in recent months, shorter - term monetary developments need to be interpreted with caution. concerning financial market indicators, the upturn in long - term interest rates in the euro area, seen since early may, continued in august and early september. domestic factors seem to have played a dominant role, as indicated by the fact that differentials between us and euro area bond yields have narrowed further. in particular, market participants appear to be increasingly optimistic about the prospects for economic activity in the euro area. at the same time, expectations for inflation, as reflected by, inter alia, the signs emanating from index - linked bonds issued in the euro area, tend to indicate that markets still expect an evolution of consumer prices, which will remain compatible with price stability. developments in the world economy continue to show signs of improvement. growth in the us economy continues and some positive economic signals have been recorded for japan. while the outlook for stronger growth in the global economy is also supported by recent developments in other regions, notably south - east asia, some risks remain, primarily in relation to the strength of the recovery in latin america. as regards economic activity in the euro area, industrial production data up to june point to a further improvement in output growth in the second quarter of this year, as has already been indicated by various survey data. moreover, available evidence in terms of retail sales data and consumer confidence, while somewhat more mixed, suggests broadly sustained consumption growth. these developments are consistent with recently published forecasts which foresee an upturn in economic growth in the course of this year. the downside risks pertaining to these projections have tended to recede and real gdp growth might eventually turn out to be somewhat higher than currently forecast. as generally expected, consumer price increases, as measured by the harmonised index of consumer prices ( hicp ), picked up in july, with the annual rate of change rising from 0. 9 % in june to 1. 1 % in july. this effectively reversed the downward movement in the overall hicp rate which had been evident since april 1999. while prices for unprocessed food declined further in july, this downward effect on the overall hicp rate was more than offset by a stronger increase in energy prices, resulting from a continued rise in oil prices. we expect consumer price increases to rise somewhat further from their july levels, mainly as a consequence of higher oil prices. however, at this stage we also expect this further increase to level out below the ceiling we have defined as

components first at the national level and thereafter in cross - border tests. to a large extent, credit institutions have already taken part in these tests. in parallel, as announced a few weeks ago, on 29 june 1999 the ecb together with the national central banks successfully completed the bilateral testing of the escb applications that are necessary for the conduct of monetary policy operations. the testing exercise, together with the parallel remedial actions, has proved that these systems are year 2000 compliant. you may recall that on 15 july 1999 we decided to close target on 31 december 1999 in order to smooth the transition not only for the escb institutions, but also for the other financial institutions. this day can thus be kept free for end - of - year operations and for making full back - ups of the relevant systems. in the area of target, as well as in the area of monetary policy implementation and liquidity management, we are also reviewing our contingency procedures to minimise any potential year 2000 - related impact. it is worth noting that general contingency procedures had already been put in place shortly before the launch of the euro. in addition, we will use an efficient communication infrastructure between the ecb and the national central banks to monitor developments over the year 2000 transition period. the ecb will also share information with the joint year 2000 council and will thereby extend its monitoring capabilities beyond the eurosystem to a global perspective. as far as our monetary policy framework is concerned, we are convinced that it is flexible enough and has built - in mechanisms designed to deal with any level of liquidity demand that might arise in the euro markets. indeed, should any adaptation be advisable, this would be of limited importance and consistent with the overall set - up. we have analysed different scenarios and have come to the conclusion that the eurosystem will be in a position to cope with any potential increase in the demand for liquidity. the stock of banknotes held by national central banks is sufficient to allow for a considerable additional demand for banknotes in circulation and the amount of collateral available in the eurosystem will be sufficient to allow for the corresponding increase in refinancing needs of the banking system. we are therefore confident that the eurosystem will continue its operations smoothly on 3 january 2000 after the century date change. we also reviewed cross - border retail payment services which are essential for the smooth functioning of the single market. we believe that citizens and businesses can only benefit fully from the