2024 saw the ECB advance further through its monetary policy cycle. This cycle has consisted of three distinct phases. The first was a tightening phase, which ran from July 2022 to September 2023, during which interest rates rose by a record 450 basis points. The second was a holding phase in which rates remained steady. And in the third - a dialling-back phase which began in June 2024 - monetary policy has gradually become less restrictive.
The period under review in this report falls into the last two phases of this policy cycle. At the start of 2024 the ECB was still in the holding phase, with its deposit facility rate at 4%. At that time, inflation had fallen around three-quarters of the way from its peak, and stood at 2.9%. The staff projections were showing inflation returning to our medium-term target of 2% in 2025. But there was uncertainty about the persistence of inflation.
Measures of domestic inflation were high and sticky. Past increases in inflation were still passing through to wages in a staggered way. And the staff projections hinged on firms absorbing these wage increases through profits, rather than raising prices, and on a recovery in labour productivity that would lower unit labour costs. Both of these factors could only be confirmed over time.
To deliver robust policy in this context, the ECB had - since March 2023 - been basing its rate decisions on three key criteria: the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. While the inflation outlook was improving and monetary policy was clearly dampening demand, the underlying inflation criterion called for caution.
Over the course of 2024, however, our restrictive policy stance ensured that inflation continued to fall towards our target. By June, not only had the inflation outlook remained stable, indicating consistently that inflation would reach 2% in 2025, but also most measures of underlying inflation had eased. This "cross-check" bolstered the ECB's confidence that inflation was returning to its target in a sustained manner.
Consequently, after nine months of holding rates steady, we began dialling back the level of monetary policy restriction. In June we cut rates by 25 basis points, while remaining data-dependent and not pre-committing to a future path for rates. As the incoming data confirmed the favourable inflation outlook, we gradually reduced the degree of monetary policy restriction further.
Over the course of September, October and December, we reduced our main policy rate by a further 75 basis points. We ended the year increasingly confident that the disinflation process was well on track.
Our balance sheet also continued to normalise during 2024, declining by half a trillion euro. At the end of December, two milestones were reached: the full repayment of funds borrowed by banks under the third series of targeted longer-term
refinancing operations, and the end of reinvestments of the principal payments from maturing securities purchased under the pandemic emergency purchase programme.
In an environment of gradually declining liquidity owing to the normalisation of the balance sheet, the ECB introduced changes to its operational framework for implementing monetary policy. In particular, the ECB announced it would continue to steer the monetary policy stance by adjusting the deposit facility rate, while also narrowing the differential between it and the rate on the main refinancing operations. Going forward, the ECB will provide liquidity to the financial system through a broad mix of instruments. And on the basis of the experience gained, the Governing Council will review the key parameters of the operational framework in 2026.
It was an eventful year for payments as well. Driven by the rising number of participants in the TARGET Instant Payment Settlement (TIPS) system - a service developed by the Eurosystem to enable instant payments across Europe - the daily average number of instant payments in euro surged by 72% over the year.
In 2024 the Eurosystem moved onward with its two-year preparation phase for a digital euro. The first digital euro progress report was published in June, and the second in December. The ECB also continued its work on developing a digital euro scheme rulebook, which will standardise the digital euro's use and management in the euro area. Preparations for the development of a new series of euro banknotes also gathered pace. The Governing Council has now selected motifs for the themes "European culture" and "Rivers and birds" and established a jury for a design contest to be launched later in 2025.
As the world becomes more digital, the ECB is taking decisive steps to integrate artificial intelligence technologies into its work. ECB staff can now use four large language models to support their work, benefiting over 4,500 users, and there are several experimental projects ongoing in areas including automated communication and data visualisation.
In 2024 the ECB also expanded its work on climate change with the launch of its climate and nature plan 2024-2025. This initiative focuses on three key areas: the impact and risks of the transition to a green economy; the increasing physical impact of climate change and the economic effects of climate change adaptation; and the risks of nature loss and degradation and their interaction with climate-related risks.
In 2024 the House of the Euro - located in Brussels and bringing together the ECB and seven national central banks - celebrated its first year. Established to foster cooperation among Eurosystem central banks and enhance their visibility in a city where many European institutions are based, the House of the Euro has become a dynamic hub for collaboration, dialogue and debate between central bankers and key stakeholders.
In an increasingly uncertain world, more Europeans are recognising the importance of unity. And in 2024 support for the euro among citizens reached a record high, reflecting a broader appreciation for the single currency as a project that fosters
European peace and prosperity. This growing support also underscores the dedication of the ECB's staff and others working to serve the interests of the people of Europe.
