imf ) forecasts that the euro area ’ s primary budget will be almost in balance this year. by comparison, japan will have a primary deficit of 9 % of gdp, the united states 6. 5 % and the uk more than 5 %. we are also seeing some noteworthy improvements in competitiveness. price competitiveness has improved significantly in several euro area countries. and current account deficits are falling. for example, the countries under full eu - imf programmes have seen their unit labour costs improve by more than 10 % since 2008, relative to the euro area average. their current accounts have improved by around 8 % of gdp since then. governments have also taken measures to strengthen the rules and institutions that guide economic policies in the euro area. this is important to ensure that the positive developments do not simply reverse when economic conditions improve and markets stabilise. one notable example is the new fiscal compact, which will provide a strong tool for keeping budgets close to balance in the future. governments have also set up a new framework to prevent and correct unsustainable developments in the private sector. in short, some hard work has been done in the euro area to unwind imbalances and to reinforce governance. but there is still a lot more hard work to do. maintaining the current momentum of reform is essential for putting the euro area on the path back to stability. fragmentation in monetary policy transmission let me now turn to the measures being taken by the ecb. bis central bankers ’ speeches the confidence crisis and the process of adjustment across the euro area has weighed on short - term growth and dampened inflationary pressures. to maintain price stability, the ecb has lowered its interest rates to historically low levels. but before august this year, our low interest rates were not reaching companies and households evenly across the euro area. in some countries, interest rate reductions were being fully passed on. in others, lending rates barely declined. and in a few countries, they had actually risen. this divergence happened because banks in some countries had found it increasingly expensive to obtain funding from market sources. they therefore could not pass on the lower interest rates to their customers. this meant that monetary policy was unable to support the real economy in these countries. smaller companies were affected the most, as was clear from our surveys of smes. and as companies in the euro area are very dependent on bank loans for financing, some economies were being forced into a damaging cycle. economic activity was weakening. public finances were

down gradually over a much longer period. indeed, higher interest rates create an incentive to save more and pay down mortgage balances more quickly – this effect is known as the ‘ intertemporal ’ channel of monetary policy. at the same time, there will be some borrowers whose budgets are under substantial pressure and so they will have to run down their buffers to meet higher living and interest expenses. importantly, this additional stock of savings is not distributed evenly among borrowers. those with relatively new loans and on lower incomes are likely to have more modest buffers, if any, and they will be feeling more pressure to adjust their spending than others. the bank is very conscious of the challenges facing borrowers, particularly as interest rates have risen quickly over the past year. that said, a wide range of borrowers appear to have built up sizeable buffers, across different income groups and among both fixed - and variable - rate borrowers ( graph 6 ). for those on variable rate loans, borrowers with lower incomes added $ 17, 000 on average to buffers in offset and redraw accounts over the past three years ; this compares with the average of $ 39, 000 accumulated by the highest income borrowers. but loan balances of borrowers on lower incomes, and hence their loan payments, are also smaller on average – $ 230, 000 compared with $ 575, 000. one final caveat is that, even within the income quartiles, the average is skewed by some borrowers accumulating much larger balances than others. graph 6 average cumulative extra payments by borrower income quartile * variable - rate owner - occupier loans in securitisation system $ 4th ( lowest ) 3rd 2nd 1st ( highest ) $ 15, 000 15, 000 10, 000 10, 000 5, 000 5, 000 - 5, 000 d j fmam j j a sond d j fmam j j a sond d j fmam j j a sond d j fmam j j a sond - 5, 000 * borrowers'reported income at loan origination, grown by wpi. sources : rba ; securitisation system conclusion in summary, the lagged effect of the cash flow channel of monetary policy is likely to be somewhat elongated currently due to the high proportion of fixed - rate loans and sizeable buffers held by many borrowers. this means that it ’ s likely to