facility rate, which under conditions of ample liquidity is the policy rate that determines money market conditions, now stands at 4 per cent ( 400 basis points ). in explaining this decision, the incoming data have largely validated our previous assessment of the inflation outlook, while most measures of underlying inflation have started to ease. furthermore, the evidence indicates that the transmission of our monetary policy to broader financing conditions and the real economy is firmly taking hold. the economic slowdown since the middle of 2022 is set to continue in the near term and the level of gdp will be considerably lower than we had previously expected. the resulting additional slack will further contribute to the disinflation process, while a significant portion of the tightening from our past rate hikes is still in the pipeline. drawing on the baseline staff projections, a range of model - based simulations suggest that a deposit facility rate of 400 basis points, so long as it is understood to be maintained for a sufficiently long duration, should be consistent with a return of inflation to target within the projection horizon. the views of external experts in our latest survey of monetary analysts ( sma ) were also clustered in the ( 375, 400 ) interval in terms of a peak policy rate. this path for policy rates is also broadly reflected in market pricing of the forward rate curve. in view of the uncertainty surrounding future inflation dynamics and the conditional, point - in - time nature of model - based simulations, expert surveys and market indicators, the choice between holding at 375 and moving to 400 was finely balanced. however, at the margin, it is safer to have decided on an additional hike rather than pause at 375 and " wait and see " whether an additional hike would be validated by the data flow between now and future meetings. in particular, the decision was motivated by the highly uncertain environment and the significant disinflation that is still required to return to our target in a timely manner. the additional rate hike will reinforce progress towards our target for two basic reasons. first, if the economy evolves according to the staff projections baseline case, last week's decision to hike bolsters confidence that inflation will return to target within the projection horizon. second, a higher level of the interest rate will more strongly limit the amplification of any upside shocks to the inflation path, in view of the interaction dynamics between inflation shocks and the overall demand environment. it follows that, all else being equal, a more secure pace of disinflation and greater insurance

have moderated. inflation inflation in august stood at 5. 2 per cent, meaning that about 60 per cent of the peak gap to our inflation target has faded away. our latest ecb staff macroeconomic projections foresee inflation standing at 3. 3 per cent in the final quarter of this year. 1 / 6 bis - central bankers'speeches while the lifting of fiscal subsidies means that inflation will only decline to a limited extent during 2024, to 2. 9 per cent in the final quarter, it is projected that inflation will return to our two per cent target by the third quarter of 2025. within this overall trend, the nature of inflation is shifting. while external and pandemicrelated factors have played a dominant role in the initial inflation surge and the partial fallback that has occurred this year, the full dynamic adjustment to these shocks involves a staggered reset of prices and wages across the economy, a process which is ongoing. given the episodic nature of wage adjustment and the variety of institutional arrangements across the member countries, this is inevitably a multi - year process. i will return to this topic later. the inflation outlook remains subject to considerable uncertainty. on one side, upside risks to inflation include potential renewed upward pressures on the costs of energy and food. adverse weather conditions, and the unfolding climate crisis more broadly, could push food prices up by more than expected. a lasting rise in inflation expectations above our target, or higher than anticipated increases in wages or profit margins, could also drive inflation higher, including over the medium term. on the other side, weaker demand – for example owing to a stronger transmission of monetary policy or a worsening of the external environment – would lead to lower price pressures, especially over the medium term. economic activity in terms of activity levels, output in the euro area broadly stagnated over the first half of this year. manufacturing output is set to remain weak in view of further moderation in export demand and tight financing conditions, while past support from order backlogs is declining. services have so far contributed positively to growth, due to the higher demand in contact - intensive sectors, but there have been clear signs of a slowdown since june. in the near term, private consumption is expected to remain weak, while housing and business investment are seen as declining further, also driven by the monetary policy tightening. over time, the economic momentum should pick up as real incomes are expected to rise, supported by falling inflation, rising wages and a strong