months. the annual growth rate of m3 in october, at 12. 3 %, is likely to have been influenced by a number of temporary factors, such as the flattening of the yield curve, the financial market turmoil and specific transactions associated with the restructuring of certain banking groups. however, even taking these special factors into account, the underlying rate of monetary expansion remains strong. moreover, the sustained expansion of loans to the domestic private sector, which grew at an annual rate of 11. 2 % in october, points to the continued vigour of underlying monetary dynamics. monetary developments therefore continue to require very careful monitoring, both to detect underlying trends associated with inflationary pressures at longer horizons and to better understand shorter - term dynamics. such monitoring will also provide a more complete picture of the response of the private sector to the increased volatility in financial markets. a broad assessment of underlying trends in money and credit growth is particularly important at present given recent financial market developments. heightened financial volatility may influence the short - term behaviour of money - holders and thereby complicate the extraction of the underlying trend monetary developments. at the same time, monetary and credit data can also offer an important insight into how financial institutions, households and firms have responded to the financial market turmoil. for the time being, however, there is little evidence that the financial market turbulence since early august has strongly influenced the dynamics of broad money and credit aggregates, although specific balance sheet items, such as holdings of money market fund shares / units, may have been affected. indeed, the growth of bank loans to households and non - financial corporations has remained robust in recent months, which may suggest that the supply of credit has not been impaired. further data and analysis will be required to develop a more complete view of the impact of the financial market developments on bank balance sheets, financing conditions and money and credit growth. to sum up, a cross - check of the outcome of the economic analysis with that of the monetary analysis fully confirms the assessment that there are upside risks to price stability over the medium term, in a context of vigorous money and credit growth and against the background of sound economic fundamentals in the euro area. at the same time, the reappraisal of risk in financial markets is still evolving and uncertainty about the potential impact on the real economy has continued. consequently, the governing council will monitor very closely all developments. our monetary policy stands ready to counter upside risks to price stability, as required by our mandate

is likely to moderate only gradually in the course of 2008. hence, the period of temporarily high rates of inflation would be somewhat more protracted than previously expected. the december eurosystem staff projections foresee annual hicp inflation to be between 2. 0 % and 2. 2 % in 2007, but then to rise to between 2. 0 % and 3. 0 % in 2008. for 2009, hicp inflation is projected to lie between 1. 2 % and 2. 4 %. compared with the september 2007 ecb staff projections, the projected ranges for hicp inflation in 2007 and 2008 have shifted upwards. forecasts from international organisations which incorporate recent inflation developments give a broadly similar picture. these projections largely mirror the assumed path of oil and food prices, for which available futures prices suggest a deceleration in the course of next year. on the domestic side, unit labour cost growth is projected to increase over the projection horizon. in this context it is important to emphasise that the staff projections assume that recent oil and food price dynamics and their impact on hicp inflation will not have broadly - based second - round effects on wage - setting behaviour. this is a key assumption. a further key assumption is that growth in profit margins will moderate over the projection horizon. in combination, these two assumptions imply, in the context of the staff projections, a continuation of overall contained domestic cost pressures, which contributes to the moderation in inflation projected in 2009. in the governing council ’ s view, risks to this medium - term outlook for price developments are fully confirmed to lie on the upside. these risks include the possibility of further rises in oil and agricultural prices, continuing the strong momentum observed in recent months, as well as increases in administered prices and indirect taxes beyond those foreseen thus far. moreover, taking into account the existence of capacity constraints, the favourable momentum of real gdp growth observed over the past few quarters and the positive developments in labour markets, stronger than currently expected wage growth may emerge. furthermore, an increase in pricing power in market segments with low competition could materialise. it is therefore crucial that all parties concerned meet their responsibilities and that second - round effects on wage and price - setting stemming from recent commodity price rises be avoided. to that end, any explicit or de facto indexation of nominal wages to prices should be eliminated. the monetary analysis confirms the prevailing upside risks to price stability at medium to longer - term horizons. money and credit have both continued to grow vigorously in recent