Monetary policy instruments

Open market operations

Open market operations serve to steer interest rates and manage the liquidity situation in the money market, and to signal the stance of monetary policy. Generally, open market positions are carried out by NCBs on the initiative of the ECB and usually on the money market where the maturity of transactions is shorter than one year. The operations may be divided into four categories.

Main refinancing operations

Main refinancing operations are the most important open market operations and the most important monetary policy measure of the Eurosystem. They serve to guarantee the liquidity of the banking systems and they play an essential role in steering interest rates and managing the liquidity environment of the market. Main refinancing operations are carried out once a week with a one-week maturity. They are performed as standard tenders against collateral. All counterparties fulfilling the general eligibility criteria are entitled to participate in the main refinancing operations, which basically includes all euro area credit institutions upon the existence of suitable collateral.

Long-term refinancing operations

In addition to weekly main refinancing operations, the Eurosystem performs monthly long-term refinancing operations with three-month maturities. The aim of these operations is to provide the banking system long-term liquidity. This prevents the need to adjust the money market liquidity every week. Long-term refinancing operations are also performed as standard tenders against collateral and the participants may be all counterparties who comply with the general eligibility criteria.

Fine-tuning reverse operations

If necessary, the Eurosystem may also carry out fine-tuning operations to increase or decrease liquidity. The aim of these operations is to steer liquidity to alleviate the interest rate pressures that stem from unexpected money market liquidity fluctuations. Fine-tuning operations are usually performed as quick tenders. For technical reasons, fine-tuning operations are restricted to a limited set of counterparties. Generally, the performance of fine-tuning operations by NCBs is decentralised, but in special cases the ECB Governing Council may allow the ECB to perform bilateral fine-tuning operations.

Structural reverse operations

The aim of structural reverse operations is to adjust the Eurosystem's structural liquidity position relative to the banking system, i.e. long-term liquidity on the market. They can be performed through reverse transactions, outright transactions or issuance of ECB debt certificates.

Standing facilities

The aim of standing facilities is to add and absorb overnight liquidity and determine the interest rate limits of the overnight market. Both facilities are available to eligible counterparties in the Eurosystem on their own initiative. The Eurosystem offers two standing facilities.

The marginal lending facility enables counterparties (i.e. credit institutions in the euro area) to obtain overnight liquidity from the central bank against the presentation of sufficient collateral. The interest rate of such overnight loans is usually much higher than the respective market interest rate. Therefore, credit institutions use the marginal lending facility only as a last resort. As the availability of the marginal lending facility is restricted only by the size of the collateral, its interest rate usually forms the upper limit of the interbank overnight market.

The deposit facility enables to make overnight deposits with the central bank at a pre-determined interest rate. The interest rate of overnight deposits is usually much lower than the market interest rate. Thus, the counterparties open overnight deposits with the Eurosystem only if they are unable to use their available funds otherwise. The desire of banks to use the standing facilities is dramatically reduced by their interest rates. Hence, the average usage of the standing facilities is generally limited, which indicates that the task of the standing facilities is mainly to increase and decrease liquidity on special occasions.

Minimum reserves

The Eurosystem obligates credit institutions to hold deposits on accounts with their national central bank as assets backing the involved deposits. The main aim of required reserves is to help stabilise money market interest rates and regulate the structural liquidity shortage[2] of the banking system by increasing the need for refinancing by central banks. The reserve requirement that currently applies in the Eurosystem to liabilities with maturity up to two years is 1%.

[1] In the situation of the financial crisis, the Eurosystem adopted non-standard monetary policy measures, which means that monetary policy operations are carried out slightly differently. Read more

[2] About liquidity management in the euro area:

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