The ECB´s normalisation strategy: Uncertainty and legacies

The ECB´s normalisation strategy: Uncertainty and legacies

Fecha: noviembre 2022

Ignacio Ezquiaga

Monetary transmission

SEFO, Spanish and International Economic & Financial Outlook, V. 11 N.º 6 (November 2022)

The ECB is facing an extraordinary situation in which it is unable to rely on an economic slowdown alone to curb inflation. Reduced worker bargaining power has raised the risk of a cost-of-living crisis with a negative impact on consumption, without necessarily reducing underlying inflation, which apart from commodity prices, according to some economists, is being driven in part by global corporations’ price– and margin-setting power. Only with decisive and swift action can the ECB exhibit its determination to bring inflation back in line with levels compatible with its symmetric target of 2% and keep inflation expectations solidly anchored. In line with these objectives, after 13 years of monetary accommodation, interest rate normalisation has begun in 2022 and is progressing at a rapid pace, despite still high levels of uncertainty, largely underpinned by geopolitical tensions arising from the invasion of Ukraine. As well, the ECB this year has also embarked on normalisation of its monetary policy toolkit. Instruments, such as its longerterm refinancing operations (TLTROs) and its asset purchase programmes, a significant legacy from the last period of monetary accommodation, are in the process of being unwound, bringing about a reduction in the size of the ECB´s balance sheet.

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