and credit growth in this environment continues to point to upside risks to price stability over the medium to longer term. monetary developments, therefore, require careful monitoring, especially in the light of the strengthening of economic activity and, in particular, of strong asset price dynamics, especially in housing markets. to sum up, annual inflation rates are projected to remain elevated in 2006 and 2007 and the economic analysis confirms that the risks to price stability continue to lie on the upside. some of these risks appear to have increased in view of the renewed strength of oil prices. given strong money and credit growth in a context 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. it therefore remains crucial to ensure that medium to long - term inflation expectations in the euro area are kept solidly anchored at levels consistent with price stability – a prerequisite for monetary policy to make an ongoing contribution to sustainable economic growth and job creation. accordingly, particular vigilance is of the essence in order to ensure that risks to price stability do not materialise. with respect to fiscal policies, there are some signs that the implementation of the stability and growth pact and commitment to the rules have improved since last year ’ s revision. however, fiscal targets in a number of cases are rather lenient and their attainment is still subject to considerable risks. the governing council therefore supports any further reinforcement of fiscal consolidation efforts that also takes full advantage of a more favourable economic environment. appropriately ambitious fiscal targets as part of a comprehensive structural reform programme would bring deficit and debt ratios down more rapidly. this is decisive in order to secure the sustainability of public finances. such strategies would also boost confidence in the economic prospects of the euro area. as regards structural reforms, the governing council again stresses the importance of undertaking comprehensive reforms to ensure open, competitive and well - functioning labour and product markets, including the promotion of wage and price flexibility and the fostering of an attractive environment for investment and innovation. the need for such reforms has again been highlighted by recent oil price developments, as they would enhance the resilience of the euro area economy to external shocks. there is a broad and firm consensus that openness and flexibility are beneficial in promoting growth and employment and it is now essential to turn the agreed reform plans into actions and to strengthen them where necessary. by pushing forward with ambitious structural reforms, euro area countries will also

the medium term, there is a strong link between the inflation rate and the rate of growth of labour costs. given that we operate a flexible medium - term inflation target, we are generally prepared to look through year - to - year variability in the inflation rate caused by supply - side shocks or exchange rate movements. this is because if these shocks do not flow through to a persistent change in growth of labour costs, inflation should return to a lower rate once the effect of the shock passes. but if supply - side shocks do lead to a persistent shift in labour cost growth, inflation will not return to where it was before. this focus on trends in labour costs was evident in the board ’ s communication after the previous meeting when we stated that over coming months we would be assessing important additional evidence on both inflation and the evolution of labour costs. the evidence that we have received since then on inflation is clear. it was high. and higher than expected. on labour costs, while the various data on labour costs for the march quarter compiled by the abs are yet to be released, other evidence received over the past month through our business liaison and various business surveys has indicated that there is now stronger upward pressure on labour costs and that this is likely to continue. we expect to see this in the abs data in the period ahead. in a tight labour market, some firms are paying higher wages to attract and retain staff. this is especially so given that inflation is high and workers are experiencing cost of living pressures. there is still considerable inertia in the wages system from multi - year enterprise agreements and current public sector wages policies, but the direction of change is now clear. given this evidence on inflation and wages and the very low level of interest rates, the board decided that now was the right time to start the process of normalising interest rates. we also decided that we would not reinvest the proceeds of maturing government bonds. this means that our bond holdings and balance sheet will decline as bonds mature. our balance sheet will also decline substantially in 2023 and 2024 as banks repay the funding made available under the term funding facility. this contraction of our balance sheet will contribute to some tightening of financial conditions in australia and so assist with the return of inflation to target. the board currently has no plans to sell the government bonds it purchased during the pandemic and intends to allow the portfolio to run down in a predictable way as bonds mature. this decision to proceed with quantitative tightening does not rule out a