non - financial sectors, both inside and outside the euro area. in addition, low capacity utilisation rates are likely to dampen investment, and unemployment in the euro area is expected to increase somewhat further, thereby lowering consumption growth. for these reasons, the euro area economy is expected to grow only at a moderate pace in 2010 and the recovery process could be uneven. the governing council continues to view the risks to this outlook as broadly balanced. on the upside, there may be stronger than anticipated effects stemming from the extensive macroeconomic stimulus being provided and from other policy measures taken. confidence may also improve further, and the global economy as well as foreign trade may recover more strongly than projected. on the downside, concerns remain relating to a stronger or more protracted than expected negative feedback loop between the real economy and the financial sector, renewed increases in oil and other commodity prices, the intensification of protectionist pressures and the possibility of disruptive market movements related to the correction of global imbalances. with regard to price developments, as expected, euro area annual hicp inflation increased further in december 2009 to stand at 0. 9 %, after 0. 5 % in november. the rise mainly reflects upward base effects stemming mostly from the drop in global energy prices a year ago. inflation is expected to remain around 1 % in the near term. looking further ahead, inflation is expected to remain moderate over the policy - relevant horizon, with overall price, cost and wage developments staying subdued in line with a slow recovery in demand in the euro area and elsewhere. in this context, it is important to emphasise, once again, that inflation expectations over the medium to longer term remain firmly anchored in line with the governing council ’ s aim of keeping inflation rates below, but close to, 2 % over the medium term. risks to this outlook remain broadly balanced. they relate, in particular, to the outlook for economic activity and the evolution of commodity prices. furthermore, increases in indirect taxation and administered prices may be stronger than currently expected owing to the need for fiscal consolidation in the coming years. turning to the monetary analysis, both the annual growth rates of m3 and loans to the private sector were negative in november, standing at – 0. 2 % and – 0. 7 % respectively. the concurrent declines to historically low growth rates recorded in these two series over the past months support the assessment of a decelerating underlying pace of monetary expansion and low inflationary pressures over the medium term. looking ahead

detect sources of risk or vulnerability within and outside the financial system, and ( ii ) risk assessment aiming at evaluating the potential severity of the identified risks. risk surveillance should aim at leaving “ no stone unturned ” in reviewing potential vulnerabilities and risks to the stability of the financial system. it relies on the continuous and rigorous monitoring of financial markets, financial institutions and the economy at large, with the goal of detecting potential vulnerabilities. it is important at this initial stage to cast the net as wide as possible to ensure that no risk is missed or overlooked. early warning indicators and a broad range of financial stability indicators can also be useful in this analysis. a solid statistical information - base and market intelligence efforts are also of the essence in the risk identification process with the view to support. the second component of the analysis – risk assessment – aims at evaluating the potential impact or severity of the risks identified, should these crystallize, as well characterising the ability of the financial system to absorb the shocks. both the likelihood, the probability of a risk scenario, and the severity of a specific risk, need to be considered in an overall assessment. macro stress - testing models are essential tools to assess the resilience of the financial system to risks identified in the surveillance process. this approach might sound mechanistic but the analysis can clearly not be fully technical. both rigorous quantitative - based risk analysis and expert judgement should be seen as input to inform decisions of policy makers on how to address the risks identified as material. when it comes to macro - prudential policy to mitigate the risks to financial stability, a key part of developing macro - prudential instruments relies on the adaptation of existing microprudential tools, such as prudential standards ( relating to capital requirements, liquidity buffers ) and limits on activities that increase systemic vulnerabilities and risks. in addressing the development of financial imbalances overtime, these standards and limits might need to be varied, or adjusted in a countercyclical manner, as proposed under the new basel iii regime in terms of regulatory tools addressing macro - prudential objectives. in this context, policy instruments would need to be adjusted dynamically in response to changing assessments of financial risks. policy instruments could aim at affecting directly financial firms ’ balance sheets or at affecting them via indirect channels, such as conditioning the demand for credit by households or the corporate sector. setting limits on loan - to - value ratios or adjusting collateral