euro area and the world economy are also exposed to a variety of risks that accompany this monetary policy tightening. based on our latest assessment, risks to economic growth in the euro area are tilted to the downside. growth could be slower if the effects of monetary policy are more forceful than expected or if the world economy weakens at a faster pace than currently projected, owing, for example, to a continued slowdown in china. this may, in turn, dampen domestic economic activity and encourage firms, banks and households to be more cautious, thereby putting a strain on bank credit supply, investment and consumer spending. the tightening impulse may be transmitted more forcefully to the real economy in an environment of this kind owing to acceleration effects that often operate during periods of subdued growth and high uncertainty. 2 conversely, growth could be higher than projected if the strong labour market, rising real incomes and receding uncertainty mean that people and businesses become more confident and spend more. on the inflation side, weaker demand owing to the stronger transmission of monetary policy or the worsening of the international economic environment could put stronger downward pressure on prices than currently expected. conversely, renewed upward pressures on the costs of energy and food – with oil prices having already increased in recent months – and the unfolding climate crisis could push commodity prices up by more than expected. the role of wage dynamics and fiscal policy are of great importance in determining the future path of inflation. wages have been catching up ; elevated wage growth is therefore embedded in our projections, albeit at a decelerating pace. but a lasting increase in inflation expectations above our target owing, for instance, to higher - than - anticipated increases in wages or profit margins, could drive inflation higher, including over the medium term. similarly, as the energy crisis fades, governments are rolling back the fiscal support measures implemented during the crisis. but a slower rollback of this fiscal support or an expansionary fiscal policy stance in the coming years would pose significant challenges to taming inflation and bringing it 3 / 4 bis - central bankers'speeches back to our target. the challenging macroeconomic environment requires a consistent mix of monetary and fiscal policies, with greater risks to price stability if these policies pull in opposite directions. conclusion to conclude, while we can be sure that our monetary policy tightening is transmitted forcefully to financial markets and is increasingly leaving a footprint in the real economy, the speed and scope of the transmission remain uncertain. this is partly due to the stillfluid economic environment in which we are navi

the current hiking cycle, the first leg of monetary policy transmission – to financing conditions – has been very strong. compared with previous hiking cycles, firms'lending rates have increased at a faster pace and credit volumes have weakened more markedly. transmission to the bank lending channel is likely to continue unfolding as lenders may become more prudent in light of rising funding costs and a slowing economy. moreover, interest rates on outstanding debt will continue to increase as loans are progressively repriced. all in all, in my view, the transmission of our policy tightening to financing conditions seems to be well underway. the second leg of transmission relates to the way in which changes in financing conditions will affect economic activity, as firms and households adjust their plans for consumption, investment and savings accordingly. the transmission of monetary policy tightening to the real economy is proceeding at a slower pace, with a substantial share of the transmission still in the pipeline. for example, real estate activity has slowed down amid the weakening of property valuations. for the economy as a whole, modelbased estimates continue to suggest that, owing to the typical lags in monetary transmission, the bulk of the impact of our tightening is expected to materialise only in 2 / 4 bis - central bankers'speeches the course of this year and thereafter. 1 the downward impact of our tightening so far on gdp and inflation is estimated to average around 2 percentage points over the 2023 - 25 period, with the strongest effect expected on gdp growth this year and on inflation over the next two years. it is also worth noting that the speed of transmission varies across the euro area. in particular, the transmission to households is likely to be faster in countries where variable rate mortgages predominate over mortgages at fixed rate. at the same time, uncertainties regarding transmission remain, mainly in relation to two sources. first, the current hiking cycle is unprecedented in speed. moreover, it follows a long period of accommodative monetary policy and was accompanied by the recalibration of balance sheet policies, all of which limits comparability with historical regularities. second, the tightening of our policy stance occurred in reaction to an unprecedented constellation of shocks hitting the euro area over the last three years, which had a disruptive effect on economic conditions and the inflation environment. the fact that we are still confronted with the overlapping legacy effects of these shocks may imply that monetary policy transmission is proceeding differently this time around compared with what historical regularities might suggest. the