The risks surrounding the economic outlook for the euro area remain on the downside. They are mainly related to slow implementation of structural reforms in the euro area, geopolitical issues and imbalances in major industrialised countries. These factors have the potential to dampen sentiment for longer than currently assumed and delay further the recovery of private investment, employment and consumption.
According to Eurostat's flash estimate, euro area annual HICP inflation was 2.2 percent in December 2012, unchanged from November and down from 2.5 percent in October and 2.6 percent in August and September. On the basis of current futures prices for oil, inflation rates are expected to decline further to below 2 percent this year. Over the policy-relevant horizon, in an environment of weak economic activity in the euro area and well-anchored long-term inflation expectations, underlying price pressures should remain contained.
Risks to the outlook for price developments are seen as broadly balanced over the medium term, with downside risks stemming from weaker economic activity and upside risks relating to higher administered prices and indirect taxes, as well as higher oil prices.
Turning to the monetary analysis, the underlying pace of monetary expansion continues to be subdued. The annual growth rate of M3 remained broadly unchanged at 3.8 percent in November 2012, after 3.9 percent in October. M3 growth continued to be driven by a preference for liquid assets, as M1 growth increased further to 6.7 percent in November, from 6.5 percent in October, reflecting inflows into overnight deposits from households and non-financial corporations. Following our non-standard monetary policy measures and action by other policy-makers, a broadly based strengthening in the deposit base of MFIs in a number of stressed countries was observed. This allowed several MFIs to reduce further their reliance on Eurosystem funding and helped to reduce segmentation in financial markets. M3 growth was also supported by an inflow of capital into the euro area, as reflected in the strong increase in the net external asset position of MFIs.