Monetary policy in 2024

The Eurosystem, comprising the European Central Bank (ECB) and the national central banks of the euro area, is responsible for conducting monetary policy in the euro area. The Bank of Finland participates in the preparation of and decision-making on the Eurosystem’s single monetary policy and is responsible for its implementation in Finland. In 2024, the key objective of monetary policy decisions for the euro area was to stabilise inflation.

Monetary policy stance in 2024

The main objective of the Eurosystem is to keep euro area inflation at 2% over the medium term, in line with the ECB’s revised monetary policy strategy published in 2021.

The Governing Council of the ECB is responsible for taking decisions on monetary policy for the euro area. The Governing Council consists of the six members of the ECB’s Executive Board and the governors of all the euro area national central banks, including the Governor of the Bank of Finland, Olli Rehn. During Rehn’s leave of absence, which ended on 30 January 2024, his place on the Governing Council was taken by Member of the Board of the Bank of Finland Tuomas Välimäki.

At its monetary policy meetings, the Governing Council takes decisions on the key ECB interest rates and on monetary policy tools, such as asset purchase programmes. Monetary policy is calibrated on the basis of the latest data.

These decisions are supported by analyses and forecasts of developments in the financial markets and in the euro area economy, prepared by experts from the ECB and the Eurosystem. The ECB’s Governing Council held eight monetary policy meetings in 2024.

At the beginning of 2024, inflation was still slightly above the target and monetary policy was restrictive.

However, it was becoming increasingly clear from the overall price and wage developments in the euro area that inflation is slowing down over the medium term. Supply shocks, which had pushed up inflation in previous years, had already abated. Monetary policy was still tight, growth in labour supply was curbing wage pressures and inflation expectations remained anchored at 2%.

Inflation in the euro area fell during 2024 to a level close to the target. At the same time, euro area economic growth remained slow. The ECB’s monetary policy decisions focused on stabilising inflation at the medium-term target of 2%.

Inflation in the euro area fell from 2.8% in January to 2.4% in December as a result of a decline in energy prices, the earlier tightening of monetary policy and subdued demand (Chart 3). Long-term inflation expectations have stayed close to the ECB’s inflation target of 2%.

Changes in key ECB interest rates

The European Central Bank started lowering its key interest rates in June 2024, after having kept the most important of these, the deposit facility rate, unchanged at 4% since September 2023 (Chart 4).

The deposit facility rate, which is used to steer the ECB’s monetary policy stance, was lowered four times during 2024, by 0.25 percentage points in each of June, September, October and December – altogether by 1 percentage point.

As a result, the deposit facility rate was reduced from 4.00% to 3.00% in 2024. The interest rate on the main refinancing operations was reduced from 4.50% to 3.15%, and the rate on the marginal lending facility from 4.75% to 3.40%.

You can read more on monetary policy decisions on the ECB’s website.

The ECB’s deposit rate cuts passed through to the money market rapidly and in full. As monetary policy was eased by lowering the key ECB interest rates, the ECB also allowed its balance sheet to contract.

Asset purchases and size of the central bank’s balance sheet

In 2024, the ECB continued to reduce its balance sheet, a process which it had started in 2023. The balance sheet was allowed to shrink both via the maturity of bonds acquired under purchase programmes and through the maturity of targeted longer-term refinancing operations (TLTROs).

The ECB has not conducted active quantitative tightening (QT), however, so it has not sold bonds acquired under purchase programmes before maturity.

Reinvestment of securities holdings was further reduced during 2024 in line with a previous decision. Reinvestments under the asset purchase programme (APP) had already been discontinued in 2023.

Full reinvestment of the principal payments from maturing securities purchased under the pandemic emergency purchase programme (PEPP) was continued during the first half of 2024. From July onwards, reinvestments were reduced, with PEPP holdings shrinking by an average of EUR 7.5 billion per month.

Reinvestments of holdings under monetary policy purchase programmes were discontinued completely at the end of 2024.

As before, flexibility could be exercised in PEPP reinvestment if there was a risk to the operation of the monetary policy transmission mechanism.

