we did. we phased out our asset purchases and raised interest rates in an unprecedented fashion. and this paid off. at its peak, headline inflation was 10. 6 percent. now, it has come down to just above 6 percent. clearly this is still way too high. but i do believe that, in the absence of further supply shocks, the worst is behind us in terms of the immediate assault on our citizens ’ purchasing power. however, a strong word of caution is still in order. because inflation was high for a long period, underlying inflationary pressures have built up. as a consequence, we now observe second - round effects – energy prices have found their way into other items in the consumer basket, and wages and services in particular have taken over the inflation torch. it is likely that price pressures in these areas will prove more difficult to bring down. it has clearly been a decade of extremes for monetary policy. but despite all of this, inflation expectations are still decently anchored, and let us hope that the next decade will not be so eventful. what we do in the realm of monetary policy, is, of course, aimed at having an effect on the real economy and then onto inflation. we know that this transmission always comes with a lag, whether monetary policy is easing or tightening. but in the spirit of robert schuman, we do aim for concrete results. so it is reassuring to see the first signs of recent monetary policy actually being transmitted to the real economy. on european capital markets, financial conditions have tightened. and euro area banks are reporting tighter lending standards. if you look at this graph, with the composite borrowing costs of both non - financial corporations and households on the left, and credit growth on the right, you can also see that interest rates for households and firms have increased faster than in previous episodes with rising interest rates. this development is in line with the steeper policy rate path compared to previous tightening cycles. we also see these higher rates reflected in lower credit growth in the euro area. the effect of monetary tightening can also be observed through macro - financial indicators. for example, over the past decade, euro area housing prices skyrocketed. in the netherlands they almost doubled. now with the shift in monetary policy, we are observing the first persistent decline in a long time - the number of transactions is going down and the number of houses being sold above the asking price is sharply decreasing. these are only the first, concrete steps in the transmission

the fomc has said that it “ expects to learn more about the underlying demand for reserves during the process of balance sheet normalization. " 10 nonetheless, let me spend a little time reflecting on this challenging question. how banks respond to the fed ’ s reduction in reserve balances could, in theory, take a few different forms. one could envision that as the fed reduces its securities holdings, a large share of which consists of treasury securities, banks would easily replace any reduction in reserve 3 / 10 bis central bankers'speeches balances with treasury holdings, thereby keeping their lcrs roughly unchanged. according to this line of thought, because central bank reserve balances and treasury securities are treated identically by the lcr, banks should be largely indifferent to holding either asset to meet the regulation. in that case, the reduction in reserves and corresponding increase in treasury holdings might occur with relatively little adjustment in their relative rates of return. alternatively, one could argue that banks may have particular preferences about the composition of their liquid assets. and since banks are profit - maximizing entities, they will likely compare rates of return across various hqla - eligible assets in determining how many reserves to hold. if relative asset returns are a key driver of reserve demand, then interest rates across various types of hqla will adjust on an ongoing basis until banks are satisfied holding the aggregate quantity of reserves that is available. recent research by the board staff shows that banks currently display a significant degree of heterogeneity in their approaches to meeting their lcr requirements, including in their chosen volumes of reserve balances. 11 figure 2 shows a subset of this research to illustrate this point. the top and bottom panels represent estimates of how two large banks have been meeting their hqla requirements over time. in each panel, the blue portions of the bars denote the share of hqla met by reserve balances, while the red, yellow, and brown slices of the bars represent the share met by treasury securities, agency mortgage - backed securities, and other hqla - eligible assets, respectively. despite holding roughly similarly amounts of hqla, the two banks exhibit very different hqla compositions, with the bank depicted in the top panel consistently holding a much larger share of hqla in the form of reserve balances than the bank shown in the bottom panel. this finding suggests that there likely is no single “ representative bank ” behavioral model that can capture all we might want to know about banks ’ demand for central bank reserve balances.