FRANKFURT, August 7 - Following is the full text of the editorial section in the European Central Bank's August bulletin: At its meeting on 31 July 2003, the Governing Council of the ECB decided to leave the minimum bid rate on the main refinancing operations of the Eurosystem unchanged at 2.0%. The interest rates on the marginal lending facility and the deposit facility were also left unchanged at 3.0% and 1.0% respectively. Recent economic and monetary information confirmed the assessment that the current monetary policy stance is appropriate as the outlook for price stability over the medium term remains favourable. The Governing Council will continue to monitor carefully all factors that might affect this assessment. As regards the economic analysis underlying this assessment, economic activity in the euro area remained subdued in the first half of 2003, broadly in line with previous expectations. At the same time, there is increasing reason to expect that economic activity will recover gradually in the second half of 2003 and strengthen further in 2004. In the euro area, there are signs that economic confidence is stabilising. The increase in real disposable income owing to past improvements in the terms of trade of the euro area should favour consumption growth, while the low level of interest rates and, more generally, favourable financing conditions should support investment. In addition, there are increasing signs that external demand will contribute to the recovery in the euro area, as recent economic data in several regions of the world tend to confirm earlier expectations of some strengthening in economic activity. This should help to compensate for the negative effects on external demand from the appreciation of the exchange rate of the euro. Financial market developments are also in line with expectations of a gradual recovery of economic growth in the euro area and elsewhere. Risks to this main scenario remain, however, on the downside, although they may have slightly declined recently. In particular, the need for a further correction of macroeconomic imbalances outside the euro area may still hamper a sustained recovery in the global economy. In the euro area, uncertainty surrounds the extent of the adjustment still needed in the corporate sector to enhance productivity and profitability, although the prolonged period of low interest rates should have largely facilitated this process and should therefore help to safeguard against downside risks to economic growth. Concerning the outlook for prices, developments in food prices (partly reflecting weather conditions) and in oil prices may contribute to some temporary and limited volatility in inflation rates. However, annual HICP inflation rates should still hover around 2% over the remainder of the year. Beyond the short term, the outlook continues to be favourable. Annual inflation rates are expected to fall in 2004 and remain below 2%. In addition to base effects, further dampening effects on inflation stemming from the pass-through of the past appreciation of the exchange rate of the euro are expected. The gradual economic recovery should be accompanied by moderate wage developments and price-setting behaviour and is not therefore expected to contribute to price pressures. This picture is reflected in available forecasts and projections, as well as in information implied in bond yields, which all indicate that inflation expectations in the euro area are firmly anchored at a level below but close to 2% over the medium term. Turning to the monetary analysis, liquidity has continued to accumulate in the euro area and therefore remains ample, significantly above what is needed to finance noninflationary growth. The low level of interest rates in the euro area across the maturity spectrum has contributed to high demand for liquid assets. The current level of interest rates is helping to counteract the negative effects on credit demand resulting from the weak economic activity in the euro area. In fact, in the course of this year, growth in loans to the private sector seems to have stabilised, at levels which are not very low by historical standards. Overall, even though a large part of the excess liquidity in the euro area has been caused by portfolio shifts, the ample liquidity needs to be closely monitored. In sum, the economic analysis confirms the expectation that inflation will be below but close to 2% over the medium term. This picture is consistent with expectations of a gradual recovery occurring in 2003, followed by a further strengthening later on, and takes into account the effects of the past appreciation of the euro. At the same time, the strong expansion of M3 should, in view of the current economic situation, not be seen as adversely affecting this outlook for the time being. Hence, cross-checking the information from the two pillars points to a favourable outlook for price stability over the medium term, which is the horizon relevant for monetary policy. At the current juncture, it is important that all policy-makers in the euro area contribute to creating a climate conducive to a recovery in confidence of economic agents. In the area of fiscal policy, when the budget plans for 2004 are being finalised, the correction of severe disequilibria in public finances in some countries must be a priority. In full respect of the Stability and Growth Pact rules and in strict compliance with the recommendations of the ECOFIN Council, governments should stick to credible medium-term consolidation strategies. These strategies should aim to restore private incentives to work and invest, thereby underpinning the growth potential of the euro area economy, and should include a frontloaded and durable retrenchment of primary public spending. Such efforts on the fiscal front should be accompanied by decisive steps in the field of structural reform in product and labour markets, which would lead to a more efficient allocation of resources by removing rigidities constraining the growth potential of the euro area. This issue of the Monthly Bulletin contains three articles. The first reviews and explains the reasons for the changes to the Eurosystem's operational framework for monetary policy, which will be effective as from March 2004. The second provides an overview of recent developments in the euro area banking sector. The third analyses the developments in the international cost and price competitiveness of euro area firms.