how certain proposals made in the ongoing public debate, which might suggest that the focus of monetary policy should be shifted towards short - term growth or employment objectives, can be fulfilled without violating the primary objective of maintaining price stability, thus ultimately producing an overall deterioration in prospects for economic growth and employment. monetary policy needs a forward - looking, medium - term orientation. it would be overambitious and therefore risky to steer the economy in the short term. fine - tuning would more likely lead to instability than stability. a medium - term orientation takes into account the fact that monetary policy affects the price level only with variable, usually long and unpredictable time lags. for example, a large proportion of the substantial reduction in interest rates during the second half of last year will still have an impact on the euro area economy. to maintain price stability, we have chosen a distinct monetary policy strategy, one that reflects the special circumstances that exist at present as well as those likely to prevail in the foreseeable future. it ensures as much continuity as possible with the strategies previously pursued by the ncbs. at the same time, it gives due consideration to the unique situation which will prevail in the early years of monetary union. this strategy rests on two “ pillars ” : a prominent role for money as expressed by the announcement of a reference value for the annual growth of m3 and a broadly based assessment of the outlook for price developments, and the risks to price stability in the euro area as a whole. monetary developments can provide useful information about future price developments and thereby act as an important compass for the conduct of monetary policy. there is broad consensus that, in the medium to long term, the development of the price level is a monetary phenomenon. consequently, the governing council of the ecb has announced a quantitative reference value for m3 growth, which has been set at an annual rate of 4½ %. under normal circumstances, substantial deviations from the reference value would tend to indicate future risks to price stability. however, monetary policy does not react to deviations of monetary growth from the reference value in a “ mechanistic ” way. in the first instance, such deviations will be thoroughly analysed to infer any signals which they may send about the prospects for price developments. if this analysis points to a threat to price stability, monetary policy will react in a manner appropriate to counter this threat, rather than attempt to eliminate the deviation of monetary growth from the reference value in the short term.

, for the time being, the main scenario for the euro area remains that economic growth is expected to return to rates close to potential in the course of 2003. in fact, this expectation is consistent with all forecasts published by international organisations. private forecasters, on the whole, also seem to share the same view. moreover, financial markets have shown signs of stabilisation in recent weeks following a period of considerable turbulence. the expectation of an improvement in economic activity in the euro area is contingent on a recovery of growth in private consumption, supported by a reduction in actual and perceived inflation rates. this expectation is also based on a projected gradual recovery of the world economy and export growth which, together with the low level of interest rates, should help to strengthen investment. nevertheless, the uncertainty surrounding this scenario remains high. it is therefore very difficult, at this juncture, to predict the timing and strength of the economic upswing, both in the euro area and globally. turning to recent price developments, in september annual hicp inflation was 2. 1 %. for october, eurostat's flash estimate indicates an annual hicp inflation rate of 2. 2 %. this increase is again likely to reflect developments in energy prices, although no detailed information is available at present. looking at price developments for the remainder of 2002 and the early part of next year, despite the recent decline in oil prices, some upward impact may occur reflecting base effects and country - specific developments - such as increases in indirect taxes or specific developments in services prices. although difficult to anticipate, particularly due to the volatility of oil prices, a further increase in the annual rates of inflation around the turn of the year and a delay in the return to inflation rates below 2 % cannot be ruled out. however, this further increase should only be temporary. beyond the very short term, we consider that both the euro exchange rate, which has strengthened since early this year, and the overall economic environment are still contributing towards reducing inflationary pressure. moreover, there should also be a further unwinding of the indirect effects of previous increases in oil prices and other factors that have added to the stickiness of the annual rate of hicp inflation excluding unprocessed food and energy prices. however, for inflation rates to fall below 2 % in the course of 2003 and to remain in line with price stability thereafter, as indicated by recent forecasts, it is crucial that oil prices do not increase sharply again and that the upward