Monetary Policy

EUROSYSTEM MONETARY POLICY INSTRUMENTS

In order to achieve its objectives, the Eurosystem has at its disposal a set of monetary policy instruments. The Eurosystem conducts open market operations, offers standing facilities and requires credit institutions to hold minimum reserves.

Open market operations

Open market operations play an important role in monetary policy of Eurosystem for the purposes of steering interest rates, managing the liquidity situation in the market and signalling the stance of monetary policy. Open market operations are initiated by the ECB and administered in a decentralised manner by the NCBs.

Five types of instruments are available to the Eurosystem for the conduct of open market operations.

The most important instrument is the reverse transaction (applicable on the basis of repurchase agreements or collateralised loans). The Eurosystem may also use outright transactions, the issuance of ECB debt certificates, foreign exchange swaps and the collection of fixed-term deposits. Open market operations are initiated by the ECB, which also decides on the instrument to be used and on the terms and conditions for its execution. They can be executed on the basis of standard tenders, quick tenders or bilateral procedures. The Eurosystem’s open market operations:

The main refinancing operations are regular liquidity-providing reverse transactions with a weekly frequency and a maturity of normally 1 week. These operations are executed by the NCBs on the basis of standard tenders. The main refinancing operations play a pivotal role in pursuing the objectives of the Euosystem‘s open market operations.

The longer-term refinancing operations are liquidity-providing reverse transactions with a monthly frequency and a maturity of normally 3 month. The Eurosystem may also execute non-regular long-term refinancing operations a maturity longer than 3 month. These operations are aimed at providing counterparties with additional longer-term refinancing and are executed by the NCBs on the basis of standard tenders.

Fine-tuning operations are executed on an ad-hoc basis with the aim of managing the liquidity situation in the market and steering interest rates, in particular in order to smooth the effects on interest rates caused by unexpected liquidity fluctuations in the market.  The instruments and procedures applied in the conduct of fine-tuning operations are adapted to the types of transactions and the specific objectives pursued in the operations. Fine- tuning operations are normally executed by NCBs through quick tender or bilateral procedures.

The Eurosystem may carry out structural operations through the issuance of ECB debt certificates, reverse transactions and outright transactions. These operations are executed whenever the ECB wishes to adjust the structural position of the Eurosystem vis-a-vis the financial sector. 

Standing facilities

Standing facilities are aimed at providing and absorbing overnight liquidity, signal the general stance of monetary policy and bound overnight market interest rates. Two standing facilities are available to eligible counterparties on their own initiative.

Counterparties can use the marginal lending facility to obtain overnight liquidity from the NCBs against eligible assets. Under normal circumstances, there are no credit limits or other restrictions on counterparties' access to the facility apart from the requirement to present sufficient underlying assets. The interest rate on the marginal lending facility normally provides a ceiling for the overnight market interest rate.

Counterparties can use the deposit facility to make overnight deposits with the NCBs. Under normal circumstances, there are no deposit limits or other restrictions on counterparties' access to the facility. The interest rate on the deposit facility normally provides a floor for the overnight market interest rate.

Minimum reserves

The Eurosystem‘s minimum reserve system applies to credit institutions in the euro area and primarily pursues the aims of stabilising money market rates and creating (or enlarging) a structural liquidity shortage. The reserve requirement of each institution is determined in relation to elements of its balance sheet. In order to pursue the aim of stabilising interest rates, the Eurosistem‘s minimum reserve system enables institutions to make use of averaging provisions. Compliance with the reserve requirement is determined on the basis of the institution‘s average daily reserve holdings over maintenance period. Institution‘s holdings of required reserves are remunerated at the marginal interest rate of the Eurosystem‘s main refinancing operations.

EUROSYSTEM MONETARY POLICY OPERATIONS

Monetary policy operations

Types of transactions

Maturity

Frequency

Procedure

Provision of liquidity

Absorbtion of liquitdity

Open market operations

Main refinancing operations

 

Reverse transactions

 

1 week

 

Weekly

 

Standard tenders

Longer-term refinancing operations

Reverse transactions

 

3 months

 

 Monthly

Standard tenders

Fine-tunning operations

Reverse transactions

 

Foreign exchange swaps

Reverse transactions

Collection of fixed-term deposits

Foreign exchange swaps

Non-standartised

 

Non-regular

Quick tenders

 

Bilateral procedures

Structural operations

Reverse transactions

 

Issuance of ECB debt certificates

Standardised/non-standardised

Regular and non-regular

Standard tenders

 

Outright purchases

Outright sales

Non-regular

 

Bilateral procedures

Standing facilities

Marginal lending facilty

Reverse transactions

 

Overnight

 

Access at the discretion of counterparties

 

Deposit facility

Deposits

 

Overnight

 

Access at the discretion of counterparties

 

Minimum reserves

Stabilises liquidity of banking system

The reserve base consists of credit institutions liabilities, except liabilities to the Bank of Lithuania and other credit institutions that are subject to the Eurosystem‘s minimum reserve system. The reserve requirement ratio is 1 per cent. Zero reserve requirement ratio is applied to the deposits with agreed maturity over two years, deposits redeemable at notice over two years, debt securities issued with an original maturity over two years and repos.

Updated 31/03/2015