However, monetary policy only affects the level of prices with a lag and cannot aim to control it in the short term. Rather, monetary policy needs to be geared to the maintenance of price stability over the medium term, also in order to avoid introducing undue volatility in economic activity. In this respect, the level of long-term interest rates in the euro area, as well as various other indicators of the inflation expectations of economic agents, point to continued confidence throughout 2001 in the ECB's determination to maintain price stability in the medium term. Indeed, there were already some signs in 2001 that medium-term inflation pressures were gradually starting to decline. At the start of the year, M3 growth moderated. This, together with a decline in the growth rates of loans to the private sector, indicated that the risks to price stability from the monetary side were becoming more balanced than they had been in 2000. In addition to this, the quantification of the upward distortions to the official monetary growth figures provided evidence in early 2001 that the growth of M3 appeared to be less pronounced than originally thought. At the same time, the global economy showed some indications of weakness in early 2001, which gradually affected economic activity in the euro area through declining investment and export growth. BIS Review 26/2002  1  As a consequence, real GDP growth in the euro area was expected to moderate.
However, owing to the strong M3 growth in 2001, there is still a lot of liquidity in the economy. We therefore have to monitor monetary dynamics closely in the coming months. The persistence of excess liquidity in the economy could become a concern once the economic recovery in the euro area gathers pace. Turning to economic developments, the latest information has reinforced our expectation that real GDP growth in the euro area will recover in 2002 and that, later in the year, it should again be back in line with potential growth. The recovery should be supported by both domestic and external factors, in an environment in which financial conditions are favourable and where there are no major imbalances in the euro area. However, at the current juncture, some uncertainty still remains regarding the strength of the recovery. As regards price developments, there is no evidence thus far of a significant upward impact on the overall price level from the euro cash changeover. While some shorter-term effects cannot be ruled out, there is reason to believe that the introduction of the euro banknotes and coins will strengthen competition, thereby supporting the maintenance of price stability over the medium term. This notwithstanding, HICP inflation is currently somewhat higher than was expected a few months ago, owing partly to a significant rise in oil prices.