What is monetary policy normalisation?

Abstract

Surging inflation has triggered moves to normalise monetary policy. This means a tightening of financing conditions by raising key interest rates, among other things. Central banks are shifting from unconventional monetary policy measures towards conventional interest rate policy. The steps to tighten monetary policy are therefore visible as an increase in the general level of interest rates. There is, however, great uncertainty concerning the future level of interest rates and their long-term equilibrium level, where the economy's resources are at full capacity and inflation is consistent with the central bank’s objective. Going forward, the ECB Governing Council will be making its monetary policy decisions meeting by meeting on the basis of incoming data on inflation and economic activity.