In the new forecast, the point at which inflation will begin to climb again has been postponed by half a year. If monetary policy remains unchanged, annual inflation will be 1.1% in 2005 and 1.3% in 2006. 3. Lower inflation in the longer term  After having discussed the medium-term inflation prospects, allow me now to move on to the long-term prospects. The assessment of inflation prospects in the longer term depends on a number of factors, such as the development of monetary and credit aggregates and different asset prices. Long-term forecasts are fraught with a high degree of uncertainty. In spite of this, a central bank must make a sound assessment of the effects of its monetary policy in the longer term. The need for a forward-looking stance is due to the fact that monetary policy has its strongest effect on prices only after a lag of two to three years. M1 was 5.4% below the year-earlier level in November; M2 was down by approximately 3%. M3 increased by 1.4%. Although there is still ample provision of liquidity, it has dwindled as a result of the latest developments. Compared with the September assessment, we have therefore made a downward correction of our inflation projection for the years 2006 and 2007. According to our September forecast - based on an unchanged three-month Libor rate of 0.75% inflation would have climbed to 2.9% in the second quarter of 2007. With an unchanged monetary policy, the current forecast predicts an increase of only 2.3%.
This is because making a payment is about more than just exchanging money for goods and services: it is a form of social interaction made possible by money, which has been described as “the most universal and most efficient system of mutual trust ever devised”7. Finally, a digital euro would increase privacy in digital payments thanks to the involvement of the central bank, which – unlike private suppliers of payment services – has no commercial interests related to consumer data. Ensuring privacy is an essential element of modern democracies and part of our European values. Payments must also respect people’s right to privacy in the digital era, and the design of a digital euro would have to respect this principle. This is a core aspect we will look at – indeed, we have already started exploring possible ways of enhancing privacy.8 At the same time, payments in a digital euro – just like any form of payment – would have to respect the rules on countering money laundering, the financing of terrorism and tax evasion. This would enable public authorities to combat any illegal activity more effectively. To summarise, the digital euro would still be a euro, only in digital form. It would both shape and promote the digitalisation of payments, while reducing the associated risks. This would in turn support the ongoing digitalisation and modernisation of the European economy.9  Why might we need a digital euro? A digital euro would be critically important in a number of scenarios, which are analysed in our report.