the us and elsewhere in the past – which would make filtering and reading the signals coming from money a difficult undertaking. but the central bank should not deny itself the opportunity to take advantage of all the information that they carry with themselves. the conviction that money matters and contains invaluable information for policy is shared across central bankers wedded to different monetary policy strategies. third : while looking into conjunctural signals, a central bank should never fall prey to myopia and short - termism. monetary theory has provided a compass for measuring how the course of policy has deviated in the past and will likely deviate in future from the straight line consistent with price stability see for example m. king ( 2002 ), ‘ no money, no inflation – the role of money in the economy, ’ bank of england quarterly bulletin, summer ; and l. meyer ( 2001 ), ‘ does money matter? ’ homer jones memorial lecture ( st. louis, 28 march ), in bank of international settlement review no. 25 ( 30 march ). and a sustainable growth path. this quantity theoretic reference should be consulted regularly and taken seriously. monetary policy cannot react mechanistically to monetary variables, and the weights that a central bank attaches in its considerations to the various headline measures of money supply are state - dependent : they cannot be set in advance. thus, there may be extended periods of time in which observers do not detect reactions to monetary indicators. in our strategy, for example, the weights are conditional on the analysis of monetary shocks, which is conducted under the first pillar. this analysis is aimed at purging the developments in monetary aggregates of the noise with which they are usually observed. this analysis yields more reliable measures which can be used for policy orientation. but if deviations in these measures of money from the long - run trajectory consistent with price stability are ample and persistent, a central bank should intervene, if the anchoring properties of money are to be reinstated and made operative.

have diminished somewhat over recent weeks. as regards exchange rates, we confirm our position, expressed when the euro rose sharply, that such moves are unwelcome and undesirable for economic growth. turning to prices, annual hicp inflation was 2. 3 % in december according to eurostat ’ s flash estimate, up from 2. 2 % in november. annual hicp inflation rates of above 2 % are likely to persist over the coming months, notwithstanding the recent oil price decline. looking further ahead, however, the available information indicates that, barring further adverse shocks, hicp inflation will fall below 2 % in the course of 2005. moreover, the latest indicators do not suggest that underlying domestic inflationary pressures are building up in the euro area. wage increases remain contained, against the background of ongoing moderate economic growth and weak labour markets. in the context of what is a broadly favourable outlook for price developments over the medium term, upside risks to price stability need to be taken into account. given past oil price rises, there is a continued need to avoid second - round effects in wage and price - setting throughout the economy. responsibility on the part of social partners remains very important. moreover, developments in indirect taxes and administered prices require close monitoring. turning to the monetary analysis, the latest data confirm our previous assessment. monetary and credit growth strengthened in the second half of 2004, largely as a consequence of the prevailing low level of interest rates. given the strength of monetary dynamics over the past few years, there remains significantly more liquidity in the euro area than is required to finance non - inflationary growth. overall, the monetary analysis points to upside risks to price stability over the medium to longer term. at the same time, the combination of high excess liquidity and strong credit growth could in some countries become a source of unsustainable price increases in property markets. to sum up, the economic analysis suggests that underlying domestic inflationary pressures are contained but upside risks to price stability over the medium term need to be monitored closely. in this context, it is crucial that there is no spillover from current short - term developments in consumer price inflation to long - term inflation expectations. cross - checking with the monetary analysis supports the case for continued vigilance with regard to the materialisation of risks to price stability over the medium term. with regard to both fiscal policies and structural reforms, the governments and institutions of the european union will have to confront many important challenges in the course of 2005