term, while in the longer term downside risks prevail, relating mainly to potential further oil price rises, a disorderly unwinding of global imbalances and potential pressures for increased protectionism. with respect to price developments, according to eurostat ’ s flash estimate, annual hicp inflation was 2. 5 % in june 2006, the same rate as in may and compared with 2. 4 % in april. during the second half of 2006, and on average in 2007, inflation rates are likely to remain above 2 %, the precise levels depending on future energy price developments. this assessment is supported by the eurosystem staff projections and available public and private sector forecasts. while the moderate evolution of labour costs in the euro area is expected to continue in 2007 – also reflecting ongoing global competitive pressures, particularly in the manufacturing sector – indirect effects of past oil price increases and already announced changes in indirect taxes are expected to exert a significant upward effect on inflation in the course of next year. against this background, and also in the context of a more favourable environment for economic activity and employment, it is crucial that the social partners continue to meet their responsibilities. risks to the outlook for price developments remain on the upside and include further increases in oil prices, a stronger pass - through of oil price rises into consumer prices than currently expected, additional increases in administered prices and indirect taxes and, more fundamentally, stronger than expected wage and price developments due to second - round effects of past oil price increases. regarding prospects for inflation over medium to longer horizons, our assessment that upside risks to price stability prevail is confirmed by the monetary analysis. money and credit growth have strengthened further over recent quarters, with the latest annual growth rate of m3 increasing to 8. 9 % in may – the highest annual growth of m3 since the start of stage three of emu. the stimulative impact of the low level of interest rates in the euro area remains an important driving factor behind the high trend rate of monetary expansion. on an annual basis, loans to the private sector as a whole have continued to increase at double - digit rates over recent months, with borrowing both by households and by non - financial corporations rising rapidly. ongoing strong lending activity to households continues to be explained, in particular, by borrowing for house purchases, which has stood at an annual rate of above 12 % in recent months. the dynamic growth of money and credit, in an environment of already ample liquidity, points to increased

upside risks to price stability at medium to longer horizons. monetary developments, therefore, require enhanced monitoring, particularly in the light of strong dynamics in housing markets. to sum up, annual inflation rates are projected to remain elevated in 2006 and 2007, with risks to this outlook continuing to be on the upside. given the dynamism of monetary growth in an environment of already ample liquidity, a cross - check of the outcome of the economic analysis with that of the monetary analysis supports the assessment that upside risks to price stability prevail over the medium term. it is essential that inflation expectations remain firmly anchored at levels consistent with price stability. accordingly, the governing council will exercise strong vigilance so as to ensure that risks to price stability do not materialise, thereby making an ongoing contribution to sustainable economic growth and job creation. in terms of fiscal policy, the overall pace of consolidation is disappointing against the background of the favourable outlook for growth. consolidation targets continue to be at risk, notably in a number of countries with an excessive deficit. the governing council therefore reiterates its position that it is crucial to avoid the mistakes of the past. it also wishes to express its broad agreement with the main fiscal challenges as generally identified by the european commission. these concern, in particular, the need for a rigorous implementation of the revised stability and growth pact with a view to speeding up fiscal consolidation and improving the outlook for fiscal sustainability. this needs to be underpinned by medium term - oriented structural reform strategies and appropriate national fiscal institutions and procedures. finally, reliable compilation and timely reporting of government finance statistics remain essential for the european fiscal framework. meeting these challenges will support confidence in the soundness of public finances and in economic prospects in europe. as regards structural reforms, enhancing the growth potential of the euro area, increasing job opportunities and strengthening the euro area ’ s ability to cope with the challenges of globalisation are among the most demanding economic policy issues of our time. in order to translate the opportunities brought about by globalisation – in terms of higher living standards – into achievements, the euro area would greatly benefit from more flexible labour and product markets. it would also gain from a more favourable business environment and a fully fledged internal market – including in the services sector – that foster innovation, investment and the creation of new firms. indeed, implementing the necessary reforms in a decisive manner would both help to reap the benefits that globalisation and the single market offer our citizens and raise the production capacity of our economy. we