. recent wage developments have been moderate, and this trend is expected to continue for some time to come in view of the continued high level of unemployment in the euro area. if this is the case, and provided that one - off shocks to prices from other sources such as those seen in 2004 are not repeated, annual inflation rates should drop below 2 % in 2005. against this background the ecb staff projections put average annual hicp inflation at between 2. 1 % and 2. 3 % for 2004 and between 1. 3 % and 2. 3 % for 2005. the lower end of these ranges is slightly higher than what was projected in june for both 2004 and 2005. the ecb staff projections for inflation are broadly consistent with other recently released forecasts. however, several upward risks to the projections for inflation exist. concerns relate in particular to oil price developments, which may continue to have a visible impact on inflation. oil price rises also imply the risk of second - round effects emerging in wage and price - setting, a risk which intensifies when the economic upswing strengthens. a further upward risk relates to the future evolution of indirect taxes and administered prices. indeed, upside risks to inflation are also reflected in the continued elevated levels of measures of long - term inflation expectations derived from financial market indicators. while these indicators should always be interpreted with caution, their current level calls for particular vigilance. turning to the monetary analysis, the annual rate of m3 growth has moderated significantly since the summer of 2003. this moderation largely represents a normalisation of portfolio allocation behaviour following the easing of the exceptional economic and financial uncertainty which prevailed between 2001 and early 2003. nonetheless, m3 growth remains resilient. it appears that the reversal of past portfolio shifts is proceeding more slowly than would have been expected on the basis of historical regularities. this may reflect an increased risk aversion of households and firms, given the stock market losses they experienced between 2000 and the spring of 2003. in addition, the low level of interest rates continues to support monetary expansion, especially of the most liquid assets included in the narrow aggregate m1. the low level of interest rates also seems to be fuelling the growth of loans to the private sector, which has risen to a relatively robust rate over recent months. in this respect, the growth rate of mortgage loans to households is rather high and is associated with fairly dynamic housing market developments and real estate prices in several euro area countries. there remains substantially more liquidity in

european central bank : press conference - introductory statement introductory statement by mr jean - claude trichet, president of the european central bank, and mr lucas papademos, vice - president of the european central bank, frankfurt, 2 september 2004. * * * ladies and gentlemen, the vice - president and i will now report on the outcome of today ’ s meeting of the governing council of the ecb, which was also attended by the president of the ecofin council, mr zalm, and commissioner almunia. we noted that the information which has become available in recent months indicates that the economic recovery in the euro area has maintained its momentum and should remain firm in the coming quarters. we have also witnessed somewhat higher inflation rates, mainly due to developments in oil prices. at present, our judgement is that although some upside risks to price stability exist, the overall prospects remain in line with price stability over the medium term. accordingly, we have retained our monetary policy stance and left the key ecb interest rates unchanged. the level of interest rates is very low by historical standards, both in nominal and in real terms, lending support to economic activity. we will remain vigilant with regard to all developments which could imply risks to price stability over the medium term. i shall now explain our assessment in more detail, turning first to the economic analysis. the latest data releases confirm that the economic recovery in the euro area is continuing. according to eurostat ’ s flash estimate, real gdp grew by 0. 5 % quarter on quarter in the second quarter of this year, having recorded a 0. 6 % increase in the first quarter. these growth rates are the strongest in the euro area for some time. the latest indicators of output and demand remain consistent with ongoing growth in real activity, increasingly supported by domestic demand, also in the third quarter of 2004. looking ahead, the conditions for a continuation of the recovery remain in place. economic growth outside the euro area continues to be robust overall, even if subject to temporary fluctuations, and should continue to support euro area export growth. on the domestic side, investment should benefit from the positive global environment and the very favourable financing conditions. improvements in corporate efficiency and higher profits are also supporting business investment. moreover, private consumption should continue its gradual recovery, broadly in line with growth in real disposable income which, with the usual lag, should be further underpinned by an increase in employment growth later on. against this background, we expect the