As necessary, the ECB may activate the Transmission Protection Instrument (TPI) to counter disorderly market dynamics that pose a threat to the transmission of monetary policy across the euro area.

In addition to the maturing purchase programme holdings, the maturity of TLTROs was another factor that caused a significant reduction in the balance sheet during 2024. The last TLTRO was conducted in 2021 and it matured on 18 December 2024. Most of the targeted refinancing operations had already matured before 2024. Banks have also voluntarily made early repayments of borrowed TLTRO funds.

At the Eurosystem level, the demand from banks for financing in the one-week main refinancing operations (MROs) and the three-month longer-term refinancing operations (LTROs) increased slightly towards the end of the year. However, participation by banks in the regular operations was low in relative and historical terms.

The outstanding amount of Eurosystem refinancing operations decreased from EUR 410 billion to EUR 26 billion in 2024.

US dollar liquidity-providing operations were conducted on a weekly basis in 2024, in line with the calendar notified in advance for these operations.

Monetary policy preparation in 2024

The Bank of Finland is an influential member of the Eurosystem and expresses its views on the basis of data, research and high-quality analysis. These principles guide the preparatory work on monetary policy at the Bank of Finland and in the Eurosystem’s Monetary Policy Committee and its working groups. Experts from the Bank of Finland are extensively involved in the activities of the Committee and its working groups.

The preparatory work on monetary policy at the Bank of Finland combines expertise from the Bank’s various departments. As part of this work, recommendations are prepared for the Bank of Finland Governor in support of the Governor’s role in monetary policy decision-making in the ECB Governing Council and in related policy discussions. The preparatory work also includes analysis of structural issues concerning the monetary policy environment and related conditions and provision of support for communication on monetary policy.

The preparatory work on monetary policy had two focus areas in 2024. The factors that led to surging inflation in the euro area were analysed by further developing the available inflation models. The impact of the various monetary policy instruments on the financial system, the real economy and inflation were also examined.

Analysis and forecasting of euro area economic growth and inflation

Before each monetary policy meeting of the ECB, experts from the Bank of Finland draw up a comprehensive analysis of the euro area economy. The analysis covers the particular trends and developments in the real economy, prices and financial markets that are relevant to the ECB’s monetary policy.

In drawing up the analysis, the experts make extensive use of the latest statistical data, nowcasting models for forecasting economic growth and employment, and inflation and monetary policy models, which are being constantly refined.

Topical themes relevant to monetary policy are also examined as an important part of the analysis. In 2024, these included inflation forecasting, monetary policy transmission, the labour market and the impact of geopolitical shocks on inflation and growth.

On the basis of this analysis, Bank of Finland experts formulate a view on inflation and economic growth in the euro area, in support of monetary policy preparation.

BOFIT conducts analysis and research on the global economy

The euro area analysis also takes into account analysis by BOFIT (Bank of Finland Institute for Emerging Economies) on the macroeconomic trends and financial markets of economies outside the euro area. This focuses on the United States, China and Russia, and also includes international trade and the commodity markets.

One of the main themes of research conducted at BOFIT in 2024 was geoeconomic fragmentation (see Are supply chain vulnerabilities increasing in the era of geoeconomic fragmentation?). Research on Russia also attracted considerable international attention (see e.g. Where do Russia’s mobilized soldiers come from? Evidence from bank deposits).

Monetary policy preparation is supported by academic research

In 2024, the Bank of Finland continued its high-quality research supporting in a variety of ways the preparatory work on monetary policy and on the central bank’s other policy areas. This research also increases the Bank of Finland’s impact and influence, and the interest shown towards it as a potential partner, both in Finland and internationally.

Researchers from the Bank of Finland published more than 20 peer-reviewed research articles in 2024 on various topics in areas such as monetary policy, financial markets and the international economy. The articles discussed subjects such as inflation forecasting, stress testing of banks, euro area government bond yields, corporate productivity, the effects of sanctions, and the fragmentation of world trade and the global economy.

