, not least as oil price developments imply some upward pressure in the short term. beyond the short term, we continue to expect annual inflation rates to fall below 2 % in 2004, stabilising at levels consistent with price stability. this expectation is based on the assumption of moderate wage developments in the context of a gradual economic recovery. moreover, the significant past strengthening of the external value of the euro should continue to have lagged effects which will limit upward pressure on prices, despite some recent declines in the level of the euro exchange rate. over longer time horizons, inflation expectations in the euro area seem to be well anchored at levels below but close to 2 %. as regards our monetary analysis, monetary growth has remained strong in recent months. as a consequence, there is significantly more liquidity available in the euro area than is needed to finance non - inflationary growth. this high excess liquidity is partly due to portfolio shifts and an increase in precautionary savings. however, the low levels of interest rates have contributed to the high demand for liquid assets. the current level of interest rates is also counterbalancing the negative impact of subdued economic growth on credit demand. in fact, the growth of loans to the private sector has stabilised at relatively robust levels since the beginning of the year. at the current juncture, the ample liquidity is not expected to translate into inflationary pressure. however, monetary growth needs to be closely monitored, as the significant amount of excess liquidity could become a source of concern if it were to persist when economic activity strengthens significantly. to sum up, and cross - checking the information from the two pillars, our economic analysis confirms the expectation that price pressures will remain subdued in the context of a gradual economic recovery and moderate import price and wage developments. the strong monetary expansion should not, in view of the economic situation, be seen as adversely affecting this outlook for the time being. overall, therefore, the medium - term outlook for price stability remains favourable. against this background, the key ecb interest rates are considered appropriate at present. clearly, the governing council will continue to carefully monitor all factors that might affect this assessment. taking a longer - term view, the current level of short - term nominal interest rates in the euro area is the lowest recorded over the past 50 years. more importantly, the low level of interest rates is at present associated with inflation expectations that are compatible with price stability. this has not often been the case in the past.

triggering such widespread turmoil? unfortunately, a lot of what has been unfolding has confirmed our fears of last june. first, it has become evident that the risks incurred by many banks were too high overall. there was an ever increasing willingness on the part of banks to accept high risk, which, for example, resulted in strong growth in lending and expanding balance sheets. moreover, markets probably assessed existing risks too optimistically, as was evident in view of the extraordinarily low risk premiums on bonds, for example. second, banks'increasing uncertainty about their own risks in the structured credit market and the creditworthiness of their counterparties turned out to be a handicap. even the affected banks themselves did not know which contingent liabilities should be recorded on their balance sheets. moreover, they had a lot of difficulty gauging the creditworthiness of their counterparties quickly and with sufficient accuracy. this confidence problem was particularly apparent in the interbank market. the risk premium for unsecured interbank loans has more than tripled since the onset of the us mortgage crisis. and, third, it has become clear that risk management has its limitations. in the area of market risk, events have occurred that – according to the models used – should not even have been possible, or at least would have been considered extremely unlikely. in the case of liquidity risks, it has become clear that assumptions and precautions based on normal times are not appropriate in extraordinary market situations. possible risks : contagion effects in related markets and deterioration of environment what comes next? is the worst already past? unfortunately, there is no clear answer to this question. a risk analysis reveals that, ultimately, the future course of the crisis is likely to be determined by two major risks. first, it is not impossible that problems which have so far been limited to a few partial markets could spill over to additional markets. such a danger of contagion mainly exists for related credit markets that have so far been largely unaffected by the turmoil. these include, for example, commercial real estate. risk premiums on these securities have been pointing in a clear upward direction of late ( cf. graph 2 ). the same development can be observed for us corporate bonds. however, by historical standards, the delinquency rate on credit card loans remains at a very low level, even though it rose in the third quarter ( cf. graph 3 ). graph 2 : risk yield premiums on commercial mortgage - backed securities 2