increase the likelihood of the feared de - anchoring of inflation expectations. on the information available, there is no evidence of such effects occurring at present, at least on a widespread basis. wage settlements in the euro area have gathered pace since the end of last year, with increases reaching 2. 5 % according to the latest data. although they are expected to rise further in 2023, the increases currently projected would, in principle, be compatible with the 2 % inflation target once trend productivity growth is taken into account. broadly speaking, profit margins have also remained moderate, although unevenly across sectors. however, the longer the current high inflation persists, the greater the probability of these second - round effects occurring. naturally, the extent of the economic downturn, over which, as i indicated earlier, there is significant uncertainty, and its effects on wages and profit margins, will be key determinants of the medium - term inflation outlook and, therefore, of our monetary policy decisions. ultimately, our next decisions will be based on the incoming data and their implications for achieving our medium - term inflation target, in line with the “ meeting - to - meeting ” approach that we have adopted. in any event, interest rates will have to reach a level that allows us to ensure a gradual convergence of inflation to our medium - term target, and how quickly we reach that level will be conditioned by that same target. on the financial markets, the process of monetary policy normalisation has translated into a significant increase in market interest rates. specifically, since early 2022 the 12 - month euribor has climbed by more than 250 bp to 2. 26 %, while the 10 - year overnight index swap ( ois ) rate ( typically used as the risk - free benchmark interest rate ) has risen by 210 bp. these increases have also been gradually passing through to the cost of bank funding for firms and households. this tightening of financial conditions will help to contain inflationary pressures. in an adverse scenario such as the present one, other economic policies also have a central role to play, in the shape of an incomes agreement, selective support for the most vulnerable, resolute supply - side policies, a firm commitment to fiscal sustainability and reinforcement of the european project against the current inflationary backdrop, profit margins and wages are key to avoiding a feedback loop that results in an inflationary spiral. this is precisely the overriding objective of the incomes agreement that we at the banco de espana have been advocating in recent

##g has set us. the layout of the report provides a good insight into the way we work. it begins with a review of international events, describing growth and prices in the financial markets and on various assets. in this context, the analyses and assessments of developments outside the swedish borders play an increasing role, in line with the ongoing internationalisation process. after describing the environment in which the banks and their borrowers operate, we devote a chapter to a survey of how the borrowers - households and firms - have been affected. what is the level of indebtedness and the ability to service debts? are there any risks entailed in their actions? if things go well for the banks ’ borrowers, they normally go well for the banks. developments over the past five years, with the swedish banks increasingly investing abroad, have meant that a substantial percentage of their borrowers are in other countries - mainly in the baltic region. this means that our analyses cannot focus exclusively on sweden ; we must also take into account developments in, for instance, neighbouring nordic countries. the banks own actions can also affect the stability of the payment system. what strategic choices do the banks make? profitability is an important component here - if the banks ’ profitability is poor, it may drive them to invest in more risky projects in an attempt to regain profitability. what loan losses might the banks suffer in the future? by looking at the quality of the banks ’ assets, we link the analysis of the banks to the analysis of the borrowers. might the banks suffer liquidity problems? we study the banks ’ financing capacity to obtain an impression of this. the final chapter contains an analysis of the financial infrastructure. this must function so efficiently that any problems arising within an individual financial institution or sub - market will not spread to other participants or markets. nor should there be any problems in the infrastructure resulting from shocks to the systems themselves. analysis of the infrastructure is made difficult by the fact that it also requires fairly detailed insight into how different computer systems are constructed - technological issues thus become more important here than in other areas. each report concludes with one or more articles. these articles give us an opportunity for more in - depth analysis of various fields or for presenting the results of various studies. this is all done with the aim of increasing our knowledge and making us even better at analysing and overseeing the financial system. although the standard layout of the report provides some form of framework for our analysis work, we are