the downside. they are mainly related to slow implementation of structural reforms in the euro area, geopolitical issues and imbalances in major industrialised countries. these factors have the potential to dampen sentiment for longer than currently assumed and delay further the recovery of private investment, employment and consumption. according to eurostat ’ s flash estimate, euro area annual hicp inflation was 2. 2 % in december 2012, unchanged from november and down from 2. 5 % in october and 2. 6 % in august and september. on the basis of current futures prices for oil, inflation rates are expected to decline further to below 2 % this year. over the policy - relevant horizon, in an environment of weak economic activity in the euro area and well - anchored long - term inflation expectations, underlying price pressures should remain contained. risks to the outlook for price developments are seen as broadly balanced over the medium term, with downside risks stemming from weaker economic activity and upside risks relating to higher administered prices and indirect taxes, as well as higher oil prices. turning to the monetary analysis, the underlying pace of monetary expansion continues to be subdued. the annual growth rate of m3 remained broadly unchanged at 3. 8 % in bis central bankers ’ speeches november 2012, after 3. 9 % in october. m3 growth continued to be driven by a preference for liquid assets, as m1 growth increased further to 6. 7 % in november, from 6. 5 % in october, reflecting inflows into overnight deposits from households and non - financial corporations. following our non - standard monetary policy measures and action by other policy - makers, a broadly based strengthening in the deposit base of mfis in a number of stressed countries was observed. this allowed several mfis to reduce further their reliance on eurosystem funding and helped to reduce segmentation in financial markets. m3 growth was also supported by an inflow of capital into the euro area, as reflected in the strong increase in the net external asset position of mfis. there has been little change in credit growth, which remained weak in november. the annual rate of decline in loans to the private sector ( adjusted for loan sales and securitisation ) remained at – 0. 5 % in november. this development reflects further net redemptions in loans to non - financial corporations. net redemptions, however, were less pronounced than in previous months, amounting to €4 billion in november, after €7 billion in october and €21 billion in september

challenges in responding to developments in the financial system which affect the complex, multi - faceted, and time - varying interrelation between financial stability and efficiency. as examples, i would like to mention three challenges : • how supervisory authorities can deal with potential asset price bubbles ; • how to manage financial integration in europe ; and • how to address crisis situations in a set - up where monetary policy is conducted at the supranational level, while supervision remains at the national level. first, how should the competent national supervisory and regulatory authorities deal with the risks posed by asset price bubbles? a menu of options seems conceivable. with a view to preventing, ex ante, the emergence of asset price bubbles, supervisory initiatives ranging from dialogue to direct regulation may help to realign long - term incentives for risk - taking. central banks, even those without supervisory functions, can also contribute by calling attention to the risks and vulnerabilities in the financial system through their financial stability work. ex post, that is, in the case where a bubble has already emerged, the adoption of specific prudential measures ( e. g. increases in prudential risk weights on top of the regulatory minimums for high loan - to - value ( ltv ) loans in the case of a real estate price bubble ) might help. second, what are challenges posed by integrating financial markets in europe? the interactions between financial integration and financial efficiency and their relationship with financial stability are complex, and this is an area that we are only just beginning to understand. increased integration is likely to improve the capacity of the system to diversify risk over a larger number of economic agents. it also implies that the number of potential contagion channels in the financial system will be greater, meaning that large adverse shocks will no longer remain localised, but will be propagated more broadly across the financial system. this may mean that the frequency of financial crises may diminish as financial integration proceeds or it could also imply that the severity of crises, when they occur, could be greater than before. it is therefore important to monitor the increasing inter - linkages between different participants in the financial system. 23 third, in what manner does the specific environment created by economic and monetary union ( emu ) affect the relationship between monetary and supervisory policies? monetary policy is conducted for the euro area as a whole, supervisory policy is still primarily based on national competencies and coordinated through the relevant eu lamfalussy