Although there are signs of improvements in the recovery, many economies are still in a weak financial position, and domestic demand is expected to grow at low rates for some time. After years of financial excesses, households in many countries, particularly in the U.S., have accumulated excessive debt. Many advanced economies also have weak fiscal positions, due to fiscal expansions implemented to contain the recession, measures to support the banking sector, or simply the fiscal profligacy that took place prior to the crisis. In particular, the level of government debt in some European countries will require a significant and protracted fiscal consolidation to avoid insolvency. Therefore, the deleveraging process of households and governments implies that domestic demand is unlikely to be an engine of growth. As a consequence of this scenario, the inflationary pressures will be relatively contained. The rise in commodity prices is having effects on headline inflation, but the propagation to other prices will be limited because of a negative output gap. This is in sharp contrast with the situation in emerging market economies (EMEs). Accordingly, monetary policy in advanced economies will remain expansionary, and despite some tightening in the near future, they will still have lower interest rates than those in EMEs, and which will be well below what used to be considered a neutral stance. In contrast, EMEs have been growing strongly, and after suffering moderately from the global crisis, many have already reached levels of full capacity, and some of them may even be overheating (Figure 1).

The immediate impact of the war in Ukraine on financial stability has so far been adequately absorbed as the direct exposures of the financial sector to Russia were low. However, risks to banks and financial stability may materialise through second-round effects and indirect channels from pre-existing vulnerabilities, notably those associated with (i) sectors most dependent on energy commodities, (ii) the development of leveraged finance and (iii) exposure to cyber-attacks. In this respect, particular attention should be paid to potentially sharp revaluations of high risk asset prices. The same holds true for rising prices and volatility in commodity markets and the considerable increase in margin calls on derivatives, in particular for energy and agricultural products. These have already put pressure on the liquidity of commodity market participants. Very careful monitoring of credit and liquidity risks in the energy commodities sector is therefore required, in particular to ensure that any potential default (e.g. by a trader) remains contained and does not lead to systemic contagion. Our second instrument for maintaining and strengthening banks' shock absorption capacity, after supervision, is regulation. I would like once again to stress the importance of an effective, fair and final implementation of the Basel III Accord, in its final 2017 version. As I said it last year, quoting the Governor, and it is even more the case today in the light of the crises we are facing: the Basel III rules represent the best possible agreement to promote financial stability at the international level.