to, 2 % in the medium term. following very strong growth in 2017, real gdp in the euro area continued to expand during the first three quarters of this year, albeit at a slower pace, with an annual growth rate of 1. 7 % being registered in the third quarter. the latest information, while being somewhat weaker than expected, remains consistent with an ongoing economic expansion. in turn, with the economy growing at rates above potential, and with the unemployment rate declining steadily, inflation should gain momentum. indeed, the euro area inflation rate stood at 2. 2 % in october, up from 2. 1 % in september and from 1. 4 % a year earlier. that having been said, measures of underlying inflation, which strip out the contributions of volatile items such as energy and food, remain muted. the situation in international financial markets during 2018 remained very challenging. most asset classes today are in negative territory when compared to the start of the year, which is a very unusual phenomenon. over the past year, developments in financial markets have been largely dominated by several political events, while generally positive economic news seemed to matter much less. these political events ranged from trade tensions, especially between the us and china, to brexit - related developments, a slowdown in emerging market economies, most notably in argentina and turkey, and also the rise of populist movements in some european countries that have led to tensions, particularly between italy and the european commission. all this led to volatility in financial markets, with a constant turn in risk - on / risk - off sentiment, which has made it more challenging for investment strategies. as a central bank, financial market developments are of a direct interest to us as these have an impact on both the domestic banking system and the central bank itself. while such volatility in financial markets and persistence of interest rates at a relatively low level in europe have continued to exert pressure on interest income flows and potential on capital gains, and hence impinge on profitability, nevertheless domestic banks have absorbed such turbulence relatively well. for the page | 3 year ahead, the situation is likely to remain equally challenging on interest income and profitability, as signs are emerging that world economic growth, including in europe, is losing momentum. this could be also particularly challenging for the process of the normalization of the monetary policy stance in europe, which is likely to be very gradual. as you are all well aware, during 2018, the european central bank gradually scaled back the

option - implied volatility gbp / usd 3m option volatility gbp / usd 2y option volatility 3m s & p variance swap rate 2y s & p variance swap rate 3m10y normalised imlied vol on usd ir ( lhs ) 2y10y normalised imlied vol on usd ir ( lhs ) basis points per cent jan 10 jul 10 jan 11 jul 11 jan 12 jul 12 jan 13 jul 13 jan 14 jul 14 jan 15 sources : barclays live, bloomberg. implied volatilities are “ normalised ” by the level of interest rates, so the data show the volatility of absolute ( rather than percentage ) changes in swap rates. bis central bankers ’ speeches chart 3 impact of asset price news on volatility in uk equity and debt markets conditional daily volatility ( % ) pre - crisis credit ( jan 2001 - jun 2007 ) post - crisis credit ( april 2009 - jan 2015 ) 1. 8 pre - crisis equity ( jan 2001 - jun 2007 ) 1. 6 post - crisis equity ( april 2009 - jan 2015 ) 1. 4 1. 2 1. 0 0. 8 0. 6 0. 4 0. 2 - 3 % - 2 % - 1 % 0 % 1 % unexpected daily change in price ( per cent ) 2 % 0. 0 sources : bank of american merrill lynch, thomson reuters datastream and bank calculations. bis central bankers ’ speeches chart 4 negative rates in european government bond markets positive negative switzerland - 0. 89 - 0. 99 - 0. 81 maturity ( years ) - 0. 61 - 0. 47 - 0. 38 germany - 0. 27 - 0. 25 - 0. 24 - 0. 21 - 0. 16 - 0. 09 - 0. 02 0. 05 0. 13 0. 20 finland - 0. 20 - 0. 18 - 0. 15 - 0. 11 - 0. 08 - 0. 06 - 0. 03 0. 09 0. 14 0. 22 - 0. 18 - 0. 15 - 0. 13 - 0. 07 - 0. 05 0. 00 0. 07 0. 17 0. 26 - 0. 31 - 0. 04 netherlands - 0. 32 - 0. 29 - 0. 24 - 0. 11 denmark - 0. 80 - 0. 62 austria - 0. 16 - 0. 17 - 0. 17 - 0. 12 - 0. 06 -