I should also like to reiterate that the prospects for a stronger potential for growth in the euro area will depend very much on progress made in enhancing the flexibility of labour and goods markets in the euro area. Although reform efforts in several countries have been heading in the right direction, there is still much to be done when looking at the area as a whole. Finally, let me also say a few words about recent exchange rate developments. I noted earlier that, from a monetary policy point of view, these developments are a cause for concern as they add to the upward pressure on consumer prices in the euro area. These concerns are compounded by the fact that the exchange rate of the euro does not appear appropriate when looking at economic fundamentals. As you are aware, we have been expressing this concern for some time. In the meantime, we have witnessed a considerable improvement in the economic growth prospects for the euro area. At the same time, owing to measures taken by the Governing Council, the outlook for price stability in the medium term in the euro area has remained intact. At present, inflation in the euro area is among the lowest in the world. The fact that the euro has continued to depreciate over recent months is not in line with these strong economic fundamentals in the euro area. Recent global exchange rate developments are also not in line with international balance of payments positions.
Taken together, these factors should underpin the growth of private consumption and investment, and thus that of domestic demand. The positive outlook for the euro area is also supported by external developments. The outlook for growth of the world economy, and thus for growth of euro area exports, has remained favourable. Forecasts of world growth have consistently been revised upwards over the past few months. Expectations of a period of sustained economic growth in the euro area can also be found in euro area bond markets. Overall, longer-term bond yields in the euro area have shown a very high level of stability in the course of this year, with fluctuations being contained within a relatively narrow range. The annual rate of increase in the Harmonised Index of Consumer Prices (HICP) was 2.4% in July 2000. Recent consumer price developments in the euro area have been very much influenced by the strong rise in oil prices and the depreciation of the exchange rate of the euro. 1  BIS Review 74/2000  While monetary policy cannot address short-term developments in prices, it is imperative for monetary policy that medium-term upward pressure on prices be contained. The risk that the current pressure on the HICP might spill over onto costs and prices determined in the domestic economy must be taken seriously. This holds true in particular in the context of the favourable prospects for economic growth. The Governing Council reacted to this picture by raising the main ECB interest rates at its meeting on 31 August 2000.