to money. it is based on the conviction that inflation is a monetary phenomenon in the long run and underlines the medium - term orientation of monetary policy and the inheritance in this respect from the deutsche bundesbank. recognising that the demand for money can be subject to short - term fluctuations which are harmless for price stability, the ecb has not announced an " intermediate objective " but rather a " reference value " for the growth of a broad monetary aggregate. the recent rise in m3 growth is up to now interpreted as being such a short - term fluctuation, caused by the relatively flat yield curve and the weakness in stock markets. technology and financial market changes obviously affect the first pillar. they might increase the volatility of the income velocity of monetary aggregates and, as they are blurring the frontiers of " moneyness ", they complicate the definition of key aggregates. to paraphrase a former governor of the bank of canada speaking about m1 twenty years ago, i would say that while the ecb is not planning to abandon m3, i cannot rule out that, some day, m3 could abandon us, but you already noticed that the first pillar is much more than the reference value. it encompasses a broad monetary analysis which will duly take into account such developments. the first pillar also rests on the fact that credit institutions remain major players in the transmission process of monetary policy. the development of euro area capital markets could however increase the weight of financial market indicators in the second pillar. the stock market is still a much less important channel of transmission in the euro area than in the us, but the holding of shares is spreading, for example through mutual funds. i would not attempt to summarise the vast debate about the appropriate monetary policy reaction to asset price movements. i am inclined to say that central banks have not to put on these variables more emphasis than warranted by their effects on demand and should avoid asymmetric reactions - benign neglect in the case of irrational exuberance, intervention in the case of sharp downward correction - which could pose a moral hazard problem. the bond market provides indicators which are probably more important within the second pillar of the eurosystem's monetary policy. technical progress and european integration lead to more sophisticated and liquid markets which supply useful information about market expectations. incidentally i notice that, while many central banks looked disapprovingly on indexed bonds prior to monetary union, the eurosystem now welcomes the opportunity to

oil as well as in other non - oil commodities has been increasing. an example of the risks that can be posed by such activity in non - oil commodities markets was the episode involving the amaranth advisors hedge fund that collapsed in september. the fund ran into difficulties after its leveraged bets in the natural gas futures market – which had been predicated on expectations of hurricane frequency and intensity that did not materialise – suddenly turned sour. regarding oil spot prices, after reaching new historical highs in early august, they subsequently declined substantially but have remained at high levels. the decline was mainly attributable to a reduction in geopolitical tensions, a receding threat of hurricanes in the gulf of mexico and an easing of petrol market tightness. all of these factors led to a decline in speculative positions which contributed to the rather abrupt downward adjustment in the price of oil. looking forward, the implied probability distribution of future oil prices, extracted from options contracts, indicates that considerable uncertainty surrounds near - term oil futures prices, with very wide confidence intervals. moreover, the balance of risks is tilted towards the upside [ see chart on the right of slide 3 ]. iii. 2 global and euro area financial markets when assessing the potential risks in the global and euro area financial markets, two main sources of vulnerability can be identified. the first concerns the persistently low levels of long - term interest rates and credit spreads which have been associated with a “ pricing for perfection ” in corporate sector capital ( credit ) markets and emerging economy debt markets in the sense that valuations in these markets appear to be based on very favourable expectations regarding future economic outcomes and low risk premia. the second concerns the growth in the volume and complexity of credit derivatives markets, coupled with the increasing presence of hedge funds in these markets. an abundance of liquidity in global financial markets, although its rate of growth has moderated, together with very high saving rates in some emerging market regions relative to domestic investment opportunities partly explain why long - term interest rates and credit spreads have been remarkably unperturbed by the shift to less accommodative monetary policies in the g3 economies and the resulting withdrawal of global liquidity. rising short - term interest rates have instead produced flatter, or inverted, market yield curves in the six months following the finalisation of the june 2006 fsr. [ see chart on the left of slide 4 ] the renewed “ conundrum ” of low long - term government bond yields seems, in part,