New research projects and findings were also presented to a wide audience of experts in the Bank of Finland’s own Research Discussion Paper series and, for example, in columns on the VoxEU platform and in the SUERF Policy Notes & Briefs. Among the topics discussed were monetary policy communication in containing surging inflation, the long-term effects of monetary policy, and banks’ capital buffer regulations.

New research contributions have also been regularly presented at international conferences and the Eurosystem’s committees, working groups and research networks.

Each year, the Bank of Finland co-organises various conferences and thematic sessions with its partners. The co-organisers include the Centre for Economic Policy Research (CEPR), the European Money and Finance Forum (SUERF) and the Central Bank Research Association (CEBRA).

A workshop on banking and finance in emerging markets was also co-organised once again with the University of Strasbourg and Fordham University.

Forecast for the Finnish economy is part of the euro area macroeconomic projections and monetary policy preparation

For the preparation of euro area monetary policy and analysis of the effects of that policy, it is necessary to conduct an independent and analytical assessment of developments in the economy over the immediate years ahead.

There is often a time lag between the introduction of monetary policy measures and their impact on inflation and other macroeconomic phenomena. For this reason, monetary policy decision-makers need an informed view of how decisions taken now would affect the economy many months or even years ahead.

The Bank of Finland draws up forecasts primarily to support the preparation of the euro area’s single monetary policy and the related decision-making, and the forecast for the Finnish economy is therefore part of the Eurosystem’s macroeconomic projections. The macroeconomic projections are also closely linked to the forecast for the public finances and to the short-term inflation forecast.

Each year, the Bank of Finland publishes four forecasts for the Finnish economy. Two of these, published in June and December, are extensive forecasts drawn up in cooperation with the Eurosystem. A considerably more limited interim forecast is published in March and September.

The forecasts are drawn up using macroeconomic statistical models. The Bank of Finland’s December 2024 forecast had three key messages (Chart 6). The main message was that economic growth would be slow initially but would gradually pick up. It would, however, be overshadowed by heightened uncertainty over the outlook for the world economy and the euro area economy. Inflation was forecast to remain low in the immediate years ahead. The public finances would continue to be deeply in deficit and government debt would continue to increase. The easing of financing conditions was expected to support the economic recovery.

Participation of the Bank of Finland in domestic economic policy debate in 2024

The Bank of Finland provides independent analysis and expertise on topical matters for the benefit of Finnish society. It participates in the domestic debate on economic policy via speeches given by its Board members, and through events, publications and statements.

The views expressed by the Bank of Finland are based on the objectives set for it by law and in the EU Treaties and also on its independent status.

The Bank of Finland’s key contributions on domestic economic policy in 2024 were the Governor’s speech at the opening session of the Government’s spending limits discussions on 15 April, the editorial of the Bank of Finland Bulletin published on 11 June, the Governor’s public hearing in Parliament’s Commerce Committee on 26 November and the Governor’s speech at the Bank of Finland Bulletin press briefing on 17 December.

The main themes raised by the Bank of Finland in domestic economic policy in 2024 were cost competitiveness and the labour market situation, fiscal sustainability and the strengthening of productivity growth.

The Bank of Finland’s analyses showed that cost-competitiveness deteriorated considerably in Finland after the global financial crisis, improving thereafter until 2017 and since then remaining relatively stable.

Cost competitiveness has been supported not by good productivity growth but by the fact that growth in labour costs remained moderate. Sustained growth in cost-competitiveness would nevertheless require an improvement in labour productivity in relation to Finland’s competitors. 

According to the Bank of Finland’s assessment of the public finances, turning Finland’s debt ratio onto a declining path would require fiscal rebalancing measures for some time to come. The new EU fiscal rules provide a good framework for this work.

There is, however, considerable uncertainty about the implementation of Finland’s new medium-term fiscal-structural plan. According to a debt dynamics calculation performed on the basis of the Bank of Finland’s forecast, an additional fiscal consolidation of EUR 4.5 billion over the next seven years would be sufficient to halt the rise in the debt ratio over the medium term.

