Euro area monetary policy in 2025

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 2025, the key objective of monetary policy decisions for the euro area was to stabilise inflation.

Bank of Finland’s expertise continued to support the preparation of euro area monetary policy in 2025

In 2025, the Bank of Finland contributed centrally to the assessment of the European Central Bank’s (ECB) monetary policy strategy. The strategy assessment reaffirmed the 2% inflation target and emphasised the need to prepare for a more volatile operating environment.

The Bank of Finland also analysed the euro area economy, global trade dependencies and the impact of geopolitics on the economy, thereby supporting decision-making on the Eurosystem’s monetary policy.

Bank of Finland and monetary policy preparation

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. Experts from the Bank of Finland are extensively involved in the work of the Eurosystem’s Monetary Policy Committee and its working groups.

The Bank of Finland’s experts collaborate across departmental boundaries. They prepare recommendations 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.

In 2025, the focus of the preparatory work on monetary policy was on participating in the ECB’s strategy assessment and analysing changes in the monetary policy environment, particularly with respect to the consequences of the United States’ trade and other policies.

Analysis and forecasting of economic growth and inflation also required examination of economies outside the euro area

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

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

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 particularly on international trade and the commodity markets.

The main themes of research conducted at BOFIT in 2025 included the impact of sanctions on the Russian economy, and the analysis of trade barriers and economic dependencies. The three articles below are examples of this work.

Iikka Korhonen and Heli Simola: From sanctions to price surges: The dynamics of Russia’s import prices

Pasi Ikonen, Sanna Kurronen, Risto Rönkkö and Lauri Vilmi: Macroeconomic model simulations suggest only minor impacts on the euro area from current US import tariffs

Juuso Kaaresvirta and Riikka Nuutilainen: ‘Assessing the dependency of Finland and the EU on Chinese imports' (in Finnish).

Bank of Finland’s academic research gained wide visibility

In 2025, more than ten peer-reviewed research articles by researchers from the Bank of Finland were accepted for publication on various topics in areas such as monetary policy, financial stability and the housing market. The articles discussed subjects such as inflation targeting, the impact of economic uncertainty on inflation, bank liquidity creation and the transmission of negative policy rates to the credit market.

New research projects and findings were presented in the Bank of Finland’s own Research Discussion Paper series and to a wider audience of experts in, for example, columns on the VoxEU platform and in the SUERF Policy Notes & Briefs. Among the topics discussed were inflation forecasting through combinations of models and optimal support to banks and firms in crisis situations.

New research contributions have also been regularly presented at international conferences and the Eurosystem’s committees, working groups and research networks, such as the ChaMP (Challenges for Monetary Policy Transmission in a Changing World) Research Network.

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

In 2025, the theme of the annual Bank of Finland and CEPR Joint Conference was ‘Frontiers of Monetary Economics in the 21st century: Where and Where to?’.

The Bank of Finland also hosted its fourth international monetary policy conference, with keynote speakers including Governor Olli Rehn, ECB President Christine Lagarde and Federal Reserve Board Vice Chair Philip N. Jefferson, among others.

Financial systems in emerging economies were discussed in a workshop co-organised by the Bank of Finland, the University of Strasbourg and Fordham University. Additionally, the Bank of Finland co-organised with the European Central Bank and the Hong Kong Monetary Authority a conference entitled ‘Europe, Asia and the Changing Global Economy’. Research at the Bank of Finland supports the preparatory work on monetary policy and the central bank's other policy areas and increases the interest shown towards the Bank of Finland as a potential partner.

Eurosystem’s work on monetary policy strategy assessment completed

2025 was an exceptional year for the economy. The uncertainties caused by geopolitics were reflected in the analysis, research and scenario work of the Bank of Finland and the entire Eurosystem.

A major joint effort by the Eurosystem was the monetary policy strategy assessment, which was completed in June 2025. The strategy assessment focused on changes in the operating environment of monetary policy since 2021 and on the effectiveness of the monetary policy strategy following its 2021 review, in the light of changes in the inflation environment. The Bank of Finland was extensively involved in the strategy work.

