The prospect of the monetary policy stance returning to normal has likewise been reflected in an upturn in long-term interest rates in the euro area. Specifically, the 10year OIS rate, which proxies the euro area risk-free interest rate, has risen by 170 bp since the beginning of the year. 6  Domestic fiscal policy Domestic economic policies also have a key role to play in the current climate. But fiscal policy headroom is constrained by high government debt and structural budget deficits. It is therefore important for domestic fiscal policy to exploit its capacity for highly granular action focused on the households, firms and sectors most vulnerable to this combination of shocks, many of which had not yet fully recovered from the adverse effects of the pandemic. In particular, fiscal policy action should target lower-income households, which bear the brunt of inflation, and more energy-intensive firms. Moreover, again with the aim of minimising their impact on budgetary imbalances, it is important that the fiscal policy measures be temporary so as not to further increase the structural deficit, and that the instruments used do not skew price signals, which would hinder the adjustment in demand. Likewise, averting any feedback into the current inflationary process is further reason to avoid an across-the-board fiscal impulse and the widespread use of automatic indexation clauses in expenditure items. This deindexation must be part of the incomes agreement to which I will return later.
Fiscal 2/6  BIS central bankers' speeches  policy in the euro area has become mildly expansionary, with the aggregate fiscal stance expected to be –0.4% of GDP in 2019 after five years of being broadly neutral.9 And our forward guidance on monetary policy has been effective, as shown by the continuing easing of financial conditions since last December. The outlook for wages and inflation The weakening growth picture has naturally affected the inflation outlook as well. Our projections for headline inflation this year have been revised downwards and we now see inflation at 1.6% in 2021. Slower growth will also lead to a more muted recovery in underlying inflation than we had previously expected. Reflecting the weaker outlook, market-based measures of inflation expectations have edged down recently. The fall in market-based measures has mainly been driven by a decline in inflation risk premia, a volatile component of overall inflation-linked swap rates, not by a drop in “genuine” inflation expectations. While a decrease in inflation risk premia may suggest that market participants assign increased prominence to lower-than-expected outcomes of future inflation, survey-based measures have remained relatively stable. We therefore remain confident that the sustained convergence of inflation to our aim has been delayed rather than derailed – meaning that we expect inflation to reach our objective at a later date than we previously foresaw. This view is based on our assessment of the resilience of the labour market and therefore of wage growth. Wage dynamics have so far broadly withstood the growth slowdown.