gains in real income owing to generally lower inflation. furthermore, the overall improvements in financial markets seen since last summer appear to be gradually working their way through to the real economy, as should the progress made in fiscal consolidation. this being said, the remaining necessary balance sheet adjustments in the public and private sectors will continue to weigh on economic activity. overall, euro area economic activity should stabilise and recover at a slow pace. the risks surrounding the economic outlook for the euro area continue to be on the downside. recent developments in global money and financial market conditions and related uncertainties may have the potential to negatively affect economic conditions. other downside risks include the possibility of weaker than expected domestic and global demand and slow or insufficient implementation of structural reforms in euro area countries. according to eurostat ’ s flash estimate, euro area annual hicp inflation was 1. 6 % in july 2013, unchanged from june. annual inflation rates are currently expected to temporarily fall over the coming months, owing particularly to base effects relating to energy price developments twelve months earlier. taking the appropriate medium - term perspective, underlying price pressures are expected to remain subdued, reflecting the broad - based bis central bankers ’ speeches weakness in aggregate demand and the modest pace of the recovery. medium to long - term inflation expectations continue to be firmly anchored in line with price stability. the risks to the outlook for price developments are expected to be still broadly balanced over the medium term, with upside risks relating to stronger than expected increases in administered prices and indirect taxes, as well as higher commodity prices, and downside risks stemming from weaker than expected economic activity. turning to the monetary analysis, underlying money and, in particular, credit growth remained subdued in june. annual growth in broad money ( m3 ) decreased in june to 2. 3 %, from 2. 9 % in may. moreover, annual growth in m1 decreased to 7. 5 % in june, from 8. 4 % in may. the annual rate of change of loans to the private sector weakened further. while the annual growth rate of loans to households ( adjusted for loan sales and securitisation ) remained at 0. 3 % in june, broadly unchanged since the turn of the year, the annual rate of change of loans to non - financial corporations ( adjusted for loan sales and securitisation ) was – 2. 3 % in june, after – 2. 1 % in may. weak loan dynamics continue to reflect primarily the current stage of the business cycle, heightened credit

and risks is sometimes overlooked. moderate inflation lubricates the economy by facilitating adjustments in relative prices and, above all, in wages. price and wage adjustments are among the most important instruments for companies to improve their competitiveness. studies show, however, that firms lower their wages only very rarely in absolute terms ; instead, they do not increase their employees ’ pay. in times of normal inflation of about 2 %, this works quite well, as germany showed in the first decade of this millennium. however, when inflation is excessively low competition will not allow wages to soar either and the adjustment process is delayed. low inflation thus holds back the sometimes necessary adjustment in relative wages and prices. rigid wage structures, higher unemployment and lower economic growth are the result. it is not only the cyclical factors that currently speak in favour of low interest rates. there are also global trends which affect the euro area and from which we cannot escape. since the mid1990s global real interest rates, i. e. inflation - adjusted interest rates, irrespective of the policies of the respective central bank, have been falling. real interest rates on ten - year government bonds fell from 4 % in the mid - 1990s to 2 % in 2007. to make it clear once again : this decrease occurred before the crisis and has nothing to do with the subsequent cuts in interest rates. the main reasons for the fall in real interest rates are the demographic development in the industrialised countries and the catching - up process in emerging countries such as china. people there, for the first time, are enjoying increasing prosperity and can save for the first time. this leads to high savings and the interest rate falls further as a result of the plentiful supply of savings. all of this has caused us to reduce the key interest rate to close to zero, like the central banks of almost all industrialised countries. compared with other central banks, we have been relatively cautious in handling this instrument. we left the main refinancing rate, i. e. the key rate, at 1 % until the end of 2011 and then, with the start of the recession in 2012, lowered it further. since the beginning of the initial turbulence in august 2007 and especially bis central bankers ’ speeches since the collapse of lehman brothers in october 2008 we have done a lot to supply banks with liquidity ; we have not only provided unlimited liquidity in our refinancing operations, but also extended their maturity by up to three