By Isabel Schnabel
The ECB’s unconventional monetary policy measures have significantly expanded its balance sheet over the past eight years, including a significant growth of excess reserves on the liabilities side. In recent years, these excess reserves have been instrumental in steering short-term interest rates. Having started quantitative tightening (QT) on 1 March 2023, which will lead to a decline in the volume of excess reserves, the ECB faces complex choices on how it will implement its monetary policy in the future. Ultimately, the size of the ECB balance sheet should only be as large as necessary to provide sufficient liquidity and effectively steer short-term interest rates towards levels that are consistent with medium term price stability.
Link: Back to normal? Balance sheet size and interest rate control