Stronger than expected pipeline pressures or higher than anticipated increases in wages or profits could drive up inflation, while financial market  2/4  BIS - Central bankers' speeches  tensions and falling energy prices could lead to faster disinflation. At the same time, most measures of longer-term inflation expectations currently stand at around two per cent, although they warrant continued monitoring. Euro area banking sector, non-bank financial sector and financial stability Euro area banks remain resilient in the current market environment thanks to strong capital and liquidity positions. Since the start of the ECB's policy rate hiking cycle, euro area bank profitability has been boosted by higher interest margins, while the change in impairments and provisions has been rather muted so far. However, in the current environment of tightening financing conditions including for banks, credit risks have increased, and lending dynamics have substantially weakened, which may weigh on future bank profitability. The decrease in bank lending to firms has, in general, not been offset by an increased recourse of firms to market-based financing, despite a bout of corporate bond issuance in the fourth quarter of 2022. Looking ahead, the decline in the asset purchase programme portfolio will increase the share of debt issuance that needs to be absorbed by investors. Based on their past behaviour, investment funds appear able to absorb part of such an increase. At the same time, in spite of some reduction in exposure to higher-risk assets, structural vulnerabilities in the non-bank financial sector remain elevated.
Starting with the analysis under the first pillar of our monetary policy strategy, the three-month average of the annual growth rates of M3 stood at 8.0% in the period from November 2001 to January 2002, compared with 7.8% in the period from October to December 2001. The high level of the annual growth rates of M3 is very much related to portfolio shifts to liquid positions, most of which occurred in the autumn of 2001 in an economic and financial environment characterised by high uncertainty. While many investors still seemed to be "parking" some of their assets in M3 in early 2002, some moderation in the short-term dynamics of M3 could be observed around the turn of the year. The Governing Council continues to hold the view that the information from the first pillar thus far does not indicate risks to price stability, as the portfolio reallocations which drove M3 growth in 2001 should remain temporary. In addition, the slowdown in the rate of growth of loans to the private sector has been continuing over the past few months. However, we will need to analyse monetary developments closely in the coming months. As regards the second pillar, there are further signs that the trough in economic activity may have been reached at the end of last year. Coincident and forward-looking indicators increasingly point to improvements in economic conditions. A similar picture is reflected in financial market expectations, especially those embedded in bond yields.