The Eurosystem’s instruments
The operational framework of the ECB and euro area national central banks consists of the following set of instruments:
All these instruments are based on the Eurosystem legal framework for monetary policy instruments, which consists of the “General framework” and the “Temporary framework”. The Temporary framework complements, amends or overrules the General framework.
Our monetary policy framework strives to ensure the participation of a broad range of eligible counterparties. In the case of standing facilities and tender open market operations, only credit institutions that are subject to minimum reserves and fulfil all the necessary eligibility criteria are eligible to participate. For outright transactions, there are no a priori restrictions on the range of counterparties.
Open market operations
Open market operations play an important role in steering interest rates, managing the liquidity situation in the financial market and signalling the monetary policy stance.
Open market operations are initiated by the ECB, which decides on the instrument and its terms and conditions. It is possible to execute open market operations on the basis of standard tenders, quick tenders or bilateral procedures. The Eurosystem may conduct them as reverse transactions, outright transactions, issuance of debt certificates, foreign exchange swaps or collection of fixed-term deposits.
Four types of open market operation
Open market operations can differ in terms of aim, regularity and procedure.
- Main refinancing operations are regular reverse transactions that provide liquidity, usually with a frequency and duration of one week. They are executed in a decentralised manner by the national central banks on the basis of standard tenders and according to an indicative calendar published on the ECB’s website.
- Longer-term refinancing operations are reverse transactions that provide liquidity for a longer duration than the main refinancing operations. Regular longer-term refinancing operations have a maturity of three months and are conducted monthly by the Eurosystem on the basis of standard tenders in accordance with the indicative calendar on the ECB’s website. The Eurosystem may also conduct other longer-term operations, with a maturity of more than three months. In recent years, such operations have had maturities of up to 48 months (the longest being the targeted longer-term refinancing operations, or TLTROs). Longer-term refinancing operations are aimed at providing counterparties with additional longer-term refinancing and can also serve other monetary policy objectives.
- Fine-tuning operations can be executed on an ad hoc basis to manage the liquidity situation in the market and to steer interest rates. In particular, they are aimed at smoothing the effects on interest rates caused by unexpected liquidity fluctuations. Fine-tuning operations are primarily executed as reverse transactions but may also take the form of foreign exchange swaps or the collection of fixed-term deposits. The instruments and procedures applied in the conduct of fine-tuning operations are adapted to the types of transaction and the specific objectives pursued in performing the operations. Fine-tuning operations are normally executed by the Eurosystem through quick tenders. The Eurosystem may select a limited number of counterparties to participate in fine-tuning operations.
- Structural operations can be carried out by the Eurosystem through reverse transactions, outright transactions and the issuance of debt certificates. These operations are executed whenever the ECB wishes to adjust the structural position of the Eurosystem vis-à-vis the financial sector (on a regular or non-regular basis). The Eurosystem has conducted asset purchases to address the risks of a too-prolonged period of low inflation and to help overcome the limitations caused by the lower bound of interest rates, giving a further boost to lending, spending and investment in the economy.
Standing facilities aim to provide and absorb overnight liquidity and to signal the general monetary policy stance and bound overnight market interest rates. The standing facilities, which are administered in a decentralised manner by the national central banks, are available to eligible counterparties on their own initiative.
Marginal lending facility
Counterparties can use the marginal lending facility to obtain overnight liquidity from the national central banks, against the provision of adequate eligible collateral. The interest rate on the marginal lending facility normally provides a ceiling for the overnight interbank market interest rate.
Counterparties can use the deposit facility to place overnight deposits with the national central banks. The interest rate on the deposit facility normally provides a floor for the overnight interbank market interest rate and thus anchors short-term wholesale money market rates. To receive the deposit facility rate, counterparties need to move holdings from their current account to the deposit facility, unless the deposit facility rate is negative, in which case it also applies to current account holdings in excess of minimum reserves.Standing facilities
The ECB requires credit institutions established in the euro area to hold a certain amount of funds on their accounts with their respective national central bank. These funds are called “minimum reserves” or “required reserves”.
The minimum reserve system is meant to stabilise money market interest rates and potentially create (or enlarge) a structural liquidity shortage.
The ECB does not require credit institutions to hold the total amount of required reserves in their account at the central bank every day. Rather, they should hold these required reserves on average, based on their daily holdings, over a maintenance period of about six weeks.
The amount credit institutions should hold is determined by certain elements of their balance sheet, in particular customer deposits with a maturity of up to two years.
The respective reserve maintenance periods start on the settlement day of the main refinancing operation (MRO) following each Governing Council monetary policy meeting.
The required reserves are remunerated according to the average interest rate of the main refinancing operations over the maintenance period.
Excess reserves, i.e. current account holdings in excess of the minimum, are remunerated at the deposit facility rate or 0%, whichever is lower. The ECB may exempt part of the excess reserves from the deposit facility rate remuneration. This was the case with the implementation of the two-tier system for remunerating excess reserves.Minimum reserves Two-tier system for remunerating excess reserves
When a central bank gives forward guidance, it is providing information about its future monetary policy intentions based on its assessment of the inflation outlook.
Forward guidance makes the ECB’s monetary policy more effective and helps us to achieve our main objective of serving the people of Europe by delivering price stability.What is forward guidance?
|Monetary policy operations||Types of transactions||Maturity||Frequency||Procedure|
|Open market operations|
|Main refinancing operations||Reverse transactions||-||One week||Weekly||Standard tenders|
|Longer-term refinancing operations2||Reverse transactions||-||Three months||Monthly||Standard tenders|
|Fine-tuning operations||Reverse transactions||Reverse transactions||Non-
|Foreign exchange swaps||Collection of fixed-term deposits||Bilateral Procedures|
|Foreign exchange swaps|
|Structural operations||Reverse transactions||Issuance of debt certificates||Standardised/ non-standardised||Regular and non-regular||Standard tenders|
|Marginal lending facility||Reverse transactions||-||Overnight||Access at the discretion of counterparties|
|Deposit facility||-||Deposits||Overnight||Access at the discretion of counterparties|
|2This procedure also applies to irregular longer-term refinancing operations with longer maturities.|
Find out more about our strategy
The aim of the ECB’s strategy review was to make sure our monetary policy strategy is fit for purpose, both today and in the future.The outcome of our strategy review
Monetary policy instruments
To deliver on our primary objective of price stability, we need the right tools at hand. That is why we have introduced new monetary policy instruments in recent years.Our monetary policy instruments and the strategy review