Thus, today monetary policy is dictated by policy interest rates (essentially the deposit facility – or depo – rate)1 and the ECB has not committed itself to any particular future path for interest rates; rather, it aims for agile decision-making, meeting by meeting, based on economic and geopolitical data and events.
This new normal is clearly visible in interest rates. As the first chart shows, sovereign yields in the major euro area economies are back at their pre- 2008 global financial crisis levels. At the same time, unlike during the pre-crisis period, investors are demonstrating a capacity for discrimination, as reflected in the dispersion of rates between different countries and, consequently, in the price of their respective public debts. In other words, we see positive risk premiums that are consistent with countries’ macroeconomic fundamentals,2 even after the Middle East energy shock.
- 1
I.e. the interest rate at which overnight deposits held by banks in the Eurosystem are remunerated. These deposits should not be confused with minimum required reserves, which, with a current ratio of 1%, receive no remuneration.
- 2
See the Focus «Risk premiums and macroeconomics: a robust and cross-cutting relationship» in the MR02/2026.
The path to the new normal is also apparent in the ECB’s balance sheet. In five years, it has shrunk from a peak equivalent to 65% of the euro area’s GDP (2021) to fluctuate around 37% (a level comparable to that of 2017). This reduction has been facilitated by the withdrawal of liquidity previously injected by the Eurosystem during times of crisis (the global financial crisis of 2008, the European sovereign debt crisis, and the COVID-19 pandemic), following the end of exceptional loans to the financial sector (TLTROs) and the passive winding down of debt purchased under QE programmes.3 These dynamics will continue in the coming years and, since they are passive and gradual, they will ensure that liquidity remains abundant in the short and medium term. As shown in the second chart, excess liquidity will not fall below 5% of GDP until mid to late 2029.4
- 3
The two major QE programmes were the APP (2014-2023) and the PEPP (2020-2024), through which the ECB purchased debt (both public and corporate; not directly, but in secondary markets) to address the risks of financial fragmentation and to stimulate the economy when policy rates (at 0% and even slightly negative) had no further room to manoeuvre. The ECB halted net purchases under both programmes in 2022, but continued to buy «on a gross basis» by reinvesting in new assets the principal from maturing assets previously acquired. Finally, the ECB began to passively offload this debt by ending reinvestments (completely in July 2023 for the APP and in January 2025 for the PEPP).
- 4
The balance sheet projection follows mechanical assumptions: APP and PEPP («asset purchases») passively decrease as assets mature, MROs and LTROs («financing operations») evolve according to the median projection of the ECB’s Survey of Monetary Analysts from June 2026, and the rest of the balance sheet grows according to historical trends. Projected excess liquidity, meanwhile, evolves one-to-one with the sum of «asset purchases» and «financing operations».
In fact, the historical comparison shown in the third chart suggests that there is still a considerable way to go before the liquidity withdrawal will begin to create a degree of scarcity and, for example, lead to a widening of money market spreads. However, it is difficult to estimate at what level liquidity will cease to be «excessive». Moreover, there have been changes in the environment suggesting that the point at which this impasse will lie may differ from the past, and that liquidity shortages may occur at levels previously considered ample. These include reduced risk tolerance, which hinders the redistribution of liquidity within the banking system, tighter financial regulation, and a precautionary desire for larger liquidity buffers.5
- 5
Isabel Schnabel, Towards a new Eurosystem balance sheet, 6 November 2025.
For this reason, the ECB has paired the return to normality of its monetary tools (essentially the reduction of its balance sheet) with a reform of its operational framework in order to ensure that the liquidity drain does not compromise monetary policy implementation in the future. As we have already analysed,6 the ECBwants to shift away from the current environment, marked by abundant liquidity originally injected by the central bank itself, towards a world in which the financial system itself determines how much liquidity it wishes to hold. To implement this, the ECB will make its regular refinancing operations (seven-day MROs and three-month LTROs) the main source of direct liquidity. Additionally, it will introduce two new instruments to supply reserves: long-term credit operations and a structural asset portfolio (these will not be «monetary policy» instruments but structural tools to stabilise the financial system’s liquidity needs).
The reform of the operational framework was announced in 2024. In 2026, the ECB is expected to review its deployment and consider whether to recalibrate certain parameters. For now, liquidity remains abundant, so the transition over these past two years has been very gradual, as also illustrated by a very nascent revival in the demand for new liquidity (see last chart). We can expect this gradual approach to continue in the future.
- 6
See the Focus «What is behind the ECB’s interest rates» in the MR09/2025.
