speech euro area current policy challenges speech by luis de guindos, vice - president of the ecb, at the cirsf ( research centre on regulation and supervision of the financial sector ) annual international conference 2022 “ the future of the eu financial system in a new geo - economic context ” lisbon, 15 september 2022 i am very pleased to be taking part in this event again and to be back to lisbon in person. following our monetary policy decisions last week, i would like to start with an overview of the euro area economic outlook that underpinned the governing council ’ s deliberations. i will then share our assessment of the stability of the euro area financial system at the current juncture – the core focus of today ’ s conference – and outline the ways in which recent economic developments are affecting financial stability in the euro area. the euro area economic outlook after the rebound in the first half of 2022, the euro area is now facing a challenging outlook. the economy grew by 0. 8 % in the second quarter of the year on the back of strong consumer spending on services. buoyant tourism has been supporting growth also during the third quarter, even as businesses struggle with high energy costs and continued supply bottlenecks. however, we expect output growth to slow down substantially. the robust consumer demand that came with the loosening of pandemic restrictions will lose steam in the coming months. global demand is falling and euro area terms of trade have been worsening. moreover, uncertainty remains high and confidence is falling sharply. finally, the very high inflation is dampening spending and production, and these headwinds are reinforced by gas supply disruptions. as a result, the latest ecb staff projections for growth have been revised down markedly, with the euro area economy now set to expand by less than 1 % next year. russia ’ s unjustified aggression towards ukraine remains the key risk factor for the growth outlook. in a downside scenario reflecting a complete and long - lasting cut - off of russian gas flows, ecb staff project a recession in 2023. the slowdown in economic activity is set against a deteriorating inflation outlook. inflation rose further to 9. 1 % in august, marking the tenth consecutive month of record - high inflation rates. energy prices are still the dominant driver of overall inflation. but price pressures have continued to strengthen and broaden, in part owing to the impact of high energy costs across more and more sectors. even when excluding food and

##ocate a higher share of their income to food and energy, they are especially vulnerable to increases in these expenses. vulnerabilities in euro area residential real estate markets are also rising in light of continued price increases and vigorous mortgage lending growth. in the first quarter of 2022 euro area residential real estate price growth stood at 9. 8 %, the highest nominal growth rate since the early 1990s. however, since the beginning of the year, household survey responses on the intention to buy a house have declined, and banks have lowered their expectations regarding mortgage loan demand, pointing to a greater potential for house price corrections. turning to financial institutions, vulnerabilities in the non - bank financial sector have also increased this year. the risk that forced selling by investment funds could amplify a market correction remains high, amid low liquidity buffers. duration risk has started to materialise and remains elevated, and further bond portfolio revaluation losses may arise in the context of rising yields. on a better note, systemic vulnerabilities in the banking sector are assessed as moderate. bank profitability has improved owing partly to higher longer - term interest rates. this should, however, not overshadow rising fragilities related to the worsening macroeconomic outlook. higher probabilities of default on corporate exposures and a related increase in provisioning, point to some early signs of higher bank credit risk due to high energy prices. while the situation is stable overall, with little sign of fragmentation in funding markets, bank funding costs have increased, with weaker banks remaining more vulnerable to further rises in their funding costs. before concluding, let me recall the topic of transmission. as already mentioned, flexibility in redemptions coming due in the pepp portfolio and tpi are important tools for addressing possible fragmentation from the monetary policy side. but monetary policy would be greatly facilitated if the banking union were complete. the lack of a common deposit insurance scheme remains an obstacle on our pathway towards a genuine economic and monetary union. conclusion a period of heightened uncertainty is here to stay for a while, rendering decision - making more complex. output growth is slowing down substantially and is expected to stagnate around year - end and remain low next year at less than 1 %, while risks have intensified on the downside. this is set against a deteriorating inflation outlook with record - high inflation rates expected to stay elevated, well above our target, with risks primarily on the upside. in this challenging environment, monetary policy needs to