One of the key findings from the perspective of inflation dynamics was that high inflation in itself can alter companies’ price-setting behaviour and wage dynamics, which should be taken into account in the monetary policy strategy.

The experts predicted that the inflation environment would remain exceptionally uncertain and more volatile due to structural shifts related to geopolitics, digitalisation, artificial intelligence, demography, the threat to environmental sustainability and changes in the international financial system.

In its updated monetary policy strategy, the Governing Council of the ECB confirmed its commitment to the symmetric 2% inflation target over the medium term.

The Governing Council assessed that appropriately forceful or persistent monetary policy action is important when responding to large, sustained deviations of inflation from the target in either direction, to avoid deviations becoming entrenched through de-anchored inflation expectations.

The Governing Council also stated that, in the event of significant disinflationary shocks, the effective lower bound on nominal interest rates needs to be taken into account. In the event of significant inflationary shocks, in turn, possible non-linearities in price and wage setting need to be taken into account. 

Finally, the Governing Council stressed that it takes into account not only the most likely path for inflation and the economy but also surrounding risks and uncertainty, including through the appropriate use of scenario and sensitivity analyses. The Bank of Finland’s Monetary Policy and Research Department reflects this approach by, for example, drawing up extensive scenarios on geopolitics and the global economy and by assessing the effectiveness of the monetary policy strategy under different circumstances.

The Governing Council assesses periodically the appropriateness of its monetary policy strategy. The next assessment is expected in 2030.

Monetary policy stance was eased in 2025

The main objective of the Eurosystem is to keep euro area inflation at 2% over the medium term. The Governing Council of the ECB adopted a symmetric 2% medium-term inflation target in its 2021 monetary policy strategy review, and this target was also maintained in the strategy assessment concluded in June 2025.

In 2025, inflation stabilised close to the 2% target. It had already fallen close to the target during the previous year, following a period of exceptionally high inflation in 2022–2023.

Energy prices declined in 2025, dampening the rise in the general level of prices. Core inflation, which excludes energy and food prices and provides a better indication of medium-term price pressures than headline inflation, continued to decelerate, as the increase in the prices of consumer goods remained moderate and services inflation also slowed amid weaker wage growth.

The subdued pace of economic growth helped curb inflationary pressures, and inflation expectations remained steadily close to the ECB’s inflation target. Inflation fell from 2.5% in January to 2.0% in December, and core inflation from 2.7% in January to 2.3% in December.

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.

At its monetary policy meetings, the Governing Council takes decisions on the key ECB interest rates and on the other monetary policy tools, such as asset purchase programmes. The Governing Council held eight monetary policy meetings in 2025. The decisions focused on stabilising inflation at the medium-term target of 2%. The ECB started lowering its key interest rates in 2024, and this continued in the first half of 2025, as inflation slowed towards the 2% target and economic growth was still subdued.

Key ECB interest rates were lowered four times

In 2025, the ECB lowered its key interest rates by 0.25 percentage points four times – in January, March, April and June – altogether by 1.00 percentage point. Thereafter, it kept the deposit facility rate, which is essential for steering the monetary policy stance, at 2.0%.

The interest rate on the main refinancing operations was reduced from 3.15% to 2.15% during 2025, and the rate on the marginal lending facility from 3.4% to 2.40%.

Monetary policy securities holdings matured and the central bank's balance sheet shrank

The Eurosystem’s balance sheet has shrunk over the past three years, and this continued in 2025. In particular, the balance sheet contracted due to the maturity of holdings of monetary policy securities.

For the purposes of monetary policy, monetary policy securities holdings are not sold before maturity; instead, the balance sheet shrinks as the holdings reach maturity. A further factor contributing to the shrinking balance sheet was that there were no longer reinvestments of these holdings in 2025.

