Back to the old normal? : Monetary policy implementation in a landscape of rising interest rates and a shrinking Eurosystem balance sheet

Abstract

The past two years have seen a strong surge in inflation. In response, the European Central Bank (ECB) has tightened its monetary policy considerably: the key ECB interest rates have been raised by altogether 4.25%, and securities holdings and the volume of credit granted to banks have been allowed to shrink significantly. With monetary policy normalisation proceeding, the ECB has begun a review of how it will implement monetary policy in the future. Will the deposit facility rate continue to be the key tool to control the level of financing costs? And how far should the Eurosystem balance sheet be allowed to shrink? Maintaining a larger Eurosystem balance sheet than before would enable the consideration of climate factors in the years ahead.