authorities may take actions to reduce the risk of local financial imbalances. in such a case, macro - prudential measures may exert cross - country spillovers that matter for monetary policy. for example, raising capital requirements in one jurisdiction may dampen lending in the whole euro area, while a tightening of loan - to - value ratios may simply shift lending between respective jurisdictions, leaving the euro area aggregate unchanged. a monetary authority may therefore have a legitimate interest in which macro - prudential measure is used. many of these questions are yet to be fully explored and we have to acknowledge that the macro - prudential policy framework is still in its infancy. we are in a learning process. the objectives, transmission mechanisms and effects are still being established, and this is an area where the esrb ’ s systemic macro - prudential oversight is playing an integral role. conferences such as today ’ s can provide crucial input here. bis central bankers ’ speeches overall, i am optimistic that macro - prudential policies, if properly coordinated at the european level, will strengthen our defences against future financial instability in the euro area, while also addressing some of the side effects that come from a single monetary policy. conclusion let me conclude. with the three challenges of : ( i ) ensuring price stability in the face of a prolonged period of low inflation, ( ii ) setting up the ssm and rebooting the banking system to support credit and growth, and ( iii ) establishing an effective macro - prudential policy framework to increase resilience in the face of future financial turbulence, the ecb will have its hands full in the coming year. we are committed to doing our job, but do not expect us to do the job of others. it is more important than ever that, in parallel, governments continue to pursue their structural reform agenda. the return of confidence in the euro area is evidence that the reform efforts will eventually pay off. this is visible from the return of market confidence. but, more importantly, it is visible from the return of political confidence – as expressed, for example, in prime minister helle thorning - schmidt ’ s assessment that joining the euro would be in denmark ’ s best interest. ultimately, the common theme in all our efforts is to further the aims of the european union. these are to promote peace, its values and the well - being of its peoples. as the recent events in ukraine demonstrate, these aims remain as attractive and compelling as

term, while in the longer term downside risks prevail, relating mainly to potential further oil price rises, a disorderly unwinding of global imbalances and potential pressures for increased protectionism. with respect to price developments, according to eurostat ’ s flash estimate, annual hicp inflation was 2. 5 % in june 2006, the same rate as in may and compared with 2. 4 % in april. during the second half of 2006, and on average in 2007, inflation rates are likely to remain above 2 %, the precise levels depending on future energy price developments. this assessment is supported by the eurosystem staff projections and available public and private sector forecasts. while the moderate evolution of labour costs in the euro area is expected to continue in 2007 – also reflecting ongoing global competitive pressures, particularly in the manufacturing sector – indirect effects of past oil price increases and already announced changes in indirect taxes are expected to exert a significant upward effect on inflation in the course of next year. against this background, and also in the context of a more favourable environment for economic activity and employment, it is crucial that the social partners continue to meet their responsibilities. risks to the outlook for price developments remain on the upside and include further increases in oil prices, a stronger pass - through of oil price rises into consumer prices than currently expected, additional increases in administered prices and indirect taxes and, more fundamentally, stronger than expected wage and price developments due to second - round effects of past oil price increases. regarding prospects for inflation over medium to longer horizons, our assessment that upside risks to price stability prevail is confirmed by the monetary analysis. money and credit growth have strengthened further over recent quarters, with the latest annual growth rate of m3 increasing to 8. 9 % in may – the highest annual growth of m3 since the start of stage three of emu. the stimulative impact of the low level of interest rates in the euro area remains an important driving factor behind the high trend rate of monetary expansion. on an annual basis, loans to the private sector as a whole have continued to increase at double - digit rates over recent months, with borrowing both by households and by non - financial corporations rising rapidly. ongoing strong lending activity to households continues to be explained, in particular, by borrowing for house purchases, which has stood at an annual rate of above 12 % in recent months. the dynamic growth of money and credit, in an environment of already ample liquidity, points to increased