of the eurosystem at 3. 25 %. these actions have helped to keep inflation expectations solidly anchored at levels consistent with price stability. such anchoring is a prerequisite for monetary policy to make an ongoing contribution towards supporting sustainable economic growth and job creation in the euro area. notwithstanding recent increases in key ecb interest rates, our monetary policy in the euro area remains accommodative. if the governing council ’ s assumptions and baseline scenario are confirmed, it will remain warranted to further withdraw monetary accommodation. the governing council will therefore continue to monitor very closely all developments so as to ensure price stability over the medium and longer term. structural reforms fiscal consolidation – which is absolutely of the essence in the euro area – is likely to be most successful when coupled with comprehensive structural reforms. these are urgently needed not only to cope with the challenges posed by technological change and accelerating globalisation but in particular also to help to cushion the adverse economic effects of the projected demographic change in the euro area. for europe ’ s future in the face of these challenges, and for the prosperity of its citizens, it is essential to ensure that a fully operational internal market is up and running. this necessitates the fully free flow of labour and capital and free trade in goods and services. it also calls for continuing to fully implement the single market and removing the remaining barriers to it within the eu ; this will provide a powerful means to promoting the efficient allocation of factors of production as well as deeper economic and financial integration. it will also allow europe to better realise its potential for stronger output and employment growth and increase its resilience to shocks. for those member states that have fulfilled the convergence criteria laid down by the treaty and participate in the euro area, the considerable benefits of the internal market are further enhanced by the single currency. i welcome the enlargement of the euro area on 1 january 2007 with the entry of slovenia. in order to fully reap the advantages of the euro and to allow adjustment mechanisms to operate efficiently within the enlarged currency area, it will be necessary to fully integrate slovenia into economic and monetary union, including the free circulation of labour inside the euro area. as regards the projected demographic dynamics for the euro area, the decline in the working age population and steadily increasing proportion of older people in the population will place further pressure on pension and health care systems, and may have wide - ranging economic consequences. in particular, without effective measures to raise labour supply and labour productivity growth, the

consequence, the governing council expects a considerable degree of short - term volatility in the annual hicp inflation rate. overall, the headline inflation rate will remain elevated at levels above 2 % on average in 2006 and is likely to remain so in 2007, as it was also reflected in the ecb staff projections of september. in the view of the governing council, risks to the outlook for price developments remain clearly on the upside. they include a stronger pass - through of past oil price rises into consumer prices than currently anticipated, additional increases in administered prices and indirect taxes beyond those announced thus far, and the possibility of renewed increases in oil prices. more fundamentally, given the favourable momentum of real gdp growth observed over the past few quarters and the positive signs from labour markets, stronger than currently expected wage developments pose substantial upward risks to price stability. against this background, it is crucial that the social partners continue to meet their responsibilities, in particular in the context of a more favourable environment for economic activity and employment. as regards medium to longer - term prospects for price developments, the monetary analysis continues to point to upside risks to price stability. the rate of monetary and credit expansion remains rapid, reflecting the still low level of interest rates in the euro area. in particular, loans to the private sector continue to grow at double - digit rates on an annual basis. from a medium - term perspective, these developments remain consistent with the persistent upward trend in the underlying rate of monetary expansion identified by the ecb ’ s monetary analysis since mid - 2004. moreover, following several years of robust monetary growth, the liquidity situation in the euro area continues to be ample by all plausible measures. given the implied upside risks to price stability over the medium to longer term, monetary developments require careful monitoring, particularly against the background of improved economic conditions and strong property market developments in many parts of the euro area. to sum up, annual hicp inflation rates are projected to remain elevated in 2006 and 2007, with risks to this outlook remaining clearly on the upside. given the ongoing dynamism of monetary and credit growth in an environment of ample liquidity, cross - checking our monetary and economic analyses supports the assessment that upside risks to price stability prevail over the medium term. it is against this background that the governing council of the ecb decided to further raise key ecb interest rates in two quarter - percentage increments on 3 august and 5 october to establish the minimum bid rate of the main refinancing operations