##s are an important driver of product market reforms. 13 correct sequencing of reforms can also help – product market reforms can facilitate the subsequent implementation of labour market reforms. by eliminating barriers to entry, procompetition product market reforms can eliminate inefficiencies, in turn promoting higher economic activity and employment, and thereby offsetting possible short - term costs of later labour market reforms. but what about monetary policy? as it turns out, the literature says little about how monetary policy drives the reform process. one view is that an accommodative monetary policy stance may increase the room for manoeuvre of governments, allowing measures to offset some of the short - term costs of reforms. 14 but there are certainly some commentators who at present believe that the ecb ’ s unconventional measures are stifling incentives for reform. to answer this question, preliminary internal research at the ecb investigates the drivers of structural reform in 40 oecd countries over the past three decades. this research supports previous findings in the literature on the drivers of reform. on monetary policy, it finds that lower interest rates, if at all, tend to support rather than hinder the implementation of reforms. we also see this confirmed by anecdotal evidence in some larger euro area countries, which recently implemented some important labour market reforms. it seems, then, that we should put more weight on the former view. by acting in accordance with our mandate, namely to support activity to bring inflation back in line with our medium - term objective, the ecb is in fact also providing space for euro area governments to carry out the necessary structural reforms. it is a window of opportunity they should seize. conclusion let me conclude. the euro area faces a significant demographic challenge in the coming decades. reversing the decline in productivity growth and improving labour market outcomes are both required to meet 6 / 7 bis central bankers'speeches this challenge. without concerted effort on structural reforms, per capita income growth in the euro area is likely to stagnate, and may even decline. the welfare benefits of structural reforms extend beyond just protecting income per capita. the distributional impacts of lower unemployment and higher participation are positive. increasing potential output growth provides both monetary and fiscal policy more space to operate in. by breaking down barriers, reforms allow the full benefits of the single market to be realised, increasing economic cohesion and strengthening the monetary union. the ecb ’ s current monetary policy settings are designed to support activity to bring inflation

the disinflationary trend is also evident in both market and survey - based measures of inflation expectations, which have come down markedly at shorter horizons and are consistent with our target at longer horizons. the recent shocks not only drove inflation to record highs but also made macroeconomic forecasting especially challenging. looking at the euro area inflation 1 / 5 bis - central bankers'speeches forecast errors, we have observed two things. first, the absolute size of the errors has declined. and second, the errors have switched sign : inflation is now coming in somewhat below, rather than above, the projections. on the one hand, these developments highlight the lack of bias in the projections. on the other, they reveal a large uncertainty around the baseline projections. it is therefore essential that we do not look at the projections in isolation, but rather alongside incoming data. let me now turn to the second criterion. almost all indicators of underlying inflation are continuing to decline while the range has been narrowing. this confirms that the disinflationary process is under way. some of the measures are still high, however, as it takes time for the impact of past shocks to fully fade. domestic inflation – which is more wage - sensitive – has also been moderating but remains elevated and is now at the top of the range amid falling labour productivity and elevated wage growth in the context of a robust labour market. indeed, the unemployment rate is at its lowest level since the introduction of the euro – despite slowing labour demand and fewer vacancies being advertised more recently. but the impact of higher unit labour costs on inflation is being cushioned by lower unit profits. moving to the third criterion, our past policy rate increases continue to be transmitted forcefully into financing conditions. in the course of our current hiking cycle, the increase in bank lending rates has reached levels not seen since the launch of the euro. meanwhile, the weakening in credit has been stronger and faster than in past hiking cycles. bank lending conditions remain tight and lending flows are still weak, although the latest bank lending survey showed first signs that the net tightening of credit standards and a decline in loan demand are moderating. tighter financing conditions are also making their way through the economy by dampening demand, helping to push down inflation. and given the typical lags in monetary transmission, much of the economic impact of our past policy rate hikes will continue to materialise over time. financial stability the pass - through to economic activity poses challenges for vulnerable sectors. higher interest rates