pace of global demand, falling consumer and business confidence, and unfavourable effects on financing conditions resulting from ongoing tensions in a number of euro area sovereign debt markets. at the same time, we continue to expect euro area economic activity to benefit from continued positive growth in the emerging market economies as well as from the low short - term interest rates and the various measures taken to support the functioning of the financial sector. in the governing council ’ s assessment, the risks to the economic outlook for the euro area remain on the downside in an environment of particularly high uncertainty. downside risks notably relate to the ongoing tensions in some segments of the financial markets in the euro area and at the global level, as well as to the potential for these pressures to further spill over into the euro area real economy. they also relate to the still high energy prices, protectionist pressures and the possibility of a disorderly correction of global imbalances. with regard to price developments, euro area annual hicp inflation was 3. 0 % in september 2011, according to eurostat ’ s flash estimate, after 2. 5 % in august. inflation rates have been at elevated levels since the end of last year, mainly driven by higher energy and other commodity prices. looking ahead, inflation rates are likely to stay clearly above 2 % over the coming months but to decline thereafter. this pattern reflects the expectation of relatively stable wage growth developments in the context of moderate economic growth. the governing council continues to view the risks to the medium - term outlook for price developments as broadly balanced. on the upside, the main risks relate to the possibility of increases in indirect taxes and administered prices, owing to the need for fiscal consolidation in the coming years. the main downside risks relate to the impact of weaker than expected growth in the euro area and globally. turning to the monetary analysis, the annual growth rate of m3 was 2. 8 % in august 2011, up from 2. 1 % in july. the annual growth rate of loans to the private sector, adjusted for loan sales and securitisation, was 2. 8 % in august, after 2. 6 % in july. a number of factors, possibly related to the intensification of tensions in some financial markets, could have had an upward effect on the components of m3. in particular, sizeable inflows into overnight deposits and money market fund shares / units, as well as a substantial inflow into repurchase agreements, appear to have driven monetary developments

in august. the inflow into repurchase agreements mainly reflected secured lending in the interbank market, which was increasingly settled via central counterparties that are allocated to the money - holding sector. overall, m3 growth was driven in particular by the increase in the annual growth rate of m1 from 1. 0 % in july to 1. 7 % in august and the increase in the annual growth rate of marketable instruments. bis central bankers ’ speeches on the counterpart side, the annual growth rate of loans to non - financial corporations and to households in august, both adjusted for loan sales and securitisation, remained unchanged from july, at 2. 2 % and 2. 7 % respectively. taking the appropriate medium - term perspective, trends in broad money and loan growth have broadly stabilised over recent months. overall, the underlying pace of monetary expansion thus remains moderate. the situation of the banking sector calls for particular attention, taking into account the interplay between sovereign risk issues and banks ’ funding needs. as we have done on previous occasions, the governing council urges banks to do all that is necessary to reinforce their balance sheets, to retain earnings, to ensure moderation in remuneration, and to turn to the market to strengthen further their capital bases. where necessary, they should take full advantage of government support measures, which should be made totally operational, including the possibility in future for the european financial stability facility ( efsf ) to lend to governments in order to recapitalise banks. to sum up, based on its regular economic and monetary analyses, the governing council decided to keep the key ecb interest rates unchanged. inflation has remained elevated and incoming information has confirmed our view that inflation is likely to stay above 2 % over the months ahead but to decline thereafter. a cross - check with the information from our monetary analysis confirms that the underlying pace of monetary expansion continues to be moderate. ongoing tensions in financial markets and unfavourable effects on financing conditions are likely to dampen the pace of economic growth in the euro area in the second half of this year. the economic outlook remains subject to particularly high uncertainty and intensified downside risks. at the same time, short - term interest rates remain low. it remains essential for monetary policy to maintain price stability over the medium term, thereby ensuring a firm anchoring of inflation expectations in the euro area in line with our aim of maintaining inflation rates below, but close to, 2 % over the medium term. such anchoring is a