annual hicp inflation is expected to be in line with price stability. this assessment is supported by available indicators of inflation expectations for the medium term. regarding risks to price stability over the medium term, unexpected further declines in commodity prices or a stronger than expected slowdown in the economy could put downward pressure on inflation, while upside risks to price stability could materialise, particularly if the recent fall in commodity prices were to reverse or if domestic price pressures turn out to be stronger than assumed. it is therefore crucial that price and wage - setters fully live up to their responsibilities. turning to the monetary analysis, the latest evidence confirms a continued deceleration in the underlying pace of monetary expansion in the euro area, supporting the view that inflationary pressures are diminishing. in analysing monetary developments it should be recognised that the intensification and broadening of the financial turmoil since september 2008 has the potential to affect the evolution of monetary aggregates significantly. it has already had a substantial impact on the behaviour of market participants, as indicated by recent money and credit data. both the broad aggregate m3 and, in particular, the components of m3 that are most closely related to the ongoing financial tensions – such as holdings of money market funds – have shown high month - to - month volatility of late. overall, looking to the extent possible through this volatility, the underlying pace of broad money expansion continues to decelerate gradually from the peak seen in early 2007. however, the intensification of financial tensions since september 2008 is leading to significant substitution among the components of m3. turning to the evolution of bank credit, the flow of mfi loans to the private sector moderated in the course of 2008, largely on account of weakness in loans to households, especially for house purchase. in december, however, outstanding mfi loans to non - financial corporations contracted for the first time since the onset of the financial turmoil, confirming the significant weakening of corporate credit at the end of the year after a long period of dynamic growth. at the same time, the substantial reduction in key ecb interest rates since october 2008 appears to have been passed through to lower bank lending rates, thereby easing financing conditions for companies and households. moreover, there are some indications that the pace of tightening of bank credit standards is stabilising, albeit at high levels by historical standards. overall, the incoming information on financing conditions requires continuous close monitoring. to sum up, as anticipated in our interest rate decision of 15 january

same time, the very substantial fall in commodity prices seen since the middle of 2008 should support real disposable income, and thus consumption, in the period ahead. most recently, there have been tentative signs of stabilisation in some survey data, albeit at historically low levels. these indications, however, require confirmation on a broader basis. in the view of the governing council, the outlook for the economy remains surrounded by an exceptionally high degree of uncertainty. overall, risks to economic growth remain clearly on the downside. they relate mainly to the potential for a stronger impact on the real economy of the turmoil in financial markets, as well as to concerns about the emergence and intensification of protectionist pressures and to possible adverse developments in the world economy stemming from a disorderly correction of global imbalances. over time, the euro area should reap the benefit of the effects of significant policy measures that have been decided upon over recent months to deal with the financial turmoil. they should help to restore trust in the financial system and to ease constraints on credit supply to companies and households. in order to ensure that such measures effectively support a sustainable recovery, it is of the utmost importance that they remain focused and temporary in nature so as to maintain a stability - oriented and medium - term perspective in macroeconomic policy - making. with regard to price developments, annual hicp inflation continued to decline in january 2009, falling to 1. 1 %, according to eurostat ’ s flash estimate, from 1. 6 % in december 2008. while no detailed breakdown for hicp developments in january is available as yet, the decline in headline inflation observed since the middle of 2008 primarily reflects the sharp falls in global commodity prices over this period, owing mainly to weak global demand. looking ahead, lower commodity prices and the prospect of weak demand confirm our assessment of mid - january that inflationary pressures in the euro area are diminishing. owing mainly to base effects stemming from the past behaviour of energy prices, headline annual inflation rates are projected to decline further in the coming months, possibly reaching very low levels at mid - year. however, also owing to base effects stemming from past energy price developments, inflation rates are expected to increase again in the second half of the year. accordingly, it is likely that hicp inflation rates will fluctuate sharply during 2009. such short - term volatility is, however, not relevant from a monetary policy perspective. looking over the policy - relevant medium - term horizon,