annual growth of m3 in the recent past has to be interpreted with caution, as several factors indicate that it might not necessarily imply risks to price stability. in fact, the relatively flat yield curve and the weakness in the stock markets appear to have made the holding of short - term deposits and marketable paper included in m3 more attractive, thereby temporarily affecting m3 growth. furthermore, the recent increase in the money stock seems also to reflect the adjustment in transaction balances in reaction to the past rise in energy and food prices. this, by itself, should be seen as a one - off level adjustment and should not indicate future upward pressures on inflation, provided that the rise in energy and food prices does not trigger second - round effects on inflation via wages. a further factor which suggests that the rise in m3 growth should be interpreted with caution is that the annual rate of growth of loans to the private sector has continued to decline over recent months. turning to the analysis from the second pillar of our monetary policy strategy, several developments clearly pointed to lower inflationary pressures coming from the demand side. recent data on economic activity indicate that real gdp growth in the euro area will most likely be lower than was expected a few months ago. this reflects the slowdown in economic activity in the united states and the persistent economic weakness in japan, which have both been more pronounced than was expected a few months ago, and have also affected other areas of the world. on the domestic side, the past strong increases in oil and food prices have counteracted the beneficial effects on households'real disposable income of the recent tax reductions in some member states. all these factors have also had adverse effects on investment. looking ahead, a gradual strengthening in growth of domestic demand can be expected as the past increases in inflation continue to unwind. domestic demand should be further supported by the positive impact on consumption of the recent tax reductions, and by the favourable financing conditions in the euro area. in the current environment, it is likely that the process of wage moderation which we have seen thus far will continue in the period ahead. first, the slowdown in economic activity should contribute to containing inflationary pressure stemming from the labour market. in addition, the latest figures on producer and consumer prices provide encouraging signs that the past increase in consumer price inflation has been temporary and that, in the absence of further unfavourable shocks, hicp inflation will return to levels of below 2 % in the not too distant future. the expected falling

trend in consumer price inflation should contribute to containing the inflation expectations of economic agents and thereby have a positive influence on price and wage - setting behaviour. this view is confirmed by bond yields, which indicate that financial markets expect inflation developments to be in line with the definition of price stability in the medium term. overall, in view of recent monetary, financial and economic developments, the governing council saw scope for a downward adjustment in key ecb interest rates by 25 basis points on 30 august 2001. the governing council considers the new level of key ecb interest rates to be appropriate for the maintenance of price stability over the medium term. turning to fiscal policies, let me express my concern about the possible impact of the slowdown in economic activity on the willingness of the governments of some euro area countries to stick to the stability and growth pact and to their stability programmes. any loosening of fiscal commitments, or initiatives to " re - interpret " the stability and growth pact itself, can only be counterproductive in the current circumstances, since this could undermine the confidence in the determination of the euro area to stick to a stability - oriented fiscal policy. to avoid this, only countries whose budget positions are close to balance or in surplus have scope to let the automatic stabilisers work fully in this phase of lower economic growth. by contrast, it would be advisable for those countries with remaining fiscal imbalances to limit the deviation from the nominal targets set out in their latest stability programmes. looking ahead, it will be important that budgetary targets for 2002 be set in such a way that budgetary positions close to balance or in surplus are either maintained or can be reached within the time frame set by the existing stability programmes. indeed, a medium to long - term orientation is essential for the conduct of fiscal policies in all euro area countries. short - term discretionary measures aimed at strengthening domestic demand not only risk having an unwelcome impact on the economy, partly as a result of time lags, but may also affect the solidity of public finances and the consolidation process in a more lasting manner. efforts to set the conditions for the further expansion of the production potential of the euro area must remain a priority. while progress is being made in a number of areas, more ambitious market - oriented structural reforms remain a challenge. labour market reforms aimed at providing the right incentives to economic agents and the liberalisation of sectors still sheltered from competitive forces are areas in which progress is still needed. fiscal reforms to dimini