that in the near future the central bank will be able to state with full confidence that the peak rates have been reached. this is why our policy needs to be decided meeting by meeting and has to remain data - dependent. second, we face uncertainty about the strength of monetary policy transmission. the strength of transmission connects current decisions with expectations of future policy and therefore affects the policy stance. how strong transmission turns out to be in practice will determine the effect of a given rate hike on inflation, and this will be reflected in the expected policy path. uncertainty about transmission arises from the fact that the euro area has not been through a sustained phase of rate hikes since the mid - 2000s and has never seen rates rise so quickly. and this raises the question of how quickly and forcefully monetary policy will be transmitted to firms – via interest - sensitive spending – and households, via mortgage payments. for firms, ecb analysis finds that monetary policy shocks are typically transmitted more quickly and forcefully to manufacturing, reflecting the sector ’ s higher interest - rate sensitivity, while there is a more muted and delayed impact on services. the key question today is whether the services sector will eventually “ catch down ” – which is what we have seen in previous cycles – or whether it will be insulated from the effects of policy tightening for longer than in the past, given the strength of demand and employment in the sector. for households, there is evidence that it will take longer for policy changes to pass through to interest burdens in this tightening cycle, as a higher share of households have fixed - rate mortgages than in the mid - 2000s. at the same time, once mortgages have been repriced, the restrictive effect may be greater : gross debt - toincome ratios, which emphasise debt servicing capacity, are higher than in previous tightening cycles, while the share of homeowners with a mortgage has increased. both sources of uncertainty will only fade away with time. and that is why we have made our future policy decisions conditional on, first, the inflation outlook, second, the dynamics of underlying inflation and third, the strength of policy transmission. but to ensure that uncertainty does not interfere with our intended policy stance – in terms of both “ level ” and “ length ” – two points are clear. first, we need to bring rates into “ sufficiently restrictive ” territory to lock in our policy tightening. second, we need to communicate clearly that we will stay “ at those levels for as long as necessary ”. this

financing conditions are propagating through the economy, dampening demand and helping to push down inflation. before taking its december decisions, the governing council closely considered their implications in terms of fragmentation risk and financial stability. government bond markets are stable, sovereign yield spreads have been resilient to the normalisation of the eurosystem's balance sheet, and investors have been able to absorb the extra securities released by the reduction in the asset purchase programmes. euro area banks have proven resilient, boasting comfortable levels of capital and strong profitability which make them well equipped to withstand adverse shocks. despite these strong fundamentals, bank valuations remain compressed, pointing to concerns about the long - term sustainability of bank earnings amid weak growth prospects, increased downside risks from deteriorating asset quality, lower lending volumes and higher funding costs. direct and indirect links between banks and the lightly regulated nonbank financial sector also pose risks to the financial system as a whole and highlight the need to boost non - bank resilience going forward. the overall outlook thus calls for 2 / 4 bis - central bankers'speeches vigilance and macroprudential policy remains the first line of defence against the buildup of financial vulnerabilities. monetary policy at its december meeting the governing council decided to keep the three key ecb interest rates unchanged. this decision was based on the overall assessment of the economic and inflation outlook, as well as the effects of our monetary policy. we believe that the current level of interest rates, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to our target. at the last meeting we also decided to advance the normalisation of our balance sheet. we intend to continue to reinvest in full the principal payments from maturing securities purchased under the pandemic emergency purchase programme ( pepp ) during the first half of 2024. over the second half of 2024, the pepp portfolio will decline by a ‚ ¬7. 5 billion per month on average. we discontinued asset purchase programme reinvestment of redemptions in july 2023 and we expect to discontinue the reinvestments under the pepp from 2025. the key ecb interest rates are our primary tool for setting the monetary policy stance. our future decisions will continue to follow a data - dependent approach to determining the appropriate level and duration of restriction. conclusion the events of the last two years have significantly shaped economic developments in the euro area, pushing