##s to bank lending and deposit rates appears rather slow, government bond yieldsin malta have already begun to increase. such increases and tighter financing conditions abroad will eventually be reflected in a higher cost of funding for domestic banks, and eventually, households and corporates. it is essential to be reminded that on monetary, financial and economic terms malta is very much integrated with the rest of europe and that the decisions taken in frankfurt ripple across the whole euro area, malta included. 2 / 5 bis - central bankers'speeches the transmission of tighter monetary conditions to the interest rates that banks offer to their customers is necessary for inflation to return to the policy target of 2 % in a timely manner. but it is not sufficient. other policy actors also need to do their part. in particular, fiscal support has to be temporary and targeted, so that it avoids supporting demand for longer than is necessary. it should also be complemented with structural reforms that improve the security of supplies and reduce vulnerability to adverse global conditions and addresses market imperfections that propagate inflationary pressures. let me now turn to financial stability and macroprudential policy. financial stability may well be at its most vulnerable at the cusp of the ongoing shift in monetary policy, coupled with uncertainty on the euro area economic growth path spurred by the energy crisis. in such a regime shift, macroprudential policy has definitely a role to play. financial cycles are notoriously elusive to economists, as we lack a stable standard by which to gauge them. so rather than worrying too much about where we are exactly in the cycle, we should focus more on making sure that the system is adequately equipped to withstand possible shocks. covid - 19 has taught us a few lessons here. as macroprudential authorities, we need to ensure that our banking systems are resilient in the face of risk materialisation, which remains elevated in the euro area. this week, fellow eurozone countries reported that they not only stepped up their macroprudential measures, but are also using combinations of tools from the framework to buttress further the resilience of their financialsystems. management buffers mitigate the risk of procyclical impact on lending, preserving resilience. these are not popular measures in any country. but macroprudential authorities must remain true to their primary objective - to ensure financial stability, just as monetary authorities need to remain loyal to price stability. carving out resilience from within is always less painful than having to build

still elevated from a historical perspective and still well above levels deemed consistent with price stability. 2 / 4 bis - central bankers'speeches on the other hand, overall inflation was until recently below the euro area average but in recent months has tended to exceed it. this reflects some base effects of sharply declining energy prices in other countries with lower subsidies than ours, but as we shall see there are some domestic factors at play. overall inflation in malta is set to ease further in the coming months. the disinflation process is largely being supported by the resolution of supply chain bottlenecks and the lagged impact of tighter monetary policy on imported inflation. furthermore, as pandemic - related re - opening effects fade out, imbalances between the demand for and supply of consumer services are also correcting. nevertheless, there are a number of domestic factors that are working in the opposite direction. these include a still dynamic economy buoyed to some extent by the support to demand arising from the energy subsidies. the weak pass - through of higher monetary policy ratesto deposit and lending rates in malta is another factor supporting robust credit growth, especially on the real estate market. this state of play may be good for economic growth in the short - term. however, it also means that the power of a key policy tool that is geared towards dampening demand and hence inflationary pressures is severely diluted in malta, where the direct transmission of tighter monetary policy to the domestic economy is impaired. at the same time, the indirect inflationary effects through import prices are strong. this means that for the disinflation process to accelerate, more ambition is required to address impediments to the reallocation of resources across sectors and lift the supply potential of the economy. the timely absorption of eu funds under nextgenerationeu is therefore key, as are enhanced incentives that support digitalization and upskilling. the fiscal stance is also set to shape the path of inflation going forward. in this regard, misalignments between fiscal and monetary policies are to be avoided to the extent possible. fiscalsupport must be targeted and temporary. both the imf and the commission are expecting a gradual reduction in energy subsidies. earlier this week the commission provided us with more clarity regarding the forthcoming fiscal rules, with an agreement expected in december, asthe stability and growth pact ( sgp ) escape clause will be deactivated before the end of the year. from my experience the rating agencies main focus boil