at an annual rate of 10. 7 % in may, as well as the still high level of credit growth. the strong rate of monetary and credit expansion reflects, in part, favourable financing conditions and solid economic growth. when identifying and assessing the policy - relevant underlying trends in monetary and credit expansion, it is important to look through shorter - term volatility and the effects of changes in the slope of the yield curve and external factors that are likely to prove temporary. taking this perspective, there are several indications that higher short - term interest rates are now influencing monetary dynamics, although they have not, as yet, significantly dampened the overall strength of the underlying rate of monetary and credit expansion. for example, increases in short - term rates have contributed to a more moderate expansion of the narrow aggregate, m1, in recent quarters. equally, the annual growth rate of loans to the private sector has shown some signs of stabilising since mid - 2006, albeit at double - digit levels. the stabilisation of loan growth is now becoming more broad - based, and is apparent in borrowing by both non - financial corporations and households. in the latter case, the stabilisation of loan growth also reflects some moderation in house price dynamics, although house price growth nonetheless remains at high levels on average in the euro area. given the continued vigour of money and credit expansion, there are clear indications of upside risks to price stability at medium to longer - term horizons. following several years of robust monetary growth, the liquidity situation in the euro area remains ample. in this environment, monetary developments continue to require very careful monitoring, particularly against the background of the expansion in economic activity and still strong property market developments. to sum up, in assessing price trends it is important to look beyond any short - term volatility in inflation rates. the relevant horizon for monetary policy is the medium term. risks to the medium - term outlook for price stability remain on the upside, relating in particular to the domestic side. as capacity utilisation is high and labour markets continue to improve, constraints are emerging which could lead in particular to stronger than expected wage and profit margin developments. given the vigorous monetary and credit growth in an environment of already ample liquidity, a cross - check of the outcome of the economic analysis with that of the monetary analysis supports the assessment that upside risks to price stability prevail over the medium to longer term. accordingly, the governing council will monitor closely all developments in order to

council raised the key ecb interest rates by 25 basis points in april, in order to adjust the very accommodative monetary policy stance in the light of upside risks to price stability. since then we have kept the rates unchanged. at the same time, as i said in the press conference after the last governing council, we see the monetary policy stance as still accommodative and risks to price stability on the upside. accordingly, i said that we are in a state of strong vigilance and that we stand ready to act in a firm and timely manner to avoid that recent price developments give rise to broad - based inflationary pressures over the medium term. as regards our non - standard measures, the governing council earlier this month decided to maintain its fixed rate tender procedures with full allotment in its refinancing operations up to the third quarter of 2011. ii. fiscal consolidation and monetary policy let me now turn to the topic of fiscal consolidation and monetary policy. in a monetary union, the central bank when setting interest rates has to take an area - wide perspective. in the same manner the us federal reserve do not and cannot tailor its interest rate to the specific economic conditions in individual us states. setting the policy rate with a clear focus on the euro area as a whole does not, however, mean ignoring the diversity in financial conditions. since the financial crisis erupted, the ecb has adopted a number of non - standard measures to foster as much as possible a smooth functioning of the monetary policy transmission throughout the euro area. the current major challenges faced by a few euro area countries are mainly the result of some governments not conducting sound policies and not implementing reforms that would benefit their citizens and the european public as a whole. it is essential that euro area countries fully assume the responsibilities at the national level that derive from their participation in the euro area. past experiences of fiscal consolidation episodes demonstrate the long - term benefits of reducing sizeable fiscal imbalances. there are at least three reasons why well - designed fiscal consolidation is beneficial in the current circumstances. accompanied by appropriate structural reforms, it promotes long - term growth. for those economies with large fiscal imbalances, it is indispensable to bolster confidence. and for all economies it helps create buffers that would be essential to deal with unforeseen events. bis central bankers ’ speeches it is also for this reason that the ongoing negotiations on the governance package should produce an ambitious outcome. i have been emphasis