In 2023 the ECB consolidated progress in its fight against inflation in the euro area. The year began with headline inflation still close to record highs. The negative effects of earlier supply and demand shocks, while easing, were still driving up prices. But two key developments paved the way for inflation to decline sharply during the year.
First, the effects of the past shocks began to fade. Energy prices, which had spiked as a consequence of Russia's unjustified war against Ukraine, fell steeply, and global supply bottlenecks further eased. The drop in energy prices, in particular, accounted for half of the decline in inflation in 2023. Second, the ECB continued to tighten monetary policy, which helped to lower inflation further by dampening demand. Altogether, from January to September, we raised interest rates by an additional 200 basis points.
In doing so, we continued to follow a data-dependent approach to rate decisions given the highly uncertain environment. To calibrate accurately how far rates needed to rise, we introduced three criteria: the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. By September, we saw the inflation outlook improving and monetary policy being transmitted forcefully. But underlying inflation remained elevated and domestic price pressures were strong.
We decided on this basis that the key ECB interest rates had reached levels that, if maintained for a sufficiently long duration, would make a substantial contribution to the timely return of inflation to our target. At the same time, we committed to holding rates at these levels for as long as necessary, while continuing to follow a data-dependent approach, based on the same criteria, to determine the appropriate level and duration of restriction.
In parallel, we advanced the normalisation of the Eurosystem balance sheet to ensure it remained consistent with our overall stance. It fell by over €1 trillion in 2023, with a large part of this decline due to maturing and early repayments under our targeted longer-term refinancing operations. We also concluded reinvestments under our asset purchase programme as the year progressed. And, in December, we announced the gradual phasing-out of reinvestments under the pandemic emergency purchase programme.
While we were consolidating progress in the fight against inflation, we advanced our work on taking account of climate-related risks within our tasks. In March we published the first climate-related financial disclosures of the Eurosystem's corporate sector holdings. The carbon intensity of our corporate asset reinvestments fell by around two-thirds in the 12 months from October 2022 when we had started tilting them towards issuers with a better climate performance.
In 2023 we saw considerable progress in another area crucial for our work: payments. We launched our new T2 wholesale payment system in March. T2 contributes to the harmonisation and efficiency of Europe's financial markets, introducing a new real-time gross settlement system - which replaces the TARGET2 system that had been in operation since 2007 - and streamlining liquidity management of central bank money.
We also launched the preparation phase of the digital euro project. This phase started in November after a fruitful two-year investigation phase, and will lay the foundations for the potential issuance of a digital euro. A digital euro would complement cash, not replace it. Cash remains the most frequently used means of payment among euro area citizens, and a clear majority consider it important to have the ability to pay in cash.
This is in part why the ECB is preparing a new series of euro banknotes - the most tangible, visible symbol of European unity. The Governing Council selected 'European culture' and 'Rivers and birds' as two potential themes for this new series, based on the outcome of two public surveys carried out in the summer of 2023. Looking ahead, European citizens will have the chance to express their preferences on a shortlist of possible designs, with the ECB expected to decide on the final designs in 2026.
In a year that marked the 25th anniversary of the ECB, we celebrated the arrival of Croatia in the euro area. Croatia's adoption of the euro in January brought the number of countries in the euro area to 20 - almost double the number when the single currency was first launched. The euro area's expansion reflects the continued attractiveness of our monetary union in an increasingly unpredictable world. In 2023 people's support for the euro remained close to record high levels.
All this could not have been done without the hard work and the dedication of ECB staff to our mission: maintaining price stability for the people of the euro area. It is an honour to lead them and this institution.
