The still strained financial markets are a further source of uncertainty. The risk of deflation in the euro area, which was never substantial, has however clearly receded since earlier this year and has now virtually disappeared. The monetary data for July showed an ongoing parallel decrease in monetary and credit annual growth. This supports our assessment of low inflationary pressures.
At the same time, the latest month-on-month growth rates of M3 did not, on balance, point to a further deceleration in monetary growth. While developments in M3 contain relevant information about future inflation over medium to long-term horizons, developments in M1 typically have good leading indicator properties for turning points in real GDP growth in the euro area.