Monetary policy instruments

The operational framework of the Eurosystem contains the following instruments:

  • Open market operations
  • Standing facilities
  • Reserve requirement for credit institutions
  • Forward guidance

The normal tools of monetary policy are not always necessarily sufficient to achieve the objectives of the central bank. For this reason the European Central Bank has complemented the regular operations in the Eurosystem with various additional measures since 2009.

Open market operations

Open market operations serve to steer interest rates and manage liquidity in the money market, and to signal the stance of monetary policy. Open market operations are carried out by the national central banks at the initiative of the European Central Bank.

Information on open market operations and the calendar on the ECB website.

Detailed information on the open market operations and their conditions are given in the European Central Bank's Guideline on the Implementation of the Eurosystem Monetary Policy Framework, which can be found here.

The open market operations come in four categories.

1. Main refinancing operations (MRO)

Main refinancing operations are weekly operations to provide liquidity that are carried out under standard tender procedures[1] with a maturity of one week. The interest rates are set at the monetary policy meetings of the Governing Council of the European Central Bank and can be found here. The MRO are auctions that can have a fixed or a floating interest rate. Since 2008 the Eurosystem has carried out fixed rate tender procedures with full allotment. All counterparties that meet the general eligibility criteria are entitled to participate in the main refinancing operations, which essentially means all euro area credit institutions that have eligible collateral and that have signed a monetary policy participation contract with the national central bank.

2. Longer-term refinancing operations (LTRO)

The Eurosystem also holds monthly longer-term refinancing operations with maturity of three months alongside the main refinancing operations to provide liquidity. These operations are designed to provide longer-term liquidity to the banking system, meaning that the liquidity of the money market does not have to be adjusted each week. The longer-term refinancing operations are also held under standard tender procedures and fixed rate procedures with full allotment against collateral, and all counterparties may participate in them if they meet the general eligibility criteria. The interest rate is generally the average interest rate on main refinancing operations for the period of the loan.

3. Fine-tuning operations (FTO)

The Eurosystem can if needed carry out fine-tuning operations to provide or absorb liquidity. These operations have no fixed frequency or maturity and are generally carried out as quick tenders[2]. Fine tuning operations are intended to ease the pressure on interest rates caused by unexpected fluctuations in liquidity. The list of eligible counterparties is by default smaller than for main refinancing operations, but the Governing Council can always change it if needed. Fine-tuning operations are also carried out in decentralised fashion by the national central banks.

4. Structural operations

Structural operations are intended to adjust the structural liquidity position of the Eurosystem relative to the banking system, meaning the long-term liquidity in the market. They may provide or absorb liquidity and are the least standardised of all the operations. Such operations may be carried out as repo transactions, outright transactions with bonds in financial markets, or the issuance of debt securities.

Standing facilities

The standing facilities are designed to regulate overnight liquidity and to set limits on the interest rates in the overnight market. Standing facilities are provided for all counterparties that meet the general eligibility criteria and counterparties may use them at their own initiative, meaning the standing facilities are by default available from central banks at all times. There are two standing facilities.

  1. The marginal lending facility (MLF) allows counterparties to take overnight loans against collateral from the central bank at an interest rate that is set by the Governing Council of the European Central Bank during its monetary policy meetings and can be found here. The MLF interest rate is the highest of the monetary policy interest rates, and is generally notably higher than the equivalent market interest rate, and so credit institutions use the standing facility only as a last resort for accessing funds. As access to the lending facility is only limited by the amount of collateral put up, the interest rate on it usually sets the upper bound on the interest rates in the interbank overnight market.
  2. The deposit facility (DF) allows counterparties to hold overnight deposits at the central bank at an interest rate that is set by the Governing Council of the European Central Bank during its monetary policy meetings and can be found here. The DF interest rate is the lowest of the monetary policy interest rates, and is generally notably lower than the equivalent market interest rate, so the average everyday use of the deposit facility is limited.

For further information: The ECB website

Minimum reserves

The Eurosystem requires credit institutions to hold minimum reserves on accounts at the national central banks to back the deposits they have taken in. The main role of the minimum reserves has historically been to help keep interest rates in the money market stable and regulate structural liquidity shortages in the banking system by increasing the need for refinancing from the central banks. The reserve requirement is currently 1% for liabilities with maturity of up to two years.

A two-tier system of interest rates applied for the minimum reserves from autumn 2019 to autumn 2022, with a multiple for calculating the interest-free allowance (see the ECB website for more details).

Detailed information and conditions are given in the European Central Bank's Guideline on the Implementation of the Eurosystem Monetary Policy Framework, which can be found here.

Forward guidance

Forward guidance means that the central bank shares information about upcoming monetary policy events and possible decisions. Forward guidance with a clear message helps to stabilise movements in financial markets and emphasise the importance for the Eurosystem of achieving the objective of price stability.

Forward guidance was used for the first time in the euro area in July 2013, when the Governing Council of the European Central Bank advised that monetary policy interest rates would remain low for an extended period of time. These messages have been updated from time to time and alongside base interest rates there has been information on the non-standard monetary policy measures.

To maintain credibility, the forward guidance of the European Central Bank must always be in line with the assessments of the Governing Council of the current state of the economy and the future outlook, especially for inflation.


[1] A tender process that is usually carried out within 24 hours from the announcement of the tender to the confirmation of the allotment results.

[2] A tender process that is usually carried out within 90 minutes from the announcement of the tender to the confirmation of the allotment results.

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