our policy, with a material contribution from oil prices as well. this central role played by monetary policy can be further demonstrated by looking at the channels through which our policy has been working. one channel has been the divergence of monetary policy cycles across advanced economies since mid - 2014, and its consequences for exchange rates, which have helped insulate euro area exporters from weakening global demand. they have in fact been able to maintain or even regain market shares as world trade has slowed. but still more important has been the effect of our policy package on the domestic economy. as i have outlined in detail elsewhere2, since we adopted our credit easing package, we have seen a substantial easing in financing conditions for the euro area economy. market financing costs have fallen, while bank lending rates for both firms and households have dropped by more than 110 basis points and are now at historical lows. this has been accompanied by rising lending volumes and improved access to finance, especially for small - and medium - sized enterprises. and crucially, our policy has not only eased financing conditions on average, but triggered a remarkable convergence in borrowing costs across different euro area countries. granular data show that in june 2014 the median lending rate for firms in vulnerable economies was 120 basis points higher than for those in stronger ones – despite overnight rates being close to zero. today the difference is only 20 basis points. without this, it is likely that large parts of the euro area would have been remained stuck in a self - sustained credit crunch. the recovery is progressing and gaining momentum as this policy stimulus has worked its way through the economy, the atypical makeup of the recovery – relying mostly on monetary policy and oil prices – has been gradually shifting towards a stronger contribution from underlying growth forces. this is evident from the fact that, as the impetus coming from oil prices wanes, the economy is accelerating rather than slowing. there are indeed three features of the recovery which give us confidence that it may be gaining its own momentum, although – given the severity of the slump we are emerging from – monetary policy still remains critical to facilitate the transition. the first is that the recovery is being propelled by a virtuous circle between rising consumption, employment growth and labour income. as low financing costs and, initially, low oil prices have 2 / 6 bis central bankers'speeches fed through into household spending, the labour market has strengthened and real disposable incomes have accelerated. around 50 % of the rise in real labour income since mid -

it goes without saying that in each case the relevant metric is euro area inflation not the inflation rates of any individual country. for the first criterion, the assessment does now seem to be improving : our latest projections foresee the path of headline inflation now much closer to the target over 2017 – 2019. but the inherent uncertainty in the forecasting process needs to be mitigated by cross - checking with other available information on inflation dynamics. particularly useful here are measures of underlying inflationary pressures, since they can be monitored in real - time and tend to be more informative than headline inflation for medium - term price developments. for us to be confident in the second criterion – that inflation is not just converging towards our aim, but stabilising around it – we would need to see signs of such pressures building. but there is so far scant evidence of this. much of the increase we have seen in headline inflation in recent months has been driven by its volatile components. of the 1. 4 percentage point rise from november last year to february this year – when inflation peaked at 2 % – more than 90 % was explained by energy and food price inflation. measures of underlying inflationary dynamics, by contrast, remain subdued. one such measure, hicp excluding food and energy, has hovered around 0. 9 % since mid - 2013 and still shows few convincing signs of an upward trend. most alternative measures are also sluggish by historical standards and show little movement towards our aim. an important source of subdued underlying inflation trends has been weak domestic price pressures, driven partly by subdued wage growth. despite the domestic nature of the recovery, annual wage growth in terms of compensation per employee reached the historical low of 1. 1 % in the second quarter of 2016. wage growth has since recovered somewhat – rising to 1. 4 % by the end of last year – but remains well below historical averages. this is where the issue of levels comes in – that is, the significant degree of labour market slack. decomposing the forces that have weighed on wage growth3, we find two principal drivers : first, the still - high unemployment rate and its effect on wage bargaining dynamics ; and second, a below - average contribution from past inflation in wage formation, caused by the last few years of exceptionally low headline inflation. as monetary policy has successfully supported demand and stabilised inflation expectations, both of these drivers should wane going forward. their dragging 4 / 6 bis central bankers'speeches effect on wage growth,