Now let’s turn to what monetary policy should/can do  I would like to mention four challenges: First challenge: if the factors at play are global, what can domestic policies do? CBs have domestic mandates whereas the prevalence of lowflation and low rates suggests that some common or external factors may be at play. This is especially problematic for smaller open economies. And the existence of a “global financial cycle” à la Rey highlights the limits of flexible exchange rates in insulating those economies. Ultra-accommodative policies in AEs have definitely had spillover effects on EMEs, including the often-forgotten –albeit welcome- reduction of spreads in the latter, as shown by IMF research. Nevertheless, the formulation and stance of policies in one country can take account of feedback effects from others. And it goes without saying that the world at large would have been even worse off if AEs had fallen into deflation. Aside from building and using forex reserves, domestic policies should therefore contribute towards making the domestic real economy and its financial system more resilient to external shocks. In this regard, prudential policy aimed at building buffers or protecting financial institutions may complement monetary policy, provided these measures do not conceal a form of protectionism or an attempt at deglobalization. Second challenge: what should the inflation target and its horizon be?
Subsequently, we have raised the deposit facility rate to 2%, a cumulative increase of 250 basis points (bp), the fastest in the euro's history. We have also created the new Transmission Protection Instrument to ensure the smooth transmission of monetary policy across the euro area. We have amended the conditions of the longer-term refinancing operations, with the specific aim of strengthening the transmission of interest rate increases. And we have announced our intention to stop reinvesting, from early March 2023, all the principal payments from maturing securities under our asset purchase programme, which will give rise to a gradual and predictable reduction in the size of the portfolio. Overall, this monetary policy normalisation process has already translated into a significant increase in market interest rates. But what can we expect in the future? At the last Governing Council meeting we stated that interest rates would still have to rise significantly at a steady pace to reach levels that ensure that inflation will return to its target. As I mentioned earlier, the latest ECB projections forecast inflation of 2.3% (i.e. above the 2% target) in 2025. Those projections were based on the market expectations for the future path of interest rates when they were prepared. Deeming the projections valid, interest rates would therefore need to rise more than the markets expected when they were prepared in order for inflation to return to its target.