, which are likely to materialise over the coming months. looking ahead into next year, after a phase of stabilisation, a gradual recovery with positive quarterly growth rates is expected by mid - 2010. available indicators of inflation expectations over the medium to longer term remain firmly anchored in line with the governing council ’ s aim of keeping inflation rates below, but close to, 2 % over the medium term. a cross - check of the outcome of the economic analysis with that of the monetary analysis corroborates the assessment of low inflationary pressure, as money and credit indicators continue to be weak. against this background, we expect the current episode of extremely low or negative inflation rates to be short - lived and price stability to be maintained over the medium term, thereby continuing to support the purchasing power of euro area households. as the transmission of monetary policy works with lags, our policy action should progressively feed through to the economy in full. hence, with all the measures taken, monetary policy will provide ongoing support for households and corporations. the governing council would like to recall that the eurosystem provided a significant amount of liquidity to euro area banks at its recent first 12 - month longer - term refinancing operation. this operation at a fixed interest rate of 1 % is expected to strengthen further the liquidity position of banks and to support the normalisation of money markets and the extension of credit to the economy alongside the other measures of enhanced credit support. once the macroeconomic environment improves, the governing council will ensure that the measures taken are quickly unwound and that the liquidity provided is absorbed. hence, any threat to price stability over the medium to longer term can be effectively countered in a timely fashion. as has been emphasised many times, the governing council will continue to ensure a firm anchoring of medium - term inflation expectations. such anchoring is indispensable to supporting sustainable growth and employment and contributes to financial stability. accordingly, we will continue to monitor very closely all developments over the period ahead. as regards fiscal policies, the governing council welcomes the spring 2009 orientations for euro area fiscal policies as agreed by the euro area finance ministers in june. a return to sound, sustainable public finances, thus strengthening overall macroeconomic stability, must be ensured. against this background, euro area governments should prepare and communicate ambitious and realistic fiscal exit and consolidation strategies within the framework of the stability and growth pact. in the view of the governing council, the structural adjustment process should

expected to remain weak but should decline less strongly than was the case in the first quarter of 2009. looking ahead into next year, after a phase of stabilisation, a gradual recovery with positive quarterly growth rates is expected by mid - 2010. the significant policy stimuli in all major economic areas should support growth globally, including in the euro area. in the view of the governing council, the risks to the economic outlook are balanced. on the positive side, there may be stronger than anticipated effects stemming from the extensive macroeconomic stimulus being provided and from other policy measures taken. confidence may also improve more quickly than currently expected. on the other hand, concerns remain relating to a stronger or more protracted negative feedback loop between the real economy and the turmoil in financial markets, further increases in oil and other commodity prices, the intensification of protectionist pressures, increasingly unfavourable labour markets and, lastly, adverse developments in the world economy stemming from a disorderly correction of global imbalances. with regard to price developments, annual hicp inflation was, according to eurostat ’ s flash estimate, - 0. 1 % in june, compared with 0. 0 % in may. as explained on previous occasions, the further decline in annual rates of inflation was anticipated and reflects primarily base effects resulting from past sharp swings in global commodity prices. looking ahead, owing to these base effects, annual inflation rates are projected to remain temporarily in negative territory over the coming months, before turning positive again. such short - term movements are not relevant from a monetary policy perspective. consistent with available forecasts and projections, looking further ahead, inflation is expected to remain in positive territory, while price and cost developments are expected to remain dampened in the wake of ongoing sluggish demand in the euro area and elsewhere. in this respect, indicators of inflation expectations over the medium to longer term remain firmly anchored in line with the governing council ’ s aim of keeping inflation rates below, but close to, 2 % over the medium term. risks to the outlook for inflation are broadly balanced. on the downside they relate, in particular, to the outlook for economic activity, while on the upside they relate to higher than expected commodity prices. furthermore, increases in indirect taxation and administered prices may be stronger than currently expected owing to the need for fiscal consolidation in the coming years. turning to the monetary analysis, the latest data confirm a continued deceleration in monetary dynamics. in may, the annual growth rate of m3 declined