The balance sheet of the ECB expanded greatly after the Great Crisis of 2007-9, similarly to other core central banks, but this development does not signify the adoption of a new ‘interventionist’ stance. The expansion of the balance sheet by core central banks reflects a profound change in the framework of monetary policy responding to pressures generated during and after the Crisis. In the case of the ECB, however, the expansion also resulted from attempting to cover the cracks of the fragmented European money market to protect the euro. This fragmentation persists and concern about the euro continues to shape ECB policy. The resurgence of inflation since 2022 led the ECB to contract its balance sheet, again similarly to other central banks, making a new framework necessary for monetary policy. But it is not clear what that would be, given the fragmented European money market. The monetary policy of the ECB is in a quandary reflecting the structural deficiencies of the Eurozone.

Should the transmission of monetary policy be understood in terms of its impacts on interest rates and bond yields, or monetary aggregates? This article considers the relationship between those aggregates and inflation, both over the past and more recently. And explains how the MPC takes account of “QT” in its forecasts.