The low level of economic growth and productivity in Finland and Europe featured prominently in public debate in 2024. The Bank of Finland‘s contribution to the debate emphasised human capital and the research, development and innovation activity which is reliant on such capital, and also diffusion of innovations. This included the involvement of experts from the Bank of Finland (in Finnish) in the Room for Growth project launched by Prime Minister Petteri Orpo.

Monetary policy implementation and its preparation in 2024

Number of Bank of Finland’s monetary policy counterparties unchanged

The Bank of Finland’s monetary policy counterparties comprise Finnish credit institutions and branches of Nordic banks operating in Finland. Monetary policy counterparties are required to be subject to financial supervision, to be financially sound and to hold a minimum level of reserves. They must also fulfil the operational requirements set by the Bank of Finland.

The number of the Bank of Finland’s monetary policy counterparties remained unchanged in 2024. At the close of the year, the Bank of Finland had 20 counterparties.

Monetary policy counterparties are required to comply with the Bank of Finland rules on monetary policy operations and collateral, which were last updated in May 2024.

Bank of Finland counterparties repaid the remaining amounts borrowed under TLTROs

The volume of credit provided by the Bank of Finland to its counterparties in refinancing operations decreased from EUR 3.7 billion to approximately EUR 300 million in 2024. At the end of the year, the outstanding volume of credit was the lowest since June 2016, the previous time the level was below EUR 1 billion (Chart 8).

The decrease in outstanding refinancing operations during 2024 was due to early repayments and maturing of the last of the targeted longer-term refinancing operations (TLTROs). The last TLTRO matured on 18 December 2024.

In 2024, banks’ demand for financing in the weekly main refinancing operations (MROs), the three-month longer-term refinancing operations (LTROs) and the US dollar liquidity operations was very low, both via the Bank of Finland and in the Eurosystem as a whole. This was due to the significant amount of excess reserves in the banking system.

With the reduction in outstanding refinancing operations, the amount of collateral deposited with the Bank of Finland also decreased further. During 2024, counterparties deposited collateral averaging a total value of EUR 15 billion with the Bank of Finland, which was approximately 40% less than the previous year.

As the amount of collateral deposited did not shrink in the same proportion as the amount of credit, the amount of excess collateral from Bank of Finland counterparties increased from 46% to an average of 93% during 2024. Excess collateral is the portion of the collateral deposited with the Bank of Finland which is in excess of the outstanding amount of credit provided in refinancing operations.

As in previous years, credit claims and covered bonds were the most common asset classes used as collateral among the Bank of Finland’s counterparties, accounting respectively for, on average, 42% and 35% of all collateral pledged in 2024 (Chart 9). In volume terms, the use of covered bonds as collateral decreased significantly, by 65%, whereas the use of credit claims remained unchanged. Among the asset classes used as collateral, only securities issued by central and regional government and corporate bonds saw growth from the previous year. 

With the reduction in outstanding refinancing operations and purchase programme holdings, the amount of liquidity deposited with the Bank of Finland by institutions required to hold a minimum level of reserves also decreased during the course of 2024, from EUR 115 billion to EUR 89 billion, i.e. by 23% (Chart 10).

The liquidity deposited with the Bank of Finland remained relatively stable in proportion to the liquidity deposited across the Eurosystem, at approximately 3%.

Counterparties’ liquidity holdings consisted almost entirely of overnight deposits, which are remunerated at the Eurosystem’s deposit facility rate.

Bank of Finland ended its asset purchases under the purchase programmes in December

In the first half of 2024, and partly also during the second half of the year, the Bank of Finland reinvested maturing holdings of Finnish public sector debt securities and corporate bonds acquired under the PEPP. Holdings under the APP were allowed to mature in full.

In 2024, holdings of monetary policy-related securities on the Bank of Finland’s balance sheet decreased from EUR 90 billion to EUR 82 billion. Of this total, securities purchased under the APP amounted to EUR 56 billion, and under the PEPP to EUR 26 billion.

At the end of September 2024, the Bank of Finland held 27.4% of the total stock of Finnish central government bonds. The share held by the Bank of Finland was at its highest in the first quarter of 2022, when the Bank held 41% and the ECB held approximately 5% of the total.

