2022 was a turning point for the ECB's monetary policy. The inflation outlook changed abruptly as two types of shock hit the economy at the same time. First, the euro area underwent an unprecedented series of negative supply shocks caused by pandemic-induced supply chain disruptions, Russia's unjustifiable invasion of Ukraine and the ensuing energy crisis. This significantly increased input costs for all sectors of the economy. Second, there was a positive demand shock triggered by the reopening of the economy after the pandemic. That allowed firms to pass their rising costs through to prices much faster and more strongly than in the past.
We had already announced, at the end of 2021, that we would gradually reduce net asset purchases under our asset purchase programme (APP) and would end them under the pandemic emergency purchase programme (PEPP) at the end of March 2022. But our overall policy stance was still highly accommodative, having been tailored to the environment of very low inflation in the past decade and the deflationary risks early in the pandemic. So we took a series of steps to normalise that stance and respond rapidly to the emerging inflation challenge.
In March we speeded up the reduction of net purchases under the APP and in April said we expected to discontinue them in the third quarter. In July we then raised the key ECB interest rates for the first time in 11 years, hiking them again in a series of large steps at the policy meetings that followed. The pace of this adjustment was an important signal to the public of our determination to bring down inflation. That helped anchor inflation expectations even as inflation accelerated.
In parallel, we acted to ensure that - as monetary policy was normalised - our policy stance would continue to be transmitted smoothly via financial markets throughout the euro area. This was achieved via two key measures. First, we decided to apply flexibility in reinvesting maturing securities in the PEPP portfolio to counter risks to the monetary policy transmission mechanism related to the pandemic. Second, we launched a new Transmission Protection Instrument.
But as the inflation outlook evolved it became clear that achieving a broadly neutral monetary policy stance would not in itself suffice. Inflation was projected to be too far above our 2% medium-term target for too long, and we saw signs that it was becoming more persistent, with price pressures broadening and underlying inflation strengthening. In this setting, we needed to bring interest rates into restrictive territory and dampen demand.
So in December, following our last policy meeting of the year, we announced that interest rates would still have to rise significantly at a steady pace to reach levels that were sufficiently restrictive to ensure a timely return of inflation to our target. At the same time, we said that, while the key ECB interest rates were our primary tool for setting the policy stance, we would begin reducing the APP securities portfolio from March 2023 at a measured and predictable pace. This also followed a decision in October to recalibrate the terms and conditions of the third series of our targeted longer-term refinancing operations, removing a deterrent to voluntary early repayment of outstanding funds. Monetary policy assets on our balance sheet declined by around €830 billion between end-June (when net asset purchases ended) and end-December, contributing to the normalisation of our balance sheet.
In addition to our measures to combat high inflation, we continued to examine and address wider threats to our mandate stemming from a changing climate. In 2022 we took further steps to incorporate climate change considerations into our monetary policy operations. This included conducting a first climate stress test of several of the financial exposures on our balance sheet and making progress in better capturing the impact of climate change in our macroeconomic modelling. As of October, we started to decarbonise the corporate bond holdings in our monetary policy portfolios by tilting them towards issuers with a better climate performance. We also decided to limit the share of assets issued by non-financial corporations with a high carbon footprint that counterparties can pledge as collateral when borrowing from the Eurosystem.
In 2022 we continued our efforts to remain at the forefront of technological developments in payment systems and market infrastructures. This involved preparations for the transition from TARGET2 to a new, modernised real-time gross settlement system, as well as several measures to ensure pan-European reachability of payment service providers in the TARGET Instant Payment Settlement (TIPS) system. Instant payment transactions via TIPS increased 17-fold in 2022 compared with 2021.
The year also marked the 20th anniversary of the introduction of euro banknotes and coins, a milestone in European history and a tangible symbol of European integration. To date, cash remains the most frequently used means of payment among Europeans, accounting for almost 60% of payments, and there is no doubt that it will continue to play an important role in people's lives. But as the economy becomes increasingly digital, we need to ensure that Europeans also have access to safe, efficient and convenient digital payment methods. This is why the Eurosystem is exploring the possibility of issuing a digital euro. As part of the ongoing investigation phase, the Eurosystem agreed in 2022 on the main use cases and several key design decisions for a digital euro.
As the year came to a close, the euro area expanded again, with Croatia becoming its newest member on 1 January 2023 - demonstrating that the euro remains an attractive currency that brings stability to its members.
None of the above would have been possible without the dedicated efforts of ECB staff and their collective determination to serve the people of Europe.
