5  More recently, we have accelerated monetary policy normalisation At the last Governing Council meeting held in early September, we decided to raise the key ECB interest rates by 75 bp, the sharpest increase in the history of the euro, and announced that we expect to continue to raise interest rates over the next several meetings to dampen demand and guard against the risk of a persistent upward shift in inflation expectations. So why did we opt for a 75 bp increase? To understand the rationale behind this decision, let me first explain the nature of our inflation target and how we assess its attainment in practice. As I have said, our objective is to achieve inflation rates of 2% over the medium term. The medium-term orientation means that rather than basing our decisions on the latest inflation figure, or even on the inflation that we expect for the coming months or quarters, we base them on our projections for the medium term, i.e. over a two or three-year horizon. This is because our actions affect inflation very gradually, reaching their maximum impact after about two years. What’s more, even if our actions passed through to inflation more immediately, for certain kinds of shocks – such as adverse supply-side shocks which push inflation and activity in opposite directions – forcing inflation to converge to 2% too quickly, could be undesirable due to the outsize impact on activity and employment that this would entail.
With this in mind, the European Commission is reviewing the European fiscal rule framework. In my view the framework needs to be simplified, by establishing an expenditure growth rule and a debt-to-GDP ratio anchor, and countries’ capacity to build up fiscal buffers in good times for use in crises needs to be reinforced. In the case of Spain, shoring up the sustainability of public finances calls for a medium-term fiscal policy strategy. This should involve immediately setting out a multi-year fiscal consolidation plan for implementation once the economic impact of the pandemic and of the war in Ukraine has been overcome. The plan should have broad political consensus and be accompanied by an efficiency review of public spending and the tax system, including all tiers of general government. In addition to the medium and long-term benefits of such a strategy, defining the plan early on would generate greater certainty and trust in public policies, which is particularly important against the backdrop of the monetary policy normalisation I have described. In any event, the course of the war in Ukraine and the subsequent sanctions and retaliatory measures have laid bare the EU’s vulnerabilities and dependencies in key sectors, such as energy, as well as the disparities between Member States in their exposure to such tensions. A challenge of this magnitude underlines the importance of a joint response to common risks. The response to the war in Ukraine must, once again, be more Europe.