, annual hicp inflation was 2. 2 % in december, down from 2. 3 % in november and 2. 5 % in october. over the short term, annual inflation rates may again increase somewhat, reflecting in particular renewed increases in energy prices and some base effects. looking further ahead, indirect effects of past oil price rises on other components of the price index may gradually materialise, and already announced changes to administered prices and indirect taxes can be expected to have an upward impact on hicp inflation. meanwhile, wage dynamics have remained moderate over recent quarters and are assumed to remain so for the time being, reflecting, in particular, global competitive pressure. all in all, currently available information is broadly in line with the scenario embodied in the december 2005 eurosystem staff projections for hicp inflation over this year and next. risks to this outlook for price developments remain on the upside and include further rises in oil prices, a pass - through of oil prices into consumer prices stronger than currently envisaged, additional increases in administered prices and indirect taxes, and – more fundamentally – potential secondround effects on wage and price - setting behaviour. it is therefore crucial that the social partners continue to meet their responsibilities also in the context of a more favourable economic environment. turning to the monetary analysis, the annual growth rate of m3 remains robust, even though it moderated further in december. this moderation can be explained in part by an apparent resumption of the unwinding of past portfolio shifts, which exerts a dampening effect on headline m3 growth. however, the trend rate of monetary expansion remains strong, reflecting the stimulative impact of the prevailing low level of interest rates. in particular, growth in the most liquid components of m3 continues to be very robust and the annual growth rate of loans to the private sector has increased further. mortgage borrowing is particularly buoyant, implying a need to monitor developments in the housing market closely. overall, strong monetary and credit growth in a context of already ample liquidity in the euro area points to risks to price stability over the medium to longer term. to sum up, the economic analysis suggests that indirect effects stemming from past oil price rises and already announced changes to administered prices and indirect taxes can be expected to have an upward impact on annual hicp inflation over the coming years. it also indicates that risks to price stability over the medium term remain on the upside. cross - checking the outcome of our economic analysis with that of our monetary analysis

in matching adjustment portfolios. proxy modelling and use of management actions two areas we have reviewed recently are proxy modelling and use of management actions in internal models. i mentioned earlier that life insurers build proxy models as an approximation of more complex valuation models. they use them to calculate and rank losses under a very large number of one - year scenarios, to create a distribution of possible losses, to identify the 99. 5th percentile loss and thus to calculate the regulatory capital requirement. if an insurer calibrates a proxy model poorly, regulatory capital will be wrong, even if the underlying valuation models are broadly correct. weaknesses could also lead to bad decisions in other contexts where insurers use proxy models, including capital allocation, pricing and risk management. for example, insurers often employ proxy models for stress and scenario testing. in may 2018, the pra issued a survey to a number of life insurers with a proxy model. the responses revealed that over the previous couple of years, some insurers had improved the quality of their proxy modelling considerably. others had not made the same investment. standards of validation also varied. the best firms had increased the number of validation tests by improving the speed of valuation models, were placing the validation tests at points carefully selected to challenge the proxy model calibration and were conducting more validation after the reporting date. another area that we have reviewed recently is what future management actions insurers assume when calculating their best estimate of reserves and internal model capital. typical management actions might include, for example, an insurer assuming that it can replace reinsurance following the default of a reinsurer or at policy renewal, or a life insurer assuming that it could reduce bonus rates on a with - profits fund if it was in financial distress. solvency ii allows insurers to assume management actions provided it would be reasonable to implement them in stressed market conditions. we found that some insurers, however, were inconsistent and insufficiently rigorous in their approach. good practice is to bring all future management actions together into a single document that, at least at a high level, the board can review. this plan should quantify each management action and show how it is used in the calculation of reserves, capital requirements or otherwise ( for example, in stress testing ). all speeches are available online at www. bankofengland. co. uk / publications / pages / speeches / default. aspx model risk management i have focused so far on