rate stood at 2. 5 % in october, 1. 4 pp below the july rate. that enabled the differential with the euro area countries to be cut by 1 pp, to slightly below the average in recent years. the improvement in underlying inflation was, however, very limited, and this variable is holding at a rate of close to 3 %. admittedly, 2006 may possibly close with a growth rate somewhat higher than that of the previous year. but the outlook for 2007 points to a slight slowdown in gdp growth, as part of a continuation of the patterns in recent quarters i have described to you. national demand is estimated to hold on a mildly slowing path, and there will be further improvements in the contribution of net external demand. this profile would be in line with the macroeconomic scenario on the basis of which the state budget for 2007 has been prepared, although the starting point is somewhat higher growth rates in 2006. as to inflation, although the growth of the cpi in 2007 on average will be far below that of the current year if cheaper oil takes root, it is clear that there will only be significant headway in inflation rate convergence with the euro area if this reduction in energy prices feeds through permanently to agents'expectations. we are therefore faced with a picture of sustained growth and some gradual correction to certain imbalances in the spanish economy. yet this scenario is not free from risks in the medium term. on the international front i have already mentioned risks relative to the outlook for the world economy and the uncertainty over the intensity of the european recovery. furthermore, oil prices are subject to the influence of numerous economic and geopolitical factors, any changes in which may prompt a reversal of the fall seen in recent months. within spain, both the persistent inflation differential with the euro area and the high indebtedness of spanish households harbour uncertainties that economic policy should contribute to dispel. the maintenance of price increases higher than those in the euro area over a lengthy period is a cause for concern. underlying inflation appears to have stabilised at a relatively high rate close to 3 % in recent years. this persistence relates partly to the presence of factors that add inertia into the inflation rate, such as the indexing mechanisms in collective bargaining. the differential with the euro area is particularly high in the case of services, standing at around 2 pp. against this background, the recent reduction in the inflation rate offers the perfect opportunity for this containment of inflation to be incorporated fully into the price

rate in a sustained fashion. the easing in oil prices has led to a marked slowdown in the inflation rate, which it would be highly desirable to consolidate in the coming quarters. the information available on the first half of 2006 shows the spanish economy has remained very strong, with activity even moving on a mildly accelerating path. this means that the improved external environment has so far offset the slight tightening of financial conditions, which has made for some rebalancing of the sources of growth of our economy, in favour of the external sector and with a smaller contribution by national demand. the increase in gdp growth in q3 is along similar lines, with a yearon - year growth rate of 3. 8 %, as a result of a further improvement in the contribution of net external demand to output. this will allow activity to expand over the course of 2006 at a sharper rate than in 2005, meaning the current year would show the highest growth rate of the present decade. yet despite this narrowing of the gap between the contributions of national and external demand to growth that i have referred to before, the expansion of the spanish economy in 2006 has essentially been underpinned by the buoyancy of domestic spending. in particular, gross capital formation has retained considerable strength, while only private consumption and government consumption have slowed slightly in the year to date. the somewhat less dynamic behaviour of private consumption in the first three quarters of 2006 is a result of the interplay of numerous factors whose effects, in some cases, have tended to counter each other. the losses of purchasing power caused by the high inflation rates in the first half of the year have affected household disposable income and, therefore, they will have tended to reduce consumer spending. further, the increase in borrowing costs following the successive rises in official interest rates by the ecb must have curtailed the spending capacity of some sectors of households. conversely, intense job creation - running at a rate of over 3 % - and the notable rise in household wealth are factors that should have sustained the growth of private consumption. regarding household wealth, it should be pointed out that, although house prices have begun to show signs of slowing, there have continued to be very significant stock market rises in 2006, outpacing those in recent years, which were already considerable. as i mentioned earlier, gross capital formation has been very robust throughout 2006. its soundness has, moreover, been appreciable in all its components. in the case of investment in construction,