credit of sponsoring banks. lately, paper of higher quality could be placed more easily, and at better prices, than some weeks ago. thus, a more discriminating market would seem to be emerging in the abcp market. financial stability let me now provide you with an update of the recent developments regarding euro area financial stability. last month, i drew some very tentative lessons from the events as we saw them evolving at the time. by now we have learned more, but the lessons to be drawn still remain tentative and provisional. as i told you last month, the re - assessment of risk – which is still ongoing – reflects the materialisation of some of the vulnerabilities that had previously been identified by the ecb as well as by the global central banking community. since our last meeting, we have witnessed tentative signs of normalisation in some parts of the credit and financial markets. nonetheless, as regards the prospects going forward i would certainly tend to agree with those who caution against complacency. the situation in certain parts of the euro area money markets remains complex, and banks are still reluctant to lend to each other in the unsecured interbank term money markets. in a number of cases the present episode of market correction will impact banks ’ profits. fortunately, several years of rather favourable economic and financial developments, as well as better risk management, have significantly improved the resilience of the euro area banking system, placing the core financial institutions in a rather comfortable position to absorb the recent disturbances. our baseline scenario is that the process of adjustment in the money and credit markets will take place in an orderly manner. nevertheless, it cannot be excluded that this positive baseline scenario could yet be challenged by some low - probability but potentially high impact negative events. therefore, there is no room for complacency at the present juncture. the first priority remains the need to restore confidence among the various participants of the global credit market. today, we still have the paradox that there are large amounts of high quality assets which investors are currently treating as if they have poor credit quality. last month, i tentatively identified three potential and non - exclusive remedies to this situation ; i will again stress them today and i will even add a fourth one. first, there is a need to increase transparency and further improve risk management – including liquidity risk management – relating to complex structured products. second, an assessment of the role played by rating agencies needs to be undertaken. third, a review

largely as a consequence of capacity constraints and relatively tight labour markets, inflation is expected to remain around 2 % on average. as regards economic activity, it appears that the sustained real economic growth experienced in the euro area in the first half of 2007 has continued over the summer. the economic fundamentals support a favourable medium - term outlook for economic activity. while euro area consumer and business confidence indicators declined in september, mainly reflecting the financial market correction, they remain above their historical averages and continue to point to ongoing sustained growth during the second half of the year. available forecasts for 2008 confirm the governing council ’ s main scenario of real gdp growing at around trend potential. this scenario is based on the expectation that global economic activity will remain robust, with the moderation of economic growth in the united states largely offset by the continued strength of emerging market economies. given the financial market volatility and the reappraisal of risks in recent weeks, this assessment remains surrounded by heightened uncertainty. on balance, risks to this outlook for growth are judged to lie on the downside. the monetary analysis confirms the prevailing upside risks to price stability at medium to longer - term horizons. on the basis of latest available data, covering the period to the end of august, the underlying money and credit expansion remains strong. however, strong money and credit growth may have been influenced by temporary factors, such as the flattening of the yield curve and recent financial market volatility. the headline figures may therefore overstate the underlying money and credit growth. in august, the flow of loans to households and non - financial corporations remained strong. however, financing conditions have tightened somewhat in the context of financial turbulence, although financing costs are not exceptionally high by historical standards. as regards developments in the bank lending behaviour, there are some signs showing an impact of recent financial market volatility. the results reported in our october 2007 bank lending survey point to some net tightening of the credit standards in the third quarter of 2007 both on loans to large enterprises and loans to households for house purchases, following a prolonged period where credit standards were eased or remained unchanged. looking ahead, banks expect to further tighten credit standards in the fourth quarter of 2007. the ecb ’ s monetary policy stands ready to counter upside risks to price stability, in line with its treaty mandate to maintain price stability as the primary objective of monetary policy. under current circumstances, particular caution is required in assessing any potential impact of recent financial market developments on the real economy. before