inflation rates are projected to remain elevated in 2006 and 2007, with risks to this outlook remaining clearly on the upside. given the ongoing marked dynamism of monetary growth in an environment of ample liquidity, a cross - check of the outcome of the economic analysis with that of the monetary analysis supports the assessment that upside risks to price stability prevail over the medium to longer term. it is essential that inflation expectations remain firmly anchored at levels consistent with price stability. if our assumptions and baseline scenario continue to be confirmed, it will remain warranted to further withdraw monetary accommodation. indeed, acting in a firm and timely manner remains essential to ensuring price stability over the medium term. the governing council will therefore exercise strong vigilance. as regards fiscal policy, euro area countries have recently notified their deficit and debt figures for 2005 to the european commission, and most have reported on developments in 2006 and budget plans for 2007. while, on average, this information points to further, albeit slow improvements in budget balances, this should not give rise to complacency. it is important that commitments under the revised stability and growth pact are met in all euro area countries. it is essential that budgetary consolidation is strengthened in the current economic upswing and that pro - cyclical policies are avoided. this would boost confidence among market participants and the public. to that effect any revenue windfalls from faster than expected growth should be pre - committed and used in full to speed up deficit reduction or to increase surpluses in good times. the prospects for attaining sound budgetary positions improve when consolidation plans are based on credible commitments to reduce expenditure ratios and better expenditure control mechanisms. finally, let me reiterate previous calls for high quality statistical data and sound statistical reporting, which are key for the prevention and correction of budgetary imbalances. as regards structural reforms, the governing council stressed the importance of creating a fully operational single market and flexible product and labour markets in order to enhance the adjustment capacity of the euro area economy and its resilience to external shocks. liberalising product markets to allow more competition would raise incentives for firms to invest and innovate, thereby raising productivity growth. removing labour market rigidities and distortions in wage and price formation are key conditions for promoting more homogeneous cost and price competitiveness trends among euro area countries and for generating sustained output growth and job creation. in particular, wage increases should be guided, in general, by the trend in labour productivity growth, while taking full account of

the outlook for price stability remain clearly on the upside. they continue to include a stronger pass - through of past oil price rises into consumer prices than currently anticipated and additional increases in administered prices and indirect taxes beyond those announced thus far. furthermore, renewed increases in oil prices cannot be excluded. more fundamentally, given the favourable momentum of real gdp growth observed over the past few quarters and the ongoing improvement in labour markets, stronger than currently expected wage developments pose substantial upward risks to price stability. against this background, it is crucial that the social partners continue to meet their responsibilities, particularly in the context of a more favourable environment for economic activity and employment. the monetary analysis continues to point to upside risks to price stability at medium to longer horizons. annual m3 growth rose again to 8. 5 % in september, after having increased to 8. 2 % in august. although the annual growth rate of m1 has moderated somewhat in recent months, reflecting shifts into instruments with more market - related returns in a context of rising interest rates, this has been more than compensated by the stronger expansion of the other components of m3. more generally, the rate of monetary and credit expansion remains rapid, reflecting the still low level of interest rates in the euro area and the strengthening of economic activity. in particular, loans to the private sector continue to grow at double - digit rates on an annual basis, their dynamism remaining broadly based across the household and corporate sectors. while the growth of household borrowing shows some signs of stabilisation, albeit at very high rates, the growth of borrowing by non - financial corporations continues to trend upwards and has now reached rates of over 12 % on an annual basis, the highest seen since the early 1990s. thus, when the counterparts of m3 are considered, the main driver of strong monetary growth remains the expansion of credit to the private sector. taking the appropriate medium - term perspective, the latest developments are consistent with a continuation of the persistent upward trend in the underlying rate of monetary expansion, identified by the ecb ’ s monetary analysis since mid - 2004. furthermore, following several years of robust monetary growth, the liquidity situation in the euro area is ample by all plausible measures. continued strong monetary and credit growth in an environment of ample liquidity point to upside risks to price stability over the medium to longer term. monetary developments therefore continue to require very careful monitoring, particularly against the background of improved economic conditions and strong property market developments in many parts of the euro area. to sum up, annual