in july, with the differences across borrowing sectors becoming more marked. the flow of loans to households remained slightly positive, whereas in the case of non - financial corporations the flow of loans was negative again. the decline in loans to non - financial corporations continues to reflect mainly a strong net redemption of loans with a shorter maturity, while lending and borrowing at longer maturities remained positive. the fall in production and trade and the ongoing uncertainty in the business outlook are likely to have dampened firms ’ demand for financing. given the normal lag between a recovery in economic activity and a pick - up in loans to enterprises, further weak developments in loans to non - financial corporations in the coming months appear likely. at the same time, a gradual improvement in financing conditions, as lower market interest rates continue to be passed on in lower bank lending rates, should support the demand for credit in the period ahead. against the background of highly demanding challenges, banks should take appropriate measures to strengthen further their capital bases and, where necessary, take full advantage of government measures to support the financial sector, particularly as regards recapitalisation. to sum up, the information and analyses that have become available since our meeting on 6 august 2009 confirms the view of the governing council that the current key ecb interest rates remain appropriate. in this respect, at today ’ s meeting we also decided that the rate for the twelve - month longer - term refinancing operation to be allotted on 30 september 2009 will be the prevailing rate on the main refinancing operations. price developments are expected to remain subdued over the policy - relevant horizon. annual hicp inflation was slightly negative in august. this reflects mainly the base effects of the strong rise in commodity prices in 2008. the return of hicp inflation to moderate positive rates is expected within the coming months. at the same time, the latest information supports our view that there are increasing signs of stabilisation in economic activity in the euro area and elsewhere. this is consistent with the expectation that the significant contraction in economic activity has come to an end and is now followed by a period of stabilisation and very gradual recovery. available indicators of inflation expectations over the medium to longer term remain firmly anchored in line with the governing council ’ s aim of keeping inflation rates below, but close to, 2 % over the medium term. a cross - check of the outcome of the economic analysis with that of the monetary analysis confirms the assessment of low inflationary pressure over the medium term, as

liquidity regulations and have argued that the interaction with monetary policy implementation is expected to be significant and complex. i would therefore conclude that liquidity regulation and central bank operations cannot be looked at in isolation. the new set of liquidity requirements will provide for a better monitoring of risks on banks ’ balance sheets and will limit the social cost of liquidity crises. it has to be combined with actions ensuring a proper functioning of the money market, such as reform and oversight of reference rates. it should be seen as a complement to regulatory reforms that improve market discipline in other segments of the banks ’ liability structure, such as capital buffers and the new bail - in rules for senior bond - holders and uninsured depositors. a more far - reaching question, which i did not address in this speech, is whether the increased risk - sensitivity of bank liabilities under the new regulatory regime will constrain the role of banks as providers of liquidity services to the economy, or as creators of “ quasimoney ”. if so, this could put undue pressure on central banks as producers of the only truly safe and liquid asset – bank reserves. this makes it even more important for governments to be fiscally responsible so that treasuries can keep or regain their role as safe and liquid instruments. going forward, central banks will continue to act as lenders of last resort, but the crisis has helped us better understand the conditions for it to be socially useful. one of these is an effective liquidity regulation that constrains the business models of banks in a way that ensures that liquidity risk is self - insured. if properly priced, instruments such as a committed liquidity facility can complement liquidity regulation while protecting monetary policy. another condition is that the resort to central bank liquidity should be expensive, bounded in time, and addresses only emergency situations. this matters particularly in the euro area, where overreliance on central bank funding, including emergency liquidity assistance, can delay the necessary restructuring and changes in banks ’ business models. and finally, there should remain a strict separation between capital and liquidity assistance that reflects the division of tasks between central banks on the one hand, shareholders and fiscal authorities on the other hand and avoids that monetary policy is held hostage of financial or fiscal dominance. liquidity ought to be provided to the banking system as needed, but it should not be a substitute for a lack of capital. thank you for your attention. bis central bankers ’ speeches