Second, forward guidance remains the anchor for monetary policy. As I explained before, for our first interest rate hike to be implemented, all three of the well-known conditions need to be met. Another crucial element of this forward guidance is the sequencing of the exit strategy, whereby we will not raise interest rates until net purchases under our asset purchase programme have come to an end. Third, given what I have just said regarding inflation prospects, we cannot rule out the possibility that all the conditions in our forward guidance will be met sooner than we had expected some months ago. And as a result, movements in our monetary policy towards normalization seem more likely. In the coming months, we will have to decide how to exercise our optionality. And as far as this how is concerned, the key word should be, in my view, gradualism. In other words, I see no reason to overreact. This view is based on several considerations. We first have to take into account that the length of the medium term, which is the time horizon of our monetary policy orientation, is dependent on the state of the economy and the nature of the shocks hitting it. When demand shocks prevail, the medium-term horizon is shorter and closer to the standard transmission lag of around two years.
In this regard, high inflation and subdued wage growth (like we have observed so far in the euro area) imply a substantial decline in real incomes, which could translate into lower consumption and investment, and, therefore, into weaker underlying inflation dynamics beyond the immediate short term. Even though part of these negative effects have been mitigated so far by fiscal policy in many countries − where measures have concentrated on compensating, at least partially, low income households for the higher energy prices − looking ahead it is unclear how persistent this policy support may be. 11  3.2  Implications for monetary policy  Now that I have characterised recent inflation dynamics and the risks surrounding future price developments, let me draw some conclusions on how monetary policy in the euro area should respond, which are fully embedded in the ECB’s new monetary policy strategy. First, in this setting of heightened uncertainty, we have underlined the need to maintain optionality and flexibility and to remain attentive to the incoming data and forecasts in order to correctly adjust our monetary policy stance. As we have stated on numerous occasions, the ECB stands ready to act at any time and to adjust all of its instruments as deemed appropriate. But, I insist, the near term is plagued with uncertainty, in terms of pure inflation dynamics but also in relation to several geopolitical risks which could potentially be highly disruptive. That is why, now more than ever, we must maintain optionality and flexibility.