and between 1. 5 % and 2. 5 % in 2008. in 2008, a declining impact from indirect taxes and energy prices is expected to be compensated by higher pressures from unit labour costs. compared with the june 2007 eurosystem staff projections, the new ranges for 2007 and 2008 are within the ranges previously projected. the governing council is of the view that risks to this outlook for price developments lie on the upside. these upside risks include increases in indirect taxes beyond those anticipated thus far and further increases in oil prices and prices for agricultural products. more fundamentally, stronger than expected wage developments and an increase in the pricing power in market segments with low competition may occur. such developments would pose upside risks to price stability. it is therefore crucial that all parties concerned meet their responsibilities. the potential materialisation of these risks – or their abatement – requires close monitoring. the monetary analysis confirms the prevailing upside risks to price stability at medium to longer - term horizons. on the basis of the latest available data ( covering the period to the end of july ), the underlying rate of monetary and credit expansion remains strong. this is reflected in the rapid growth of the broad monetary aggregate, m3, which grew at an annual rate of 11. 7 % in july, and the strength of mfi loans to the private sector, which continue to increase at double - digit rates on an annual basis. when identifying and assessing the policy - relevant underlying trends in monetary expansion, it is important to look through short - term volatility and the impact of temporary factors on developments in specific monetary aggregates. taking the appropriate broader and mediumterm - oriented perspective, there are several indications that increases in short - term interest rates over recent quarters have influenced monetary developments. for example, increases in short - term rates have contributed to a more modest expansion of m1, as the opportunity cost of holding the most liquid components of m3 has increased. moreover, higher short - term rates have led to some stabilisation in the growth of mfi credit to the private sector, albeit at double - digit annual rates, with the growth of household borrowing moderating as house price dynamics and real estate activity have slowed. however, these developments are yet to dampen the overall rate of monetary expansion, as the flattening of the yield curve has increased the attractiveness of monetary assets relative to less liquid longer - maturity instruments, thereby causing broad money growth to rise. furthermore, the growth of loans to non - financial companies has shown renewed

the first half of 2007, as a whole, was in line with potential growth. data on activity in the third quarter – from various confidence surveys and indicator - based estimates – remain favourable overall and support the assessment that real gdp is growing at sustained rates. in particular, the latest data on unemployment are favourable and the levels of all confidence indicators to august were high. global economic activity is expected to remain robust, as the likely slowdown in the united states is expected to be largely offset by the continued strong growth in emerging markets. this will continue to provide support to euro area exports and investment. in addition, consumption growth in the euro area should strengthen further over time, in line with developments in real disposable income, as employment conditions improve further. that said, in view of the overall potential impact of increased financial market volatility and the re - pricing of risk on the real economy, appropriate monitoring of the economy ’ s evolution is necessary. this outlook is also reflected in the september 2007 ecb staff macroeconomic projections for the euro area, which for the first time include cyprus and malta. the projections foresee average annual real gdp growth in a range between 2. 2 % and 2. 8 % in 2007, and between 1. 8 % and 2. 8 % in 2008. in comparison with the june eurosystem staff projections, the range projected for real gdp growth in 2007 has been revised slightly downwards, mainly reflecting the assumptions of somewhat higher oil prices and slightly tighter market financing conditions due to higher average risk premia. in the view of the governing council, the ranges presented serve as a good reminder of the general uncertainty surrounding economic projections, which it is worthwhile emphasising given the current volatility in the financial markets. the risks to these projections for economic growth are judged to lie on the downside. these downside risks relate mainly to a potentially broader impact from the ongoing reappraisal of risk in financial markets, global imbalances and protectionist pressures, as well as further oil and commodity price rises. with respect to price developments, according to eurostat ’ s flash estimate, annual hicp inflation was 1. 8 % in august 2007, the same rate as in the previous month. however, over the remainder of this year, inflation rates are likely to increase again to above 2 %. in the september 2007 ecb staff projections, annual hicp inflation is projected to lie between 1. 9 % and 2. 1 % in 2007,