In the event that the downwards risks I have mentioned weaken the inflation outlook over the medium term more fundamentally than we currently project, we would not hesitate to act. Should more monetary policy impulse become necessary. The ECB is determined to use all available instruments to achieve its mandate over the medium term. As for potential risks to financial stability, we do not see them materialising at present but we will naturally be monitoring them closely. Over the past two years, national authorities across Europe have been active in developing and implementing macroprudential policy measures but their effectiveness still has to be tested. Before addressing my second topic, let me mention Greece again. The comprehensive agreement that has been reached involved a long and complication discussion. But if, as we all hope, the new programme is completely  BIS central bankers’ speeches  1  implemented, it will put Greece in a strong position to grow again and to reap the full benefits of participating in our common currency. The negotiations over the summer once again confirmed that Europe’s institutional framework is not yet commensurate with the requirements of sharing a single currency. A more complete union is necessary. From the ECB’s perspective, two elements are of particular importance. First, despite the best efforts of everyone involved, the crisis has revealed the need for a political centre to economic and monetary union.
In the euro area, inflation has been approximately in line with the objective defined by the European Central Bank. The preliminary estimate for May points towards rising inflation, particularly as a result of higher oil prices. Capacity utilisation in the euro area is low and unemployment remains high. Growth potential is weaker than in the US, although GDP growth picked up in the first quarter. As in the US, private consumption is an important factor driving growth. Increased net exports also contributed to growth in the euro area in the first quarter. Interest rate expectations in the euro area have also been revised upwards somewhat recently. The market now expects the ECB to raise interest rates at the end of 2004 or the beginning of 2005. Interest rate expectations were continuously revised downwards up to March 2004. Interest rates abroad have been unusually low for 2½ years. This has been the greatest challenge for our monetary policy. Even though a somewhat swifter rise is now expected, it appears that interest rates among our most important trading partners will remain low for a period ahead. In Norway, output growth has picked up after a growth pause. The interest rate reductions since 2002 have contributed to the turnaround and a soft landing for the economy. Private consumption is showing fairly strong growth. Household demand will probably be the most important driving force in the Norwegian economy in the period ahead.