A total of EUR 530 billion worth of holdings under monetary policy purchase programmes reached maturity during 2025, averaging EUR 45 billion per month. There was some variation in the monthly figures.

The targeted refinancing operations conducted earlier have fully matured, and the only types of monetary policy refinancing operations conducted during 2025 were the one-week main refinancing operations (MROs) and the three-month longer-term refinancing operations (LTROs). The demand for financing in these operations was very low due to the significant amount of liquidity in the banking system.

At the end of the year, the outstanding amount of Eurosystem refinancing operations totalled EUR 37 billion. At the end of 2024, the outstanding amount was almost the same, EUR 34 billion.

US dollar liquidity-providing operations were conducted on a weekly basis in 2025, in line with the calendar notified in advance for these operations.

Normalisation of monetary policy implementation continued in 2025

In 2025, the demand for credit in refinancing operations remained low on account of banks’ abundant liquidity buffers. The Eurosystem’s balance sheet shrank further due to the continued maturing of purchase programmes. The Eurosystem further advanced in applying the revised operational framework for implementing monetary policy.

Increase of one in monetary policy counterparties

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, to hold a minimum level of reserves and to fulfil the operational requirements set by the Bank of Finland.

Monetary policy counterparties are required to comply with the Bank of Finland rules on monetary policy operations and collateral, which were last updated in September 2025.

The number of the Bank of Finland’s monetary policy counterparties increased by one during 2025. At the close of the year, the Bank of Finland had 21 counterparties.

Outstanding amount of refinancing operations and use of collateral at low levels

In 2025, the volume of credit provided by the Bank of Finland to its counterparties in refinancing operations was low compared with previous years, owing to the counterparties’ strong liquidity position.

The outstanding amount of refinancing operations varied during the year and peaked at EUR 650 million. After October 2025, the Bank of Finland’s counterparties no longer borrowed funds in refinancing operations, and there were no refinancing operations outstanding at the end of the year.

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

Banks primarily use market-based funding channels to meet their liquidity needs rather than central bank credit. In the future, as the amount of excess reserves decreases, banks are expected to return to central bank refinancing operations.

With the low volume of outstanding credit, the need for counterparties to deposit collateral with the Bank of Finland was also limited. In 2025, the total value of collateral deposited by counterparties with the Bank of Finland averaged EUR 16 billion, which was still 6% more than in 2024.

The reduction in outstanding credit, together with the slight increase in deposited collateral, resulted in a further increase in the amount of excess collateral from Bank of Finland counterparties. During 2025, the amount of excess collateral averaged 99%, compared to an average of 93% in the previous year. 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, 39% and 37% of all collateral pledged in 2025 (Chart 8).

In volume terms, the use of covered bonds as collateral grew slightly, by about 11%, whereas the use of credit claims remained more or less unchanged.

As banks’ excess reserves declined due, in particular, to the maturing of monetary policy securities holdings, the amount of liquidity deposited with the Bank of Finland by institutions required to hold a minimum level of reserves also continued to decrease during 2025. At the close of the year, the amount of these deposits totalled approximately EUR 69 billion (Chart 9).

As in previous years, the liquidity deposited with the Bank of Finland remained relatively stable in proportion to the liquidity deposited across the Eurosystem, at 3% on average.

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

Purchase programme holdings continued to decrease

At the end of 2025, the Eurosystem’s total holdings under purchase programmes amounted to EUR 3,820 billion. The corresponding holdings on the Bank of Finland’s balance sheet amounted to EUR 70.8 billion.

Purchase programme holdings were at their highest in summer 2022, when the Eurosystem’s holdings totalled nearly EUR 5,000 billion and the Bank of Finland’s EUR 97 billion.

The Eurosystem’s holdings are now decreasing by about EUR 500 billion per year and those of the Bank of Finland by EUR 10 billion. This pace will continue for a few more years. After that, it will slow because the shorter-term debt securities will have matured, leaving only longer-term holdings whose maturities are distributed across the next 25 years. 

