2002. the continued strength in monetary growth reflects an ongoing pronounced preference for liquidity in an environment of high financial, economic and geopolitical uncertainty. in addition, the low level of interest rates in the euro area makes the holding of liquid assets relatively attractive. overall, although liquidity remains ample, it is unlikely at this stage that it will give rise to inflationary pressures, given the current economic environment and the expectation that some of the portfolio shifts will be reversed once the financial market uncertainty diminishes. this assessment is supported by the continuing moderate growth of loans to the private sector, particularly to non - financial corporations. as regards the information under the second pillar, recently published data and survey information indicate that economic growth in the euro area remained subdued around the turn of the year and that the overall sentiment in the economy remained lacklustre. while these indications suggest that growth dynamics will remain weak for the early part of this year, the most likely scenario remains that of a gradual increase of real gdp growth rates, starting in the second half of 2003. the current low levels of interest rates should contribute to this scenario materialising. in addition, while the appreciation of the euro over recent months is likely to contribute to a dampening of export growth to some extent, this should be counterbalanced by the assumed recovery in the world economy. in this respect, it should also be taken into account that the price competitiveness of euro area companies remains favourable in a medium - term perspective. at the same time, uncertainty regarding the economic outlook remains high, in particular due to the ongoing geopolitical tensions. further turbulence in the oil markets could have a negative impact on economic activity throughout the world and, therefore, on euro area employment as well. these concerns could weigh adversely on confidence. in addition, the accumulated macroeconomic imbalances outside the euro area have led to uncertainty surrounding the strength of the recovery in other major economies. by way of conclusion, there are still downside risks to the outlook for euro area economic activity. turning to prices, hicp inflation has remained slightly above 2 % in recent months. on the one hand, there was upward pressure from oil prices and from various increases in indirect taxes and administered prices. on the other hand, the strengthening of the euro, together with base effects, helped to limit year - on - year consumer price increases. looking ahead, given the outlook for moderate economic growth, the gradual pass - through of the appreciation of the euro should contribute

the main drivers behind the subsequent economic recovery ( slide 3 ). at present, it seems that some of the downside risks we had identified earlier have been materialising. looking ahead, short - term indicators and survey data suggest that real gdp growth may be very moderate towards the end of this year and at the beginning of next year. indeed, economic activity in the euro area is adversely affected by a moderation in the pace of global demand. in addition, the crisis continues to weigh on confidence and financing conditions in the euro area. these developments are expected to dampen activity. at the same time, activity should benefit from bis central bankers ’ speeches continued positive economic growth in the emerging market economies, the continued extremely low levels of short - term interest rates and the various measures that have been implemented to support the functioning of the financial sector. having said this, uncertainty remains very high and risks to the economic outlook on the downside. turning to prices, average inflation in the euro area rose to 1. 6 % in 2010, and continued increasing in 2011. it stood at 3 % in november, according the eurostat ’ s flash estimate, unchanged from previous months, still significantly lower than in the us. the main drivers behind the elevated inflation rates since the end of last year have been oil and other commodity price surges. as of late, increases in indirect taxes due to fiscal consolidation needs have been an additional driver. at the same time, domestic price pressures have remained moderate. survey data up to october point to some easing in pipeline pressures, especially at the earlier stages of the pricing chain, i. e. producer prices for intermediate goods. in view of the rather weak growth prospects and continued slack in labour markets, labour cost pressures are likely to remain contained in the medium term. looking ahead, euro area inflation rates are likely to decline in the coming months. they are expected to fall below 2 % in the course of 2012. in the medium term, inflation rates should remain moderate. this is in line with latest available inflation forecasts from public sources. medium to longer - term inflation expectations according to both survey and market based measures remain well anchored in line with the ecb ’ s aim of keeping inflation rates below, but close to, 2 % over the medium term. as to monetary and credit developments, following double digit growth rates in the build - up of the financial crisis, signalling risks for macroeconomic instabilities and price stability, annual growth in the broad monetary aggregate m3