tuomas valimaki : monetary policy implementation in a landscape of rising interest rates and a shrinking eurosystem balance sheet speech by mr tuomas valimaki, board member of the bank of finland, at the bank of finland bulletin press conference, helsiniki, 6 september 2023. * * * accompanying slides to the speech ladies and gentlemen of the media and all others present here and online, welcome to this bank of finland bulletin press conference, the last one of the summer – or first of the autumn! as i'm sure you are aware, each issue of the bank of finland bulletin deals with a different theme. the june and december issues focus on the forecast for the finnish economy, the may issue provides a financial stability assessment and the septemberoctober issue discusses monetary policy. in addition to these regular issues, the bank of finland occasionally publishes thematic reviews – like today, when we focus on the implementation of the european central bank's monetary policy. the implementation of monetary policy refers to the process through which the eurosystem – that is, the ecb and the national central banks, such as the bank of finland – transmits monetary policy decisions to the financial markets. before the global financial crisis, monetary policy implementation was often viewed as a black box where ecb interest rate decisions went in and market rates came out. only a limited group of central bank economists and financial market participants were initiated in the workings of the monetary policy implementation framework. a lot then changed over the next ten years or more, as asset purchase programmes and long - term refinancing for banks turned the execution of monetary policy into a key element in determining the monetary policy stance. slide 2 : key messages these are the key messages of what we have published today : 1. monetary policy has been tightened considerably in response to the rapid rise in inflation. as a result, short - term interest rates have returned to the focus of monetary policy, and the ecb's deposit facility rate paid to banks is, without question, the key instrument for signalling the monetary policy stance. 2. in times of crisis, the eurosystem's balance sheet was expanded exceptionally strongly. the normalisation of monetary policy and maturing of the asset purchase programmes and long - term loans granted to banks are causing the eurosystem's balance sheet to contract, potentially creating new challenges. when we needed to adopt the crisis measures, it often felt like sailing uncharted 1 / 9 bis

less space for the shortest money market rate to fluctuate. by narrowing its interest rate corridor, the central bank can thus limit the volatility in short - term money market rates in all the three situations ( a, b and c ). the downside to the narrow interest rate corridor is that it would decrease banks'incentives to balance reserves between themselves and would increase the central bank's market footprint. if the pool of collateral eligible for refinancing operations is kept very broad, as it is at present, a very narrow interest rate corridor ( particularly the gap between the main refinancing operations rate and the deposit facility rate ) could provide banks an inexpensive way of fulfilling the regulatory liquidity requirements. the liquidity regulatory framework is, after all, based on the premise that banks will ensure they are able to operate without state support. central banks should therefore consider, particularly if they are applying a very narrow interest rate corridor, the separation of collateral criteria by operation type so that in 7 / 9 bis - central bankers'speeches future, only liquid assets with a high credit rating would be eligible as collateral for the main refinancing operations, which would be key to controlling interest rates. this would mean that in the main refinancing operations, the central bank could continue to apply the fixed - rate full allotment policy on a permanent basis. and at the same time, a more extensive pool of collateral similar to the present situation could be applied to longer - term refinancing operations. these structural refinancing operations should be conducted as variable rate tender procedures in which banks compete for reserves by placing bids. the liquidity transformation resulting from the operation and the higher risk - rating of the collateral would then be priced into the funding received by banks. the separation of collateral criteria by operation type and the separation of refinancing operations into monetary policy operations and structural operations would improve the eurosystem's scope for safeguarding financial stability as well, without any negative side effects for controlling interest rates. slide 13 : increase in liabilities may create a need for structural operations even though the eurosystem's balance sheet is now shrinking, it will probably remain larger than before the crises. due to the growth in banknotes and other liabilities, the eurosystem's balance sheet total is unlikely to be much below eur 3 trillion. this figure is likely to be pushed up further by possible buffer demand for reserves among banks. in