One benchmark that could subsequently inform the normalisation process is the level of the natural rate of interest, defined as the rate that maintains inflation stable at its target level. According to the estimates available, which are subject to much uncertainty, this interest rate is at low levels in the euro area, hovering around or slightly above 1%. This would suggest that, until such levels are reached, the monetary policy stance will continue to be expansionary. Interest rate increases should be gradual. The aim is to avoid abrupt movements, which could be particularly harmful in the current context of heightened uncertainty. If this gradual approach is to be adopted, it is essential that inflation expectations remain anchored and that no indirect or second-round effects arise on a scale that could jeopardise such anchoring. Moreover, we have no pre-established guidelines for the normalisation. In principle, after the first interest rate movements I mentioned earlier, successive additional increases could follow over the subsequent quarters until, for example, levels consistent with the natural rate of interest are reached, if the medium-term inflation outlook holds close to our target. But it should be borne in mind that the current uncertainty relates to aspects of such importance for future inflation as the course of the war, the clearing of the bottlenecks in production and international transport, the extent to which second-round effects materialise, globalisation dynamics and energy and climate change policies. We will therefore have to fine-tune the 12  normalisation process based on the incoming data.

It bears repeating that a fiscal rule framework that ensures the sustainability of public finances is absolutely necessary for the smooth functioning of the monetary union. 13  The reform should align the framework with the structural economic transformations that have arisen since the very creation of the monetary union, including the developments in long-term interest rates and the potential growth of the economies, which are fundamental determinants of debt sustainability. These developments, which have been uneven across countries, together with the high disparity of the Member States’ current budgetary imbalances, would require rules that take a more individualised approach. The current framework also needs to be simplified, for example by establishing a rule for government expenditure growth that is anchored to the government debt-to-GDP ratio. Its hitherto scant capacity to ensure that countries build up fiscal buffers in good times for use in crises must also be improved. This requires improving the design of the system of incentives governing compliance with fiscal rules and possibly strengthening the role of independent fiscal institutions such as the Independent Authority for Fiscal Responsibility (AIReF). Making headway in the expansion of the public and private risk-sharing channels in the EU is also essential. In this regard, we need a permanent macroeconomic stabilisation mechanism in the euro area that complements monetary policy. To do so, it needs sufficient resources and revenue-raising and borrowing capacity.