measures of inflation compensation have come down notably, from an average of 2. 7 % last august to 2. 3 % in june 2024. our june 2024 projections show inflation coming down towards our 2 % target over the second half of next year, as inflationary pressures are expected to subside. eadline inflation is projected to average 2. 5 % in 2024, 2. 2 % in 2025 and to fall below our target, to 1. 9 %, in 2026. over the coming quarters, inflation is expected to fluctuate around current levels, due, inter alia, to energy - related base effects. in fact, excluding these base effects, a decline in inflation would have materialised over the respective period. base effects are expected to fade out at the beginning of 2025, while, at the same time, fiscal support measures are unwound. wage developments are also important, as they are a key driver of inflation at the current juncture. the latest data, pointing to an increase in negotiated wage growth to 4. 7 % in the first quarter of 2024, from 4. 5 % in the fourth quarter of 2023, have surprised on the upside. still, one - off payments in the public sector in germany, have largely affected this outcome, whereas developments in other euro area countries are more encouraging. the german public sector wage increase reflects the fact that negotiated wages in that sector had not been raised since 2021. wage growth is expected to remain elevated in 2024, and to show a bumpy profile. these developments reflect the staggered nature of the wage adjustment process as workers continue to recoup real wage losses from past price shocks. however, leading indicators suggest that data on wages earlier this year may have been the peak, and that wage growth will ease during the remainder of 2024. according to the ecb wage tracker data for the first few months of the year, when most agreements take place, negotiated wage pressures are moderating. this is supported by other indicators of wage pressures such as the indeed wage tracker4 based on job postings, which has materially decelerated in recent months ( from a peak of 5. 4 % in october 2022 to 3. 7 % in june 2024. ) the impact of higher wages on price pressures depends on the rate of labour productivity growth. a recovery in productivity growth should support the moderation in labour cost pressures. an ongoing decline in profit margins also reinforces the

##lationary regime that will heighten concern over deflation. to avoid such a scenario, gradual policy rate hikes - - that make sure the extent of the hike is kept within a range that will not cause a shock to the real economy - - should more likely allow for a smoother monetary policy normalization. this can be viewed as a form of risk management in monetary policy conduct. the most critical point to keep in mind when proceeding with monetary policy normalization is to maintain accommodative financial conditions while gradually raising the policy interest rate. what is meant by accommodative financial conditions here is a situation where the real policy interest rate is below the natural rate of interest. the key here is the level of the natural rate of interest. the natural interest rate has been an important topic of discussion in considering recent conduct of monetary policy. unfortunately, at least for now, it is difficult to empirically identify a reliable figure for the natural interest rate. the bank uses a variety of methods to measure this rate, but since the figures - - as of the first quarter of 2023 - - range widely from around minus 1 percent to around plus 0. 5 percent, depending on the methods employed, these are merely estimates. 4 i personally consider it reasonable to assume the lowest figure, since i believe that there is no need at this point to undertake rapid policy rate hikes to curb inflation, and that hasty policy rate hikes should rather be avoided. even with this assumption, the current real policy interest rate is see nakano, s., sugioka, y., and yamamoto, h., " recent developments in measuring the natural rate of interest, " bank of japan working paper series, no. 24 - e - 12 ( october 2024 ). well below the natural interest rate, suggesting that accommodative financial conditions have been maintained. if underlying inflation becomes increasingly likely to surpass 2 percent once the target of 2 percent has been achieved in a sustainable and stable manner, the bank will, to curb inflation, raise the policy rate at a faster pace than the inflation rate. moreover, when the inflation rate remains at around 2 percent in a sustainable and stable manner, it can be assumed that the policy rate at the time is roughly on a par with the level of the neutral interest rate. in this case, the bank will conduct monetary policy with an eye to maintaining the policy rate at that neutral level. let me repeat that, when the