The Bank of Finland itself bears the risk in holdings of Finnish public sector securities, but the risks in the private sector purchase programmes are shared among the Eurosystem’s central banks.

At the end of 2024, the amount of corporate bonds purchased under the APP on the Bank of Finland’s balance sheet totalled EUR 13.6 billion, and covered bonds amounted to EUR 9.1 billion. The Bank of Finland has also purchased a significant amount of corporate bonds under the PEPP.

Purchase programme holdings will continue to show on the balance sheets of the Bank of Finland and of the other euro area central banks for a long time to come. For example, the average maturity of holdings of public sector securities is seven years, so these holdings will still amount to tens of billions of euros on the balance sheets at the start of the 2030s.

In 2024, the Bank of Finland participated actively in the Eurosystem’s work to improve the risk management framework for corporate sector bond holdings.

Although new purchases are no longer made, management of the securities portfolio in the years ahead will continue to involve tasks such as those related to corporate bond repurchases. The Bank of Finland will also continue to regularly monitor its bond holdings.

Operational framework for implementing monetary policy was revised

The operational framework for implementing monetary policy was revised in 2024. The operational framework was adjusted to the current operating environment in which the significant amount of liquidity in the banking system (central bank money available to commercial banks) is declining and falling back to normal levels. The Eurosystem’s balance sheet and the amount of excess liquidity have shrunk since 2022 on account of the maturity of securities holdings and TLTROs.

The review of the operational framework for implementing monetary policy was announced in December 2022 and completed in March 2024.

The outcome of the review was that short-term money market rates will continue to be steered using the ECB’s deposit facility rate. Some volatility in money market rates around the deposit facility rate will be tolerated, however. A broad mix of collateral will be accepted in refinancing operations. The operational framework will be reviewed again in 2026, based on experience gained, or earlier, if necessary.

The following key changes were made to the operational framework:

• The spread between the rate on the main refinancing operations and the deposit facility rate was reduced from 0.50 percentage points to 0.15 percentage points as from 18 September 2024.
• In addition to providing liquidity through the weekly main refinancing operations and the three-month longer-term refinancing operations, the market operations will be supplemented in the future by structural refinancing operations and a structural portfolio of securities.

Experts from the Bank of Finland participated actively in the planning of the operational framework review in the Eurosystem working groups and committees.

You can read more on the subject in the following:

• ECB announces changes to the operational framework for implementing monetary policy
• What is the operational framework and what does it do?
• 'ECB revised the framework for implementing monetary policy' (in Finnish) – blog post by Member of the Board Tuomas Välimäki

Taking climate change into account in monetary policy implementation

Climate risks have been taken into account in the Eurosystem’s monetary policy implementation since October 2022, in respect of purchase programmes. At that time, a climate score was introduced in monetary policy purchases of corporate bonds with the aim of tilting corporate bond purchases towards issuers with a better climate performance.

The Eurosystem aims to gradually decarbonise its corporate bond holdings on a path aligned with the Paris Agreement. The ECB calculates an overall climate score for each issuer, which takes into account the issuer’s past carbon dioxide emissions, emission reduction targets and the quality of its emission disclosures.

The most recent addition to the emission reduction targets  in the monetary policy-related corporate bond portfolio was made in June 2024, when the ECB’s Governing Council decided on the interim targets for corporate bonds purchased under the APP and the PEPP.

The interim targets will be used internally in the Eurosystem to monitor the corporate sector portfolio’s emission reduction trajectory. If deviations from the desired trajectory are identified, remedial actions will be considered, within the ECB’s mandate, on a case-by-case basis.

The interim emission reduction targets are portfolio-specific. The ECB does not set emission reduction targets for individual companies.

As part of the reform of the operational framework, work will also be launched in 2025 to take climate-related considerations more extensively into account in the implementation of monetary policy, going beyond purchase programme holdings, for example in regard to the design of the structural portfolio of securities.

In 2024, preparatory work was also continued to incorporate climate risks into the Eurosystem’s collateral framework.

The ECB’s Governing Council set interim emission reduction targets in 2024 for the Eurosystem’s corporate bond portfolio.