faster and further than was expected earlier. in the course of the second half of last year, inflation moved up by almost one percentage point to reach 1. 7 % in december. and expectations of higher inflation rates in the first months of this year have just been confirmed by a rise to 2. 0 % in january. this continued upward movement essentially reflects the increase in oil prices, but - increasingly - also the impact that the lower exchange rate of the euro has on import prices in general. while these effects can be expected to unwind sooner or later, they have been more protracted and more fervent than expected earlier and, through their very duration and magnitude, they clearly heighten the risk for second round effects. at this point, let me say something about interest rates. about one month ago, the governing council of the ecb decided to raise the interest rate on the main refinancing operations by 25 basis points. i would like to stress that this was not a direct consequence of the favourable prospects for euro area activity growth which i just described. as has been emphasised repeatedly, the ecb is not concerned about higher growth as such, but that this higher growth be non - inflationary. in this respect, the interest rate decision of 3 february should have been a reassuring one. on the one hand, the rate increase did not mean that the ecb had put the brakes on. rather, when looking at the high rates of monetary and credit growth and the fact that the levels of both nominal and real interest rates remained relatively low in a longer - term perspective, the appropriate picture would have been that of throttling back. the economic upturn in the euro area is now well under way and its momentum should not be hurt by an adjustment of the monetary policy stance. on the other hand, the interest rate move provided a clear signal to market participants, social partners and policymakers that the ecb was determined to counter inflationary dangers in a timely fashion and that the prospects for price stability in the euro area remained good. in the run - up to this interest rate decision, a number of risks to price stability in the medium term came more clearly to the fore, indicated by both of the two pillars of the monetary policy strategy. first, monetary growth has remained consistently above the reference value and the uneven growth pattern at the turn of the year 1999 / 2000, with lower growth in january, should be seen against the background of a base effect. it is worth

jean - claude trichet : the successful entry of cyprus into the euro area speech by mr jean - claude trichet, president of the european central bank, at the conference “ welcoming cyprus to the euro area ”, nicosia, 18 january 2008. * * * ladies and gentlemen, it is a great pleasure for me to attend this conference celebrating your adoption of the euro. let me first congratulate all parties involved in the successful cash changeover that took place at the beginning of the year. it has been going smoothly. none of this would have been possible without the excellent performance of the cypriot economy during the convergence process. 1. cyprus ’ s economic achievements on the way to the euro 1 today ’ s euro celebrations are the result of the successful macroeconomic policies that the cypriot authorities have pursued in recent years. cyprus has made significant progress in both nominal and real convergence, owing to successful policies – namely, well - managed monetary and exchange rate policies combined with a range of structural reforms. in the last decade, hicp inflation in cyprus has been contained, averaging 2. 2 % in 2007, with the only exceptions being in 2000 and 2003, when inflation rose mainly because of increases in energy prices as well as vat harmonisation. short - term as well as long - term interest rates have followed a declining trend in recent years to levels in line with those of the euro area as a whole. this suggests that market participants have confidence in cyprus ’ s macroeconomic and fiscal developments as well as in its monetary and exchange rate policies. the process of nominal convergence has been accompanied by robust economic growth. real gdp growth in cyprus has been well above that in the euro area in recent years. real output growth has been underpinned by domestic demand, and in particular by strong private consumption and, importantly, by strong fixed capital formation. cyprus ’ s gdp per capita ( in ppp terms ) progressed from around 74 % of the 1996 average of the 12 countries which initially joined the euro area to around 84 % in 2006 : this is a significant improvement, and may it continue that way. in spite of its remarkable progress towards nominal and real convergence, cyprus has not experienced major imbalances : price and cost competitiveness developments have been favourable since 2004. the fiscal balance ( the deficit - to - gdp ratio ) has been improving since 2004 and stood at - 1. 2 % of gdp in 2006. looking at the financial side, cyprus is experiencing substantial financial deepening, which has been