This decision was taken on the grounds that the evidence continues to support the assumptions which have formed the basis of the derivation of the reference value since 1999, namely those relating to trend potential output growth of 2-2½% per annum and to a trend decline in M3 income velocity of ½-1% per annum in the euro area. We will issue a separate press release this afternoon explaining in greater detail the background to this decision. When comparing current developments with the reference value, it is important to remember that the reference value is a medium-term concept. Short-term movements of M3 do not necessarily have implications for future price developments. Moreover, deviations of M3 from the reference value must be analysed in conjunction with other real and financial indicators in order to understand their implications for price stability. Turning to the most recent data, in the period from August to October 2002 the three-month average of the annual growth rate of M3 was 7.1%, unchanged from the previous three-month average. M3 growth has been influenced considerably by portfolio re-allocations in an environment of general uncertainty and particularly by stress in financial markets. At the same time, it also reflects the low level of interest rates in the euro area which makes the holding of liquid assets relatively attractive. There is ample liquidity in the euro area. However, in the light of the sluggish economic growth, it is unlikely that this excess liquidity will translate into inflationary pressures in the near future.

This persistence has partly reflected a series of transitory developments, such as the indirect effect of previous oil and food price increases and a limited changeover effect. However, structural factors in the labour and product markets have also played a role, as mirrored, in particular, in the upward trend in wage developments observed until recently. This trend has only just shown signs of stabilisation. Services price inflation has also remained stubbornly high. Indeed, structural rigidities have impeded an appropriate adjustment of wages and prices. As a result, annual inflation rates have remained above 2% during most of 2002, including November, as has been confirmed by Eurostat's flash estimate, which indicates an annual HICP inflation rate of 2.2%. Second, when looking forward from now until the early part of 2003, although recent developments in oil prices have lowered short-term price pressures, there are still some factors that could keep annual inflation rates above 2% for several months to come. Yet this short-term outlook is related both to base effects and to indirect taxes and administered prices, i.e. to temporary developments. Third, when looking beyond the short term, we consider that both the overall economic environment and the euro exchange rate, which has strengthened since early this year, will contribute further towards reducing inflationary pressure. Moreover, we expect the indirect effects of previous increases in oil prices and other factors to further unwind. Although wage-related risks remain in place, they are judged less likely to materialise as long as the economic environment does not change substantially.