Monetary policy of major central banks changed fundamentally in 2022. The sudden and persistent increase in inflation since the second half of 2021 led major central banks to increase their policy interest rates steeply.

The starting point of the current cycle of policy rate hikes is different from those seen in other recent episodes. On one hand, the current rate rise follows a very significant increase in inflation, unprecedented during the period when central banks guided the conduct of monetary policy by adopting explicit inflation targeting. On the other hand, the starting point of interest rates in the current cycle was very low, both in nominal and real terms. 

Additionally, contrary to most previous episodes, central banks now operate in a high excess reserve regime that was set up to underpin the quantitative expansion programmes via the purchase of financial assets, mainly sovereign debt securities, and via financing operations of the banking system. The pass-through of the policy rate hike to the various market segments may be more uncertain, warranting ongoing monitoring of the impact of the policy shift.

For more details see Box 1 “Changes to the monetary policy stance in 2022”, published in the Economic Bulletin of Banco de Portugal, October 2022.

Prepared by José Miguel Cardoso da Costa. The opinions expressed in the article are those of the author and do not necessarily coincide with those of Banco de Portugal or the Eurosystem.

If you want to receive an e-mail whenever a new “Economics in a picture” is published send your request to info@bportugal.pt.