its future orientation. the current policy stance is restrictive. but if the incoming data continue to confirm our baseline, the direction of travel is clear and we expect to lower interest rates further. in terms of the future orientation, we previously said that " we will keep policy rates sufficiently restrictive for as long as necessary ". this bias was necessary in an environment of high realised inflation and high uncertainty about future inflation. but it no longer reflects the evolving macroeconomic landscape, our outlook for inflation or the balance of risks around it. with the disinflation process well on track, and downside risks to growth, this bias in our communication is no longer warranted. these considerations are reflected in the monetary policy statement adopted by the governing council last week. we no longer aim for " sufficiently restrictive " policy, but rather intend to deliver an " appropriate " policy stance. the second implication for monetary policy concerns our reaction function. 5 / 7 bis - central bankers'speeches the high - inflation period has proven the value of the three criteria we have been using to take decisions, which is why the governing council confirmed this policy framework at last week's meeting. and these criteria will be invaluable in the period ahead, even as the risks to inflation move from past shocks to future ones. in an uncertain environment, we will need to continue complementing our baseline outlook with a rich distribution of possible risks derived from current data. but our framework is flexible, in the sense that we can change the weight we put on the different legs of our reaction function depending on the nature of the shocks we are facing. for example, if we face large geopolitical shocks that significantly increase uncertainty about the inflation projections, we will need to draw on other sources of data to make the risk assessment surrounding our baseline outlook more robust. at the same time, the purpose of monitoring underlying inflation is to help us differentiate noise in the inflation data from underlying trends. so, if underlying trends are not affected, it will help increase confidence in the baseline projection. and assessing monetary transmission will continue to be important, as geopolitical uncertainty may affect monetary transmission by altering the risk appetite of investors, borrowers and financial intermediaries. the third implication concerns the policy horizon. even though we are not there yet, we are close to achieving our target. so, we are no longer in a situation where we need to fix the policy horizon at the shortest possible transmission lag. we can return to a situation where the

##grade over time. for example, if we go back to our june 2023 projections, we expected average growth of 1. 5 % in 2024. now, we expect 0. 7 %. one driver of this delayed recovery has been sluggish export growth, driven by the competitive challenges facing euro area companies. but the most important driver of our growth forecast misses has been the domestic economy. in fact, around half of the misses since end - 2021 relate to investment and a quarter relate to consumption. the behaviour of investment can be attributed to a combination of factors, including the stronger - than - expected impact of higher interest rates, higher energy prices and structural deterrents. the inertia in consumption has been striking given that the conditions for a recovery are in place. employment is historically high and real incomes 4 / 7 bis - central bankers'speeches are rising. but households continue to save an unusually high share of their income and take a cautious approach to spending. one reason for this caution is that many households have a perception of their real income growth that is well below measured data. just 37 % of households in our consumer survey believe that their real income has risen or stayed the same, even though 50 % of all households have experienced actual increases. and these households have significantly lower consumption growth than those with correct perceptions. this pessimism about real incomes is largely driven by past inflation, and so in principle it should dissipate as the high - inflation episode moves further into the rearview mirror. 2 but increasing geopolitical uncertainty could create new dents in household sentiment. in particular, if the united states – our largest export market – takes a protectionist turn, growth in the euro area is likely to take a hit. our exporters also specialise in capital goods that other countries use for export production, which makes them particularly sensitive to shifts in confidence about world trade. the main upside risks we see in the future also relate to external shocks. a rise in geopolitical tensions could push energy prices and freight costs higher in the near term, while extreme weather events could drive up food prices. the net effect of trade fragmentation and tariffs on inflation remains uncertain, as it involves assumptions that are impossible to anticipate with precision. these include potential retaliatory actions as well as exchange rate and commodity price movements. implications for monetary policy so what does this changing environment mean for our monetary policy? there are three main implications. the first concerns our current policy stance and