In addition to purchase programme holdings reaching maturity, the Eurosystem has also sold some corporate bonds due to the issuers’ deteriorating credit quality. These sales aim to limit the credit risk associated with the Eurosystem’s purchase programme holdings.

The Bank of Finland is one of the six national central banks in the Eurosystem that manage corporate bonds on behalf of the entire Eurosystem.

Amount of liquidity still significant but falling back to normal levels

The amount of liquidity in the banking system, or central bank money available to commercial banks, has been deliberately very abundant in the euro area for many years. At present, the amount of liquidity in the banking system is falling back to normal levels as securities holdings mature.

The operational framework for implementing monetary policy was already adjusted to the current operating environment in 2024, and the Eurosystem will review it 2026.

In the current situation, the Eurosystem’s balance sheet is shrinking and the amount of excess liquidity is decreasing. The expectation is that the amount of liquidity will return to normal levels in the coming years.

The ECB’s deposit facility rate is the most important policy rate, which steers the shortest money market rates in particular. Some volatility in money market rates around the deposit facility rate is tolerated, however. Longer-term money market rates are affected by market expectations regarding the ECB’s future interest rate decisions.

The liquidity-providing operations currently in use are the one-week main refinancing operations (MROs) and the three-month longer-term refinancing operations (LTROs).

In the future, the refinancing operations will be supplemented by new structural refinancing operations and a structural portfolio of securities to cover the banking system’s structural liquidity needs (Chart 11).

Bank of Finland advanced various market operations projects and organised a conference on monetary policy implementation

In 2025, the Bank of Finland advanced several matters related to market operations. One of these was the long-prepared introduction of the unified Eurosystem Collateral Management System (ECMS). The ECMS is a system used by central banks and banks to manage securities and other assets pledged as collateral for central bank liquidity (see also the section ‘Money and payment’).

In 2025, the Bank of Finland launched work to establish a credit risk function to support monetary policy implementation, risk management and preparedness.

The credit assessment sources accepted in the Eurosystem include external credit assessment institutions (ECAIs), central banks’ in-house credit assessment systems (ICASs) and the internal ratings-based (IRB) systems of banks operating as monetary policy counterparties. Finnish companies have relatively few external credit ratings, the use of banks’ internal systems in the assessment of eligible collateral has been limited, and so far the Bank of Finland has not yet set up an in-house credit assessment system.

When the Bank of Finland’s credit risk function starts its operations, it will, among other things, make it possible for a larger number of banks operating in Finland to use credit claims as collateral.

In spring 2025, the Bank of Finland held for the first time a conference on monetary policy implementation. The conference was co-organised with the European Money and Finance Forum (SUERF). The conference was entitled ‘Monetary Policy Implementation: Old Wisdom and New Trends’, and it brought leading international experts on monetary policy implementation to Finland.

Read Head of Division Niko Herrala’s blog post Old wisdom and new trends in monetary policy implementation.

Eurosystem takes climate change more closely into account in monetary policy implementation

Climate-related considerations have been taken into account in the Eurosystem’s monetary policy implementation, specifically in purchase programmes, since October 2022, when the ECB introduced a climate score for monetary policy purchases of corporate bonds. Climate score is an issuer-specific figure that takes into account the issuer’s past carbon dioxide emissions, its emission reduction targets and the quality of its emission disclosures. The Eurosystem aims to gradually decarbonise its corporate bond holdings on a path aligned with the Paris Agreement.

Purchases under all the monetary policy purchase programmes have now ended, but monitoring of climate-related considerations will also continue during the maturity phase of the portfolios.

To support the achievement of the long-term objective of carbon neutrality, the ECB's Governing Council set interim emission reduction targets in 2024 for corporate bonds under the asset purchase programme (APP) and the pandemic emergency purchase programme (PEPP). The interim targets serve to track progress achieved in reducing the emissions of corporate bond holdings.

