in global commodity prices over the past few months. looking forward, lower commodity prices and weakening demand confirm that inflationary pressures in the euro area are diminishing. owing mainly to base effects stemming from the past behaviour of energy prices, headline annual inflation rates are projected to decline further in the coming months, possibly reaching very low levels at mid - year. however, also owing to base effects stemming from past energy price developments, inflation rates are expected to increase again in the second half of the year. hence it is likely that hicp inflation rates will fluctuate sharply during 2009. such short - term volatility is, however, not relevant from a monetary policy perspective. looking over the policy - relevant, medium - term horizon, annual hicp inflation is expected to be in line with price stability. this assessment is supported by available indicators of inflation expectations for the medium term. risks to price stability over the medium term are broadly balanced. unexpected further declines in commodity prices or a stronger than expected slowdown in the economy could put downward pressure on inflation, while upside risks to price stability could materialise particularly if the recent fall in commodity prices were to reverse or if domestic price pressures turn out to be stronger than assumed. it is therefore crucial that price and wagesetters fully live up to their responsibilities. turning to the monetary analysis, the latest evidence confirms a moderating rate of monetary expansion in the euro area. monetary trends therefore support the view that inflationary pressures and risks are diminishing. in analysing monetary developments it should be recognised that the intensification of the financial market turmoil since mid - september has the potential to affect the evolution of monetary aggregates significantly. recent money and credit data indicate that this has already had a substantial impact on the behaviour of market participants. both the broad aggregate m3 and, in particular, the components of m3 that are most closely related to the ongoing financial tensions – such as holdings of money market funds – have shown high month - to - month volatility of late. overall, however, looking to the extent possible through this volatility, the rate of broad money growth continues to moderate in line with the trend established over the past 18 months, with the intensification of financial tensions since september leading to significant substitution among the components of m3, rather than, at least so far, sharp changes in the trend of m3 itself. turning to the evolution of bank loans, the tightening of financing conditions resulting from the intensification of the

transactions accounted for 60 % of all unsecured overnight interbank lending. right after the bankruptcy, this proportion dropped to 50 %. a fall in the cross - border flow of liquidity indicates a fragmentation of the euro area money market along national borders and threatens the implementation of a common monetary policy throughout the euro area. the ecb reacted and succeeded in calming markets, including money markets, first by conducting two monetary policy operations with a three - year maturity, and then, most recently, by committing to remove redenomination risk in countries having signed to an esm assistance programme ( the so - called outright monetary transactions, omts for short ). for example, the share of the cross - border overnight transactions increased gradually from 30 % to 50 % following the omt announcement. the rise and fall of the euribor - ois spread, of the use of the ecb ’ s deposit facility and the proportion of cross - border transactions all indicate that banks are more risk - averse than they were before the financial crisis. money markets, especially unsecured ones, suffer from counterparty risk, that is, the fear of not being repaid. accordingly, driven by the desire to protect and ensure repayment, transactions in money markets have become both more short - term and secured. there is no official data on the overall size of the repo market in the euro area, although surveys are regularly conducted by icma and the ecb. according to the latest icma survey, the total value of repo contracts outstanding on the books of the 62 participating institutions was €5. 6 trillion in june 2012, down from €6. 2 trillion in december 2011. 6 the ecb ’ s money market study of see, for example, f. heider, m. hoerova and c. holthausen, “ liquidity hoarding and interbank market spreads : the role of counterparty risk ”, ecb working paper no 1126, 2009. see also b. cœure, “ the importance of money markets ”, speech delivered at the morgan stanley 16th annual global investment seminar, tourrettes, provence, 16 june 2012. injecting liquidity in the financial system increases the assets of the eurosystem, which leads to an equivalent increase in liabilities, in this case in the form of more deposits from banks. a similar cessation of interbank lending after the lehman bankruptcy has been documented in the united states. see g