The Eurosystem conducts monetary policy through its operational framework, which includes market operations, standing facilities and the minimum reserve requirements. Since the financial crisis, the Eurosystem has also deployed non-standard measures, such as outright asset purchases and forward guidance on monetary policy measures.
Market operations play an important role in steering market rates, managing liquidity in the euro area banking system and signalling 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 refinancing operations and fixed-term deposits used in liquidity-absorbing operations.
The Eurosystem’s open market operations can be divided into four categories:
- main refinancing operations
- longer-term refinancing operations
- fine-tuning operations
- structural operations.
Main refinancing operations are regular liquidity-providing refinancing operations executed by the national central banks with a maturity and frequency of one week. Prior to the financial crisis, the main refinancing operations were the most important monetary policy instrument used by the Eurosystem, but since the crisis their relevance has changed due, for example, to the introduction of new non-standard measures.
Longer-term refinancing operations are used by the Eurosystem to provide counterparties with financing with a longer maturity than the main refinancing operations. Regular longer-term refinancing operations are conducted on a monthly basis and their maturity is three months.
The Eurosystem may also conduct non-standard longer-term refinancing operations where necessary. Examples of these are the long-term operations conducted with a maturity of 36 months in 2011–2012 and the targeted longer-term refinancing operations (TLTROs) conducted since 2014 with varying terms and conditions including maturities as high as 48 months.
A special feature of the TLTROs is their built-in incentive scheme, which provides incentives for banks to increase lending to the real economy (TLTROs on the ECB website).
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 adjusted 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 liquidity position of the Eurosystem vis-à-vis the financial sector. Structural operations may be executed in the form of reverse transactions, the collection of fixed-term deposits through tenders or outright purchases or sales of securities through bilateral arrangements.
The planned schedule of refinancing operations is announced in advance in the calendar for the Eurosystem's tender operations. The results of refinancing operations are published on the ECB website.
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 provide an interest rate corridor within which the interbank rate may fluctuate. The interest rate corridor can be used as one tool to signal the stance of monetary policy. Since the financial crisis, the deposit facility rate has become a key instrument in steering short-term market rates.
Minimum reserve requirement
The minimum reserve requirement applies to all euro area banks, which are thus required to deposit a certain amount of funds with their national central bank. By changing the size of the requirement, the Eurosystem can influence the structural demand for central bank money: the higher the requirement, the more central bank money counterparties need to comply with it.
Banks meet their reserve requirement by holding sufficient reserves on their central bank account on average over the maintenance period. This averaging mechanism helps 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 reserve holdings are remunerated at the average, over the maintenance period, of the interest rate on the main refinancing operations. Since the financial crisis, minimum reserves have become less relevant in the implementation of monetary policy, as the volume of banks' deposits at the central bank has grown with the introduction of various refinancing operations and asset purchase programmes.
Asset purchase programmes
The monetary policy toolbox also includes asset purchase programmes, which, in addition to the steering of interest rates, have been used since the financial crisis 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 a package known as the asset purchase programme (APP). Further information on the programme is available on the ECB website.
In addition, on 18 March 2020, the ECB announced the launch of a new asset purchase programme, the pandemic emergency purchase programme (PEPP). Purchases under the programme started on 26 March 2020. Further information on the PEPP is available on the ECB website.
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: the securities markets programme (SMP) and the first and second covered bond purchase programmes (CBPP1 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 details on the terminated purchase programmes and discloses, besides other information, the amounts of securities purchased under the programmes across the Eurosystem as a whole.