growth of private consumption. Regarding household wealth, it should be pointed out that, although house prices have begun to show signs of slowing, there have continued to be very significant stock market rises in 2006, outpacing those in recent years, which were already considerable. As I mentioned earlier, gross capital formation has been very robust throughout 2006.