the first quarter of this year euro area real gdp rose by 0. 2 %, quarter on quarter. with regard to the second quarter, monthly indicators have been somewhat volatile, partly reflecting technical factors. overall, recent information, including survey data available for july, remains consistent with our expectation of a continued moderate and uneven recovery of the euro area economy. looking ahead, domestic demand should be supported by a number of factors, including the accommodative monetary policy stance and the ongoing improvements in financial conditions. in addition, the progress made in fiscal consolidation and structural reforms, as well as gains in real disposable income, should make a positive contribution to economic growth. furthermore, demand for exports should benefit from the ongoing global recovery. however, although labour markets have shown some further signs of improvement, unemployment remains high in the euro area and, overall, unutilised capacity continues to be sizeable. moreover, the annual rate of change of mfi loans to the private sector remained negative in june and the necessary balance sheet adjustments in the public and private sectors are likely to continue to dampen the pace of the economic recovery. bis central bankers ’ speeches the risks surrounding the economic outlook for the euro area remain on the downside. in particular, heightened geopolitical risks, as well as developments in emerging market economies and global financial markets, may have the potential to affect economic conditions negatively, including through effects on energy prices and global demand for euro area products. a further downside risk relates to insufficient structural reforms in euro area countries, as well as weaker than expected domestic demand. according to eurostat ’ s flash estimate, euro area annual hicp inflation was 0. 4 % in july 2014, after 0. 5 % in june. this reflects primarily lower energy price inflation, while the other main components of the hicp remained broadly unchanged. on the basis of current information, annual hicp inflation is expected to remain at low levels over the coming months, before increasing gradually during 2015 and 2016. meanwhile, inflation expectations for the euro area over the medium to long term continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2 %. the governing council sees both upside and downside risks to the outlook for price developments as limited and broadly balanced over the medium term. in this context, we will closely monitor the possible repercussions of heightened geopolitical risks and exchange rate developments. turning to the monetary analysis, data for

for tltros, we define the price of the liquidity, but banks determine the volume. one tool can therefore act as an automatic stabiliser for the other. indeed, as wholesale funding costs for banks have risen, so has the attractiveness of the tltro. this substitution effect accounts in particular for the higher participation in the fourth operation by banks in less vulnerable countries. some observers have voiced concerns that the app could in fact negatively affect bank lending by squeezing margins and hence banks ’ profitability. i do not share this view. ecb staff estimates of the impact of the app show the overall effect on bank capital to be positive. capital gains on securities held, lower funding costs, improved credit quality and higher intermediation volumes outweigh the negative impact of the flattening of the term structure on net interest income. though structural problems certainly remain in the euro area banking sector, banks ’ weak profitability is to a large extent linked to the macroeconomic environment – something that the successful implementation of our programme will help address. in sum, the expanded app, combined with our other credit easing measures, is largely producing its desired effects. we judge that the recent volatility in financial markets has not materially affected this picture, although close monitoring and continuous assessment are warranted from a monetary policy perspective. it is nonetheless clear that the effectiveness of the app would be enhanced by complementary measures from other policymakers. in particular, the improving economic and financial environment provides the ideal conditions for governments to press ahead with structural reforms, which are in turn necessary to make bis central bankers ’ speeches the recovery lasting. raising expectations of future growth is vital to lift animal spirits and encourage a stronger rebound in investment, which is the cornerstone of a self - sustaining economic recovery. bis central bankers ’ speeches