Risks to the outlook for price developments continue to be seen as broadly balanced over the medium term, with upside risks relating to higher administered prices and indirect taxes, as well as higher oil prices, and downside risks stemming from weaker economic activity and, more recently, the appreciation of the euro exchange rate.

Turning to the monetary analysis, the underlying pace of monetary expansion continues to be subdued. The annual growth rate of M3 decreased to 3.3 percent in December 2012, from 3.8 percent in November. Shifts from overnight deposits to short-term time deposits led to a decrease in the annual rate of growth of M1, which declined to 6.2 percent in December, from 6.7 percent in November, and outflows from marketable instruments dampened overall M3 growth. A further strengthening in the deposit base of MFIs in a number of stressed countries took place in December, in combination with further capital inflows into the euro area, both of which continued to reduce fragmentation.

The annual growth rate of loans to the private sector (adjusted for loan sales and securitization) remained negative in December. This mainly reflected ongoing negative annual growth of loans to non-financial corporations, which was -1.3 percent in December after -1.5 percent in November. However, annual growth in MFI loans to households remained broadly unchanged at 0.7 percent in December. To a large extent, subdued loan dynamics reflect the current stage of the business cycle, heightened credit risk and the ongoing adjustment in the balance sheets of the financial and non-financial sectors. In line with these developments, the bank lending survey for the fourth quarter of 2012 confirms the weakness in credit demand and the continued effect of credit risk considerations on the tightening of credit standards. At the same time, the survey confirms the positive impact of Eurosystem measures on banks' overall funding and liquidity situation. In particular, banks reported improvements across all funding categories in the fourth quarter.

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