The process of monetary policy normalisation has translated into a significant increase in market interest rates. Since early 2022 the 12-month EURIBOR has climbed by more than 290 bp, while the 10-year overnight index swap (OIS) rate (typically used as the risk-free benchmark interest rate) has risen by 240 bp. These increases have begun to pass through to the cost of bank financing for firms and households, which will help to contain inflationary pressures. In Spain, long-term government bond yields have risen by 2.5 pp this year, and the risk premium relative to the German benchmark has increased by 35 bp, although it has remained stable since the TPI was approved. Meanwhile, the average cost of long-term corporate debt issuance has also risen sharply (over 220 bp) and, as with public debt, has reached levels not seen since 2014. Moreover, the IBEX 35 has fallen by nearly 11% since early 2022. The impact on bank lending conditions has been more subdued. The average cost of new loans rose up to July (latest available figure), albeit moderately. Broadly speaking, the passthrough from market interest rates to new loans occurs with a certain lag, but so far on this occasion, it is proving slower than in recent episodes.15 The contained cost of some bank liabilities, such as private-sector deposits, may be contributing to this difference. Nevertheless, the increase is expected to fully pass through in the coming months.
Thus, this episode has shown that structural policies that foster the integration and interconnection of European markets – in particular energy markets – and strengthen the 12  single market will not only generate greater resilience to shocks, but also drive competitiveness. Joint funding arrangements should be established to safeguard this common effort and avoid any excessive or highly unequal impact on national public finances. Common funding arrangements would enable financing for large-scale programmes based on shared quality standards and provide for a uniform approach for assessing programme execution. Headway must also be made in the expansion of the public and private risk-sharing arrangements in the EU. The euro area needs a permanent macroeconomic stabilisation mechanism – with revenue-raising and borrowing capacity – to complement the single monetary policy. It is also imperative that the banking union be completed with the establishment of a European deposit guarantee scheme. Lastly, we must press forward with constructing a capital markets union. 4. Concluding remarks In short, with war on European soil and a sharp rise in geopolitical tensions, the challenges we face are very complex. These developments, together with the additional series of shocks on an unprecedented scale from the pandemic, have pushed inflation to persistently very high levels both in Spain and in the euro area as a whole. Given this situation, monetary policy needs to be steered to ensuring that the direct effects of these shocks are not included in the formation processes for other prices and wages.