and non - financial sectors take hold. these concerns are heightened by the recent upward shift in bond yields owing to the global " higher - for - longer " narrative and the flare - up of tensions in the middle east, which have added to the uncertainty surrounding the outlook. after a period of lower market volatility until august, the rising prospect of higher - forlonger rates has started to weigh on riskier asset valuations in recent months. risk sentiment in markets remains highly sensitive to further surprises in inflation and economic growth. higher than expected inflation or lower growth could trigger a rise in market volatility and risk premia, increasing the likelihood of credit events materialising. this brings me to the vulnerabilities in the non - bank financial sector. as regards credit risk, some non - banks remain heavily exposed to interest rate - sensitive sectors, such as highly indebted corporates and real estate. deteriorating corporate fundamentals and the ongoing correction in real estate markets could expose non - banks that have 2 / 4 bis - central bankers'speeches invested in these sectors to revaluation losses and investor outflows. furthermore, low levels of liquidity could expose investment funds to the potential risk of forced asset sales if macro - financial outcomes deteriorate. corporate profitability in the euro area has held up well, but higher interest rates are weighing on the debt servicing capacity of more vulnerable firms. a weakening economy could prove challenging for firms with high debt levels, subdued earnings and low interest coverage ratios. real estate firms are particularly vulnerable to losses stemming from the ongoing downturn in euro area commercial real estate markets. in an environment of tighter financing conditions and elevated uncertainty, real estate prices have declined markedly. the effects of higher interest rates have been compounded by structurally lower demand for some real estate assets following the pandemic. although banks'exposure to these markets is comparatively low, losses in this segment could act as an amplifying factor in the event of a wider shock. euro area households, especially those with lower incomes and in countries with mainly floatingrate mortgages, are being increasingly squeezed by the higher interest rates. tighter financing conditions have reduced the demand for housing, putting downward pressure on prices. on a more positive note, robust labour markets have so far supported household balance sheets, thereby mitigating the credit risk to banks. spreads in government bond markets have remained contained as many governments managed to secure cheap financing at longer maturities during the period of low interest rates.

prices, which may also come under upward pressure owing to adverse weather events and the unfolding climate crisis more broadly. most measures of underlying inflation continue to decline. the eurostat's flash estimate for inflation excluding energy and food points to a further decline to 4. 2 % in october, supported by improving supply conditions, the pass - through of previous declines in energy prices, as well as the impact of tighter monetary policy on demand and corporate pricing power. at the same time, domestic price pressures are still strong and 1 / 4 bis - central bankers'speeches are being increasingly driven by wage pressures and the evolution of profit margins. while most measures of longer - term inflation expectations stand around 2 %, some indicators remain elevated and need to be monitored closely. the resilience of the labour market has been a bright spot for the euro area economy, but there are signs that the labour market is beginning to weaken. fewer new jobs are being created and, according to the latest flash estimate, employment expectations have continued to decline in october for both services and manufacturing. monetary policy based on our assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission, the governing council decided to keep the three key ecb interest rates unchanged at its october meeting. the incoming information has broadly confirmed our previous assessment of the medium - term inflation outlook. our past interest rate increases continue to be transmitted forcefully into financial and monetary conditions. banks'funding costs have continued to rise and are being passed on to businesses and households. the combination of higher borrowing rates and weakening activity led to a further sharp drop in credit demand in the third quarter of this year. and credit standards have tightened again. we are also seeing increasing signs of the impact of our policy decisions on the real economy. further tightening is still in the pipeline from the current policy stance, and it is set to further dampen demand and help push down inflation. we are determined to ensure that inflation returns to our 2 % medium - term target in a timely manner. based on our current assessment, we consider that the key ecb interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal. we will continue to follow a data - dependent approach to determining the appropriate level and duration of restriction. financial stability let me now turn to financial stability. in our upcoming financial stability review, we highlight that the financial stability outlook remains fragile as the gradual effects of tighter financial conditions on both the financial