and the incidence of second - round effects on domestic wages and prices. second, in the light of the recent financial turmoil, we will analyse the state of transmission of our monetary impulses by the financial system and in particular by banks. if either of these two factors entail downward risks to price stability, we will not hesitate to act. in parallel, other policies should help to put the euro area economy on firmer grounds. it is becoming clearer and clearer that fiscal policies should support the economic recovery through public investment and lower taxation. in addition, the ongoing cyclical recovery should be supported by effective structural policies. in particular, actions to improve the business environment, including the provision of an adequate public infrastructure, are vital to increase productive investment, boost job creations and raise productivity. compliance with the rules of the stability and growth pact remains essential to maintain confidence in the fiscal framework. the agreement on net financial assets let me conclude by turning briefly to the recent decision to publish the agreement of net financial assets, also known as anfa. this is another step to live up to our commitment to be accountable and transparent, both towards you as parliament and towards the public at large. the anfa is an agreement between the ecb and the euro area national central banks – the ncbs. it ensures that monetary policy is unaffected by ncb operations related to their national, non - monetary policy tasks. the right to perform such tasks dates back to the start of economic and monetary union. at that time, the founding member states decided to centralise only central bank functions and tasks that are necessary to conduct a single monetary policy. all other tasks remained with the ncbs. such national, non - monetary policy tasks include managing the ncbs ’ remaining foreign reserves – including gold – after the transfer of foreign reserves to the ecb, managing some non - monetary policy portfolios including those related to pension funds for their employees, or providing payment services to national governments. when the ncbs hold portfolios not related to monetary policy as part of their national tasks, these portfolios are financed either by central bank money provided by the ncbs or by nonmonetary liabilities. this does not interfere with monetary policy as long as it is limited to less than the amount of banknotes needed by the public. this limit ensures that banks still have to borrow from the eurosystem at the monetary policy rate set by the governing council. here is where the anfa comes in. its purpose is to limit

moreover, while spreads between different short - term interest rates are still generally narrow, they have been widening somewhat between rates paid on short - term time deposits and overnight deposits. as a result, the annual growth rate of m1 has continued to moderate from high levels, and stood at 7. 7 % in august 2010, while the annual growth rate of other short - term deposits has become less negative. the rise in the annual growth rate of bank loans to the non - financial private sector reflects both a further slight increase in the positive growth of loans to households and a gradually less negative annual growth rate in loans to non - financial corporations. the latest developments are consistent with the lagged response of loan developments to economic activity over the business cycle that was also observed in past cycles. banks have gradually increased the overall size of their balance sheets recently, but the challenge remains for banks to expand the availability of credit to the non - financial sector when demand picks up further. where necessary, to address this challenge, banks should retain earnings, turn to the market to strengthen further their capital bases or take full advantage of government support measures for recapitalisation. to sum up, the current key ecb interest rates remain appropriate. we therefore decided to leave them unchanged. considering all the new information and analyses which have become available since our meeting on 2 september 2010, we continue to expect price developments to remain moderate over the policy - relevant medium - term horizon. recent economic data are consistent with our expectation that the recovery should proceed at a moderate pace in the second half of this year, with the underlying momentum remaining positive. at the same time, uncertainty is still prevailing. a cross - check of the outcome of our economic analysis with that of the monetary analysis confirms that inflationary pressures over the medium term remain contained, as suggested by weak money and credit growth. we expect price stability to be maintained over the medium term, thereby supporting the purchasing power of euro area households. inflation expectations remain firmly anchored in line with our aim of keeping inflation rates below, but close to, 2 % over the medium term. the firm anchoring of inflation expectations remains of the essence. turning to fiscal policies, we take note of the recent announcements made in some euro area countries with regard to measures to tackle the existing fiscal imbalances. indeed, a number of countries have to meet major challenges, and immediate, ambitious and convincing corrective action is required. credible multi - year consolidation plans are needed and will strengthen public confidence in the capacity