Monetary policy instruments
The Eurosystem conducts its monetary policy through its operational implementation framework, which includes market operations, standing facilities and the minimum reserve requirements. In addition, since the financial crisis, non-standard measures (such as outright asset purchases) have also been deployed.
Market operations play an important role in steering market rates, in liquidity management and in communicating the stance of monetary policy. The Eurosystem has five different instruments at its disposal: reverse transactions, outright transactions, issuance of ECB debt certificates, monetary policy foreign exchange swaps and fixed-term deposits. The most common among these are the reverse transactions used in collateralised liquidity-providing credit operations, fixed-term deposits used in liquidity-absorbing operations, and outright transactions used in the context of the asset purchase programmes.
The open market operations of the Eurosystem can be divided into four categories:
1. main refinancing operations
2. longer-term refinancing operations
3. fine-tuning operations
4. structural operations.
Main refinancing operations are regular liquidity-providing operations whose maturity and frequency is one week. The main refinancing operations conducted by the NCBs are the most important monetary policy instrument of the Eurosystem.
Longer-term refinancing operations are used by the Eurosystem to provide counterparties with liquidity with longer maturity than the basic refinancing operations. Regular longer-term operations are arranged on a monthly basis and their maturity is three months. Extraordinary longer-term refinancing operations can also be arranged where necessary. As an example, there were long-term operations with a maturity of 36 months in 2011–2012 and targeted longer-term refinancing operations (TLTRO) with maturities as high as 48 months in 2014–2017.
A special feature of the targeted operations is the provision of incentives for banks to increase their lending (ECB announces new series of targeted longer-term refinancing operations (TLTRO II), Targeted longer-term refinancing operations (TLTROs).
Fine-tuning operations are executed on an ad hoc basis with the aim of managing the liquidity situation on the markets and steering interest rates, in particular in order to smooth the effects on interest rates caused by unexpected liquidity fluctuations on the markets. The fine-tuning operations are adapted to the types of transactions and specific objectives pursued in the operations.
Structural operations may be conducted at any time there is a need to adjust the structural position of the Eurosystem vis-à-vis the financial sector. Structural operations may consist of reverse transactions, the collection of fixed-term deposits through auctions, or outright purchases or sales of securities through bilateral arrangements.
The planned schedule of operations is announced in advance in the calendar for the Eurosystem's tender operations.
The Eurosystem offers its counterparties standing facilities that can be used either to increase or decrease liquidity in the banking system. The system comprises two instruments: the marginal lending facility and the deposit facility.
The marginal lending facility is available to counterparties if they want to borrow from the Eurosystem on an overnight basis against collateral. When using the deposit facility, banks make overnight deposits with the central bank.
The interest rates of the standing facilities make up an interest rate corridor within which the interbank rate may move. The interest rate corridor can be used to communicate the monetary policy stance.
Minimum reserve requirement
The minimum reserve requirement applies to all euro area credit institutions, which are thus required to hold a certain proportion of their deposit portfolio with the national central bank of their home country. By changing the size of the requirement, the structural demand for central bank money can be influenced: the higher the requirement, the more counterparties need central bank money to fulfil it.
Credit institutions meet their reserve requirement by holding sufficient reserves on their central bank account on average during the maintenance period. The averaging is used to stabilise the shortest money market rates. A new maintenance period always begins on the settlement date of the main refinancing operation following the monetary policy meeting of the ECB Governing Council. The minimum reserves are paid the average interest rate of the main refinancing operation over the maintenance period.
Asset purchase programmes
The monetary policy toolbox also includes outright securities purchases, which have been used since the financial crisis, when the steering of short-term interest rates alone has been insufficient to achieve the price stability target.
The asset purchase programmes active at present are the public sector purchase programme (PSPP), the third covered bond purchase programme (CBPP3), the asset-backed securities purchase programme (ABSPP) and the corporate sector purchase programme (CSPP). Together these constitute the expanded asset purchase programme (EAPP).
The other asset purchase programmes are outright monetary transactions (OMT), which has been announced but under which no securities purchases have been made, and the already terminated programmes called the securities markets programme (SMP) and the first and second covered bond purchase programmesCBPP1 and CBPP2).
Information on asset purchases by the Bank of Finland through these programmes is published on the Bank of Finland's balance sheet. The ECB website also contains further information on the terminated purchase programmes and discloses the amounts of securities purchases under the programmes across the Eurosystem as a whole.