luis de guindos : monetary policy, financial stability and mediumterm growth in the euro area speech by mr luis de guindos, vice - president of the european central bank, at the 8th annual conference of mediterranean central banks, organised by the croatian national bank, the bank of spain, the oecd, the iemed, and the ufm, split, 14 february 2024. * * * over the past few years the euro area economy has experienced unprecedented shocks that created exceptional uncertainty and drove inflation to record highs. in response to these inflationary pressures, we embarked on the most forceful rate hiking cycle in the history of the euro. credibility – very much the focus of today's conference – is a key central bank asset that becomes even more important in times of high uncertainty. our policy measures are making a substantial contribution to reducing inflation, demonstrating our commitment to ensuring that inflation returns to our two per cent medium - term target in a timely manner. in my remarks today, i will first review the state of the euro area economy and our latest monetary policy decisions. i will then turn to financial stability considerations, before concluding with some thoughts on why action to support the euro area economy is also needed from other policy actors. economic outlook and monetary policy our interest rate decisions are guided by three considerations : first, the inflation outlook in light of incoming economic and financial data ; second, the dynamics of underlying inflation ; and third, the transmission of our monetary policy to financing conditions and the real economy. starting with our first criterion, incoming information has broadly confirmed the mediumterm outlook from our december macroeconomic projections. economic activity is likely to have stagnated in the fourth quarter of 2023 and incoming data continue to signal weakness in the near term. at the same time, some forward - looking survey indicators point to a pick - up in growth further ahead. although headline inflation increased in december to just below 3 %, on account of energy base effects reflecting impacts from the fiscal measures a year ago, the rebound was somewhat weaker than expected. aside from energy, all the main components of inflation fell or remained unchanged. meanwhile, headline inflation declined again in january. this means that the disinflationary process is continuing. we also expect inflation to ease further over the course of this year amid the fading impact of past energy shocks, supply bottlenecks and the post - pandemic reopening of the economy, and as tight financing conditions continue to weigh on demand.

economic conditions. sovereign funding costs have remained stable and contained throughout the tightening cycle, and as the eurosystem gradually reduces its presence in the sovereign bond market. however, weak growth developments or fiscal slippage could reignite concerns around sovereign debt sustainability, especially in countries where debt is already high. challenges ahead while inflation is on the right track, we need to keep a close eye on the risk factors at play. on the upside, wage pressures remain high and we do not yet have sufficient data to confirm they are starting to ease. profit margins could also prove more resilient than anticipated. heightened geopolitical tensions, especially in the middle east, could raise energy prices and disrupt global trade. while we are heading in the right direction, we must not get ahead of ourselves. it will take some more time before we have the necessary information to confirm that inflation is sustainably returning to our two per cent target. that is why we will continue to be guided by data. the next few months will be especially rich in new information on drivers of underlying inflation as we receive data on latest wage settlements and price re - setting by firms. we will also have the benefit of new projections in march. in any case, our future decisions will ensure that our policy rates will be set at sufficiently restrictive levels for as long as necessary. adding on to the challenges discussed so far, the unprecedented shocks of the past few years have also had profound effects on the euro area's low and declining mediumterm growth. euro area potential growth is estimated to have mostly recovered from the pandemic, thanks to sizeable policy support measures such as job retention schemes and the expected impact of the next generation eu programme. however, potential growth is very likely to slow down in the future. in this context, other policy areas – notably fiscal and structural policies – have a crucial role to play in complementing monetary policy and supporting euro area growth potential. 3 / 5 bis - central bankers'speeches potential output is determined by three main factors. first, total factor productivity, which hinges on supply conditions like the state of technology, as well as market structures and regulations that facilitate an efficient allocation of available resources across firms. the outlook for productivity growth, which has been disappointing in recent decades, especially compared with other major economies, depends in part on how the green and digital transitions play out. although this twin transition is expected to contribute positively in the longer run, there may be an initial cost as companies have to adjust to