however, higher funding costs and less prudent fiscal policies could reignite concerns around sovereign debt sustainability, particularly in countries where debt levels are already high. the euro area banking system has been a source of resilience in this turbulent year. banks'capital and liquidity buffers remain strong, and profitability has further improved in recent quarters on the back of higher interest rates. despite these strong fundamentals, it is striking just how compressed bank valuations remain. this seems to reflect lingering concerns about the long - term sustainability of bank earnings, as they face increased downside risks from the prospect of deteriorating asset quality, lower lending volumes and higher funding costs. while asset quality indicators have been robust over the last year, early signs of deterioration are becoming visible a€ “ particularly in smaller firms and some sectors like commercial real estate. conclusion since the start of our hiking cycle, we have increased our policy rates by a cumulative 450 basis points. our restrictive policy stance continues to be transmitted forcefully into financing conditions and is increasingly affecting the real economy. inflation has come down markedly but is still expected to stay too high for too long, and domestic price pressures remain strong. we will therefore ensure that our policy rates will be set at sufficiently restrictive levels for as long as necessary. in view of the prevailing elevated uncertainty, our future decisions on policy rates will continue to be data dependent and taken on a meeting - by - meeting basis. at our december meeting, we will have a new set of macroeconomic projections and more 3 / 4 bis - central bankers'speeches data on actual and underlying inflation, economic activity and the state of transmission, so we will be in a better position to reassess the inflation outlook and required policy action. a resilient and well - functioning financial system is essential for the smooth transmission of monetary policy that is required to achieve our goal. to this end, macroprudential authorities should preserve releasable capital buffers to ensure that they are available in the event that conditions in the banking sector deteriorate. furthermore, the lessons learnt from the turmoil this spring underline the need to implement outstanding basel iii reforms and complete the banking union, while previous market shocks confirm the need to boost the resilience of the non - bank financial sector by strengthening the policy framework for non - banks in an internationally coordinated manner. prudent and investment - oriented fiscal policies are also very supportive of our price stability goal. fiscal policy should be geared towards making the euro area economy

higher than anticipated in many euro area countries, and especially in spain and italy which both saw an unexpected surge in private consumption. however, the reopening effects are expected to dwindle and economic growth to slow in the short term, in view of households ’ loss of purchasing power, the energy crisis, weaker global demand, tighter financial conditions as a result of the monetary policy normalisation, and the highly uncertain economic and geopolitical setting. indeed, the latest data for the third quarter point to a rapid economic slowdown in the euro area countries. the purchasing managers ’ indices ( pmis ) signal a contraction in manufacturing in the big euro area economies in the third quarter, while the pmi services index points to a considerable slowdown, with a contraction in germany and italy. thus, the gas market developments described above contrast with developments in other commodities – such as oil and non - energy goods – whose prices have tended to moderate since the summer owing, among other factors, to the prospects of a global economic slowdown. inflationary pressures are stronger than expected and are spreading across expenditure items, exacerbating the loss of purchasing power inflationary pressures in the euro area have been more intense and more persistent than expected throughout the year. euro area inflation stood at 9. 1 % in august. higher energy prices are the main factor behind these high inflation levels. indeed, it is estimated that, between their direct impact on energy goods in the consumption basket and their indirect effect through other goods and services, they are responsible for somewhat more than 60 % of the growth in inflation. yet the increase in food prices is also very significant ; in fact, food prices are directly responsible for almost 25 % of the increase in inflation. in any event, inflationary pressures have gradually spread to the less volatile prices in the consumption basket. higher production costs have passed through to consumer prices faster than expected, against a backdrop of manufacturing bottlenecks and demand pressures associated with the economic reopening. underlying inflation in the euro area was over 4 % in august, and over 3 % in all euro area countries. moreover, inflation was over 4 % in more than half the underlying inflation components ( in 41 % of them in spain ). particularly notable was the higher inflation in components relating to expenditure on transport, household equipment and maintenance and, especially in spain, recreation, hospitality and tourism. 4 the economic projections for the euro area have undergone significant revisions, with growth revised down and inflation revised up the recent