In this respect, indicators of inflation expectations over the medium to longer term remain firmly anchored in line with the Governing Council’s aim of keeping inflation rates below, but close to, 2% over the medium term. Risks to the outlook for inflation are broadly balanced. On the downside they relate, in particular, to the outlook for economic activity, while on the upside they relate to higher than expected commodity prices. Furthermore, increases in indirect taxation and administered prices may be stronger than currently expected owing to the need for fiscal consolidation in the coming years. Turning to the monetary analysis, the latest data confirm a continued deceleration in monetary dynamics. In May, the annual growth rate of M3 declined further to 3.7%, with that of loans to the private sector falling further to 1.8% – the lowest rates since the start of Stage Three of Economic and Monetary Union. This concurrent deceleration supports the assessment of a slower underlying pace of monetary expansion and low inflationary pressures over the medium term. In May, the outstanding amounts of most components of M3 showed a contraction, reflecting, to a large extent, the recent declines in interest rates paid on short-term deposits and marketable instruments and the increased allocation of funds to instruments outside M3 that these may have fostered. Following a substantial strengthening in April, the growth of M1, while having remained strong, also moderated in May. The short-term developments in M3 have been volatile over the past few months.
This is particularly relevant in the current setting of low demand for financing in Spain, in which this trend could contribute to further eroding the net interest margins in some market segments. To conclude, let me sum up the key messages I would like to convey. In recent years, Spanish credit institutions have made sterling efforts to overcome the problems stemming from the crisis and to adapt to the new and stricter regulatory requirements. This has been reflected in the significant improvements in their solvency, profitability and asset quality. However, despite these improvements, Spanish banks continue to face major challenges, largely shared with other euro area banking systems. These include, most notably: (i) stepping up sales of non-productive assets (ii) the need to strengthen capital, (iii) addressing profitability challenges without unduly easing credit standards and, lastly (iv) harnessing new technologies in a competitive environment of potential new competitors. In an economy as highly banked as Spain’s, overcoming these challenges is key to the banking industry gaining a sufficient position of strength from which to contribute to economic growth and job creation. Thank you for your attention. 8/8