Monetary policy

The Eurosystem, comprising the national central banks of the euro area and the European Central Bank (ECB), is responsible for conducting the single monetary policy of the euro area. The main objective of the Eurosystem is to keep euro area inflation at 2% over the medium term. In 2022, a surge in inflation prompted the ECB to raise its key interest rates.

As a member of the Eurosystem, the Bank of Finland participates in the preparation of the euro area’s single monetary policy and in the related decision-making and is responsible for the policy’s implementation in Finland.

Inflation increased sharply across the euro area in 2022, which prompted the ECB to begin the normalisation of its monetary policy, i.e. reduce its monetary policy stimulus measures.

Interest rates were raised and net asset purchases ended in 2022 as part of monetary policy normalisation

In 2022, the ECB embarked on the normalisation of its monetary policy by sharply raising its key interest rates, recalibrating its asset purchase programmes, phasing out its collateral easing measures implemented during the COVID-19 pandemic and tightening the interest rate conditions on its longer-term refinancing operations.

The key ECB interest rates were initially raised in July 2022 and then raised three more times during the remainder of the year. The aim of raising interest rates is to stabilise inflation at the 2% target level over the medium term.

The raising of key interest rates is also reflected in higher market rates, such as the 12-month Euribor rate.

As part of its overall monetary policy normalisation, the ECB ended its net purchases under the pandemic emergency purchase programme (PEPP) in March 2022. Net asset purchases under the asset purchase programme (APP) were ended in June.

Climate considerations incorporated into ECB corporate sector purchase programme

In October 2022, the ECB began incorporating climate change considerations into its corporate sector purchase programme (CSPP). The ECB aims to gradually decarbonise its corporate bond holdings so that its portfolio is aligned with the goals of the Paris Agreement.

The Eurosystem will tilt its reinvestments of maturing securities under the programme towards issuers with a better climate performance. In addition, the Eurosystem will use a climate score to adjust its bids on the primary market to favour issuers with a better climate performance and green bonds that fulfil particular criteria.

These climate measures will be pursued without prejudice to the Eurosystem’s primary objective of maintaining price stability.