in july 2008, annual inflation reached 4. 0 %, having steadily risen from 2. 1 % in september 2007. this is largely due to the direct and indirect effects of past sharp increases in energy and food prices globally. there are some indications, however, that domestic inflationary pressures are intensifying as labour cost growth has been increasing in the recent quarters. looking forward, given the current futures prices for oil and other commodities, the annual inflation rate in the euro area is likely to remain significantly above the level consistent with price stability for a considerable period of time before declining only gradually in the course of 2009. with regard to the outlook for price developments, the main and serious concern is that a protracted period of high inflation, even if it is largely due to the direct and indirect effects of previous commodity price increases, has the potential to adversely affect price and wage - setting behaviour and short to medium - term inflation expectations, thereby inducing a wage - price spiral via broadly - based second - round effects. the likelihood of such an undesirable scenario should be avoided. for if it materialises, it will adversely and perversely affect growth and the purchasing power of households. moreover, it will require a stronger degree of monetary tightening in order to achieve price stability in a sustained manner. this concern is further heightened by other upside risks to price stability. as i previously noted, notwithstanding the recent sharp decline in oil prices, the possibility of renewed increases cannot be excluded. in addition, despite some signs of moderation of growth in broad money and credit aggregates, the continued vigorous underlying pace of monetary expansion over the past few years confirms the existence of upside risks to price stability over a medium to longer term horizon. in order to address these upside risks and achieve price stability in the euro area over the medium - term, in accordance with the ecb ’ s mandate, the governing council raised the key ecb interest rates by 25 basis points in july. the council decided to keep the interest rates unchanged at its august meeting. we believe that the current stance of monetary policy will contribute to achieving our overriding objective of price stability and to maintaining medium and longer - term inflation expectations firmly anchored to this objective. looking forward, we will continue to monitor very closely all relevant developments and we will do what is necessary to ensure that price stability will be maintained over the medium term. it is evident from price developments in many countries that rising and persisting inflationary pressure is becoming a global phenomenon

booming and liquidity was abundant until august last year, new publicly - placed issuance has virtually dried up, except for the simpler securitised instruments backed by high - quality collateral. moreover, the value of many of the outstanding complex structured products, including some of those backed by high - quality assets, has fallen in recent months. in the corporate credit markets, spreads in the below - investment grade segment have recently widened to the highest levels since the beginning of the turmoil. in addition, the cost of buying protection against the risk of default by some of the major financial institutions ( as reflected in corporate credit default swaps spreads ) has increased again, reaching levels comparable to those seen in late march, before the bear stearns rescue. in equity markets, the stock prices of non - financial firms have also declined sharply since early may, while ( implied ) stock market volatility rose to a peak in july and has remained high. these developments reflect market expectations of a deteriorating corporate earnings outlook, increased financing costs and high and volatile commodity prices. overall, a number of developments, both external to and within the euro area, suggest that the uncertainty surrounding the euro area financial stability outlook has increased. this assessment reflects to a considerable extent the continuing decline in us house prices, which is leading to a sharp rise in loan delinquencies and losses, and associated further declines in the prices of mortgage backed securities. in the euro area, credit risks have risen, stemming from developments in some housing markets as well as in those non - financial corporate sectors which are more exposed to residential construction activity. at the same time, however, there is little evidence so far to suggest that the availability of bank credit in the euro area as a whole has been significantly affected by these developments and, more generally, by the financial turmoil. in particular, the expansion of credit to the non - financial corporate sector remains strong, though moderating. the persistence of the financial turmoil may also make the financial system more vulnerable to the crystallisation of other risks that have been previously identified by the ecb and other central banks and institutions. these include the possibility of a more broad - based turn in the global credit cycle, a disorderly unwinding of global imbalances and the financial stability implications of persistently elevated energy prices. it seems that large euro area banks have so far weathered the financial storm somewhat better than their global peers. nevertheless, the investment losses suffered by some banks could make these institutions more vulnerable to