. cross - checking the outcome of our economic analysis with that of our monetary analysis supports the assessment that upside risks to price stability prevail over the medium to longer term. accordingly, the governing council will continue to monitor very closely all developments and ensure that risks to price stability over the medium term do not materialise. given the favourable economic environment, the governing council is of the view that the ecb ’ s monetary policy continues to be on the accommodative side, with the key ecb interest rates moderate, money and credit growth vigorous and liquidity abundant. consequently, firm and timely action is warranted to ensure price stability over the medium term. it is precisely because the ecb has always acted in a firm and timely manner in the past years that our monetary policy, with its medium - term orientation, has succeeded in solidly anchoring longer - term inflation expectations at levels broadly consistent with price stability. as explained on various occasions before, it is through the continued anchoring of inflation expectations that monetary policy can make an ongoing contribution towards supporting sustainable economic growth and job creation in the euro area. fiscal developments and structural reforms fiscal developments in euro area countries in 2006 turned out to be significantly better than anticipated. however, this budgetary improvement was largely the result of buoyant tax revenues in an environment of stronger - than - expected economic growth, offsetting in some cases higher - thanplanned public expenditure. against the background of the current economic “ good times ”, it remains essential to step up the pace of fiscal consolidation in 2007 and beyond, allowing unexpected tax revenue to be fully allocated to deficit and debt reduction. after all, common sense dictates that “ the best time to repair the roof is when the sun is shining ”. it is important that all euro area countries achieve their medium - term objective of a sound fiscal position as soon as possible, and by 2010 at the latest. furthermore, pro - cyclical fiscal policies should be avoided in all countries. it is vital to ensure fiscal sustainability in view of ageing populations in order to support long - term growth and facilitate the conduct of a stability - oriented monetary policy. with regard to structural reforms, euro area countries have become increasingly aware in recent years of the need to adjust to the challenges of increased global competition, ageing populations and accelerating technological change. countries should make the best use of the current “ good times ” to make further progress on the path of economic reform, especially in view of the

area. however, the increase in the average real cost of financing has been relatively modest over the past few months, although credit spreads for parts of the corporate sector have widened substantially. moreover, the considerable tightening of credit standards reported by banks ( in the january 2008 bank lending survey for the euro area ) has taken place from a very “ loose ” level and has not significantly constrained the availability of credit. the available information suggests that the decline in securitisation activity and the re - intermediation of offbalance sheet assets onto banks ’ balance sheets have not affected substantially the supply of bank loans, and, for the time being, the re - intermediation of non - bank credit has not artificially distorted upwards the figures for credit growth. nevertheless, caution is warranted before reaching any conclusions on the likely effects of the financial market turmoil on the cost and availability of bank credit. the impact of the market turmoil on some banks ’ balance sheets has been considerable and a number of credit institutions will have to strengthen their capital positions and be more cautious in their lending policies. moreover, the time lags in the effects of a change in credit standards by banks on loan demand imply that it could be some time before their cumulative impact becomes observable. more data and further analysis are required before a better assessment can be made of the extent to which the ongoing process of risk reappraisal and banks ’ balance sheet adjustment will affect credit growth in the future. with regard to the prospects for price stability, the short - term inflation outlook is not satisfactory. the annual inflation rate in the euro area, which was 3. 2 % in january 2008, is likely to remain at such an elevated level significantly above 2 % in the coming months and moderate towards 2 % very gradually, and more slowly than previously envisaged. the likelihood that inflation will remain at a high level for a prolonged period underscores the importance of this temporary but protracted upward pressure on inflation not spilling over to the medium term. the assessment derived from economic analysis that there are upside risks to price stability over the medium term is confirmed by the continuing vigorous money and credit growth. it is therefore imperative that the risk of second - round effects on wage and price setting stemming from short - term inflation pressure be avoided. it is also essential that medium and long - term inflation expectations remain well anchored to price stability. the ecb remains committed to preventing second - round effects and the materialisation of upside risks to price stability over the