The Governing Council clarified the content of the interim targets in the ECB’s climate-related financial disclosures for 2024, which were published in June 2025. The interim target is a reduction of 7% on average per year in the weighted average emissions intensity compared with the reference year 2021, taking into account the impact of inflation. The annual target of 7% supports the objectives set out in the Paris Agreement and the European Climate Law.

The Eurosystem is launching preparatory work to take climate-related considerations more extensively into account in the implementation of monetary policy, going beyond purchase programme holdings, for example in the structural portfolio of securities.

Bank of Finland supported domestic economic debate with independent analyses in 2025

The Bank of Finland’s forecasts suggested that the Finnish economy’s recovery would be slow. In expressing its views, the Bank of Finland emphasised the long-term growth outlook, the importance of human capital and the need to strengthen the sustainability of general government debt.

Bank of Finland predicted gradual strengthening of Finland’s economic growth

The forecast for the Finnish economy is part of the Eurosystem’s macroeconomic projections. The Bank of Finland assesses trends and developments in the Finnish economy with its independent analyses. The forecasts are intended primarily to support the preparation of the euro area’s single monetary policy and the related decision-making.

Finland’s economic woes continued in 2025. Geopolitical uncertainty and the threat of a trade war undermined business and household confidence.  Labour market conditions weakened noticeably, as the subdued demand in the economy weighed on employment and pushed up unemployment.

In the December 2025 forecast, household consumption remained at the previous year’s moderate level, as savings increased and concerns about unemployment grew. Private investment fell slightly further, reflecting the continued weakness in new housing construction and a contraction in non-residential investment. Exports, in turn, picked up despite the uncertainties in the global economy, supported in particular by goods exports.

The Bank of Finland stressed in its forecasts in 2025 that the Finnish economy’s recovery would be slow. The December 2025 forecast had three key messages (Chart 12). 

1. Economic growth and employment will gradually strengthen as domestic demand picks up.
2. Inflation will remain moderate in the immediate years ahead.
3. Public finances will continue to be deeply in deficit.

Bank of Finland participated actively in domestic economic policy debate

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 2025 were the Governor’s speech at the Government’s mid-term policy review session in April, the Governor’s public hearing in Parliament’s Commerce Committee in November and the Governor’s speeches at two of the Bank of Finland Bulletin press briefings. The theme of the June press briefing was the impact of the trade war on Finland’s economic growth in the immediate years ahead. The December press briefing emphasised the need to strengthen the public finances and highlighted the fiscal pressures caused by higher defence spending.

The main themes of the views expressed by the Bank of Finland were the outlook for long-term economic growth and measures to strengthen growth, and debt sustainability and the reform of the national fiscal framework.

Slower growth in the economy will weaken the financial base of the welfare state. At the same time, population ageing will increase the demand for services. In the debate on economic growth, the Bank of Finland emphasised human capital and the research, development and innovation (RDI) activity which is reliant on such capital, and also the broad diffusion of innovations.

The combined human capital in Finland is at risk of declining from the late 2040s onwards. Due to shrinking age cohorts, the accumulation of human capital among the working-age population will be slow, even if educational attainment were to improve and work-based immigration were to remain at a high level.

You can read more on the subject in the article Finnish economy’s long-term growth outlook squeezed by a shrinking working-age population and weak productivity by Arto Kokkinen, Pirkka Jalasjoki and Meri Obstbaum.

According to the Bank of Finland’s assessment of the public finances, turning the public debt ratio around will require significant fiscal consolidation, but expenditure pressures, especially the increase in defence spending, will make this difficult.

The revised national fiscal framework will provide a solid basis for this work. The numerical rules established in law will improve the quality of fiscal policy by increasing transparency and the accountability of political decision-makers to voters.

However, the numerical rules will guide decision-making only if there is sufficiently broad commitment to them. The parliamentary consensus on the objectives reached during the autumn is therefore an essential part of a well-functioning regulatory framework.