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

the automatic stabilisers that can mitigate the impact of shocks over the economic cycle. what is the role of the ecb in addressing the unfavourable combination of persistently high inflation, weakening economic growth and continuing tensions in the financial markets? the objective of the single european monetary policy is unambiguously clear. the overriding goal, in accordance with our mandate, is to preserve price stability over the medium term. the stance of monetary policy must ensure that the high inflation we have been experiencing over a prolonged period of time does not get embedded into medium and longer - term inflation expectations, which should be kept firmly anchored to price stability. broad - based second - round effects from higher energy and other commodity prices on price and wagesetting should be avoided. in order to address these upside risks to price stability, the governing council raised the key ecb interest rates by 25 basis points in early july. we believe that the current monetary policy stance will contribute to achieving our objective. we will continue to monitor very closely all developments in the period ahead and will do what is necessary to preserve price stability in the euro area over the medium term. at the same time, the ecb will continue to manage liquidity in the interbank money market in order to ensure that the very short - term money market rate remains close to the ecb ’ s main policy rate, as required for the efficient implementation of monetary policy, and to alleviate the persisting pressures in the term money markets, so as to mitigate the impact of the financial turmoil on the banking system and the broader economy. over the past year, the ecb money market operations have effectively contributed to containing risks to the euro area ’ s financial stability without changing the stance of monetary policy – as defined by the key ecb interest rates – which remained firmly geared towards the price stability objective. moreover, although the ecb supplied large amounts of liquidity to the banking system to offset or contain the impact of disturbances to the money market, the injection of additional liquidity was temporary. as a result, the overall amount of bank reserves – central bank money – in the economy has not been augmented, but only the intertemporal allocation and the maturity structure of the central bank funds provided has been affected. last week, we announced certain changes in the operational risk framework ( collateral framework ) of the eurosystem ’ s money market operations. these changes did not alter the key elements of this framework – as they did not affect the