ECB reviews monetary policy operational structure

There ECB announced a change of operational structure made to for the implementation of monetary policyfollowing the review launched in December 2022. The decisions taken establish the fundamental principles and parameters for the implementation of monetary policy and the provision of central bank liquidity in a context of gradual decrease in excess liquidity in the banking system, which will however remain significant in the coming years.

The guiding principles

The Governing Council of the ECB first established a series of principles, which will guide the implementation of monetary policy in the future. The fundamental principles are the following:

  • Effectiveness – The main objective of the operational framework is to ensure the effective implementation of the monetary policy orientation and is achieved by directing short-term money market rates to levels strictly consistent with monetary policy decisions.
  • Robustness – The operational framework must be robust in the face of different monetary policy configurations as well as different financial and liquidity environments and must be consistent with the use of the tools defined in the ECB’s monetary policy strategy.
  • Flexibility – The euro area banking sector is large and diverse in terms of size, business models and geographical location of credit institutions. Providing central bank reserves in an elastic manner based on banks’ needs therefore represents the most suitable solution to effectively channel liquidity throughout the euro area banking system, helping to flexibly absorb liquidity shocks.
  • Efficiency – An efficient operational framework allows the desired monetary policy orientation to be implemented without interfering with it, in compliance with the principle of proportionality taking into account the net side effects, including risks to financial stability.
  • Open market economy – The design of the operational framework should be consistent with the smooth and orderly functioning of markets, including money markets, which are most closely linked to the implementation of monetary policy.
  • Secondary objective – To the extent that different configurations of the operational framework are equally capable of ensuring the effective implementation of the monetary policy stance, the operational framework will facilitate the pursuit of the ECB’s secondary objective of supporting general economic policies in the European Union, in particular the transition to a green economy, without prejudice to the ECB’s primary objective of maintaining price stability.

Parameters and characteristics of the operational structure

The Governing Council will continue to steer the stance of monetary policy by adjusting the interest rate on deposits at the central bank and short-term money market interest rates are expected to trend close to this rate, with a margin of tolerance in terms of variability, provided that the signal on the direction that is intended to be given to monetary policy is not obscured.

The Eurosystem will provide liquidity via a wide variety of toolsamong which short-term refinancing operations (ORP) and longer-term refinancing operations with expires in three months (LTRO) as well as, at a later stage, longer-term structural refinancing operations and a structural portfolio of securities. Short-term and even three-month operations will continue to be conducted with fixed-rate auction procedures and full allotment of the requested amounts, against an extended range of guarantees, in order to satisfy the banks’ liquidity needs.

The differential between the rate charged in refinancing operations at the ECB and that on deposits at the central bank will be reduced to 15 basis points starting from 18 September 2024, compared to the current 50 basis points. The narrowing of the spread will incentivize bidding at auctions, making short-term money market rates likely to move closer to the deposit facility rate, and will limit the potential scope for variability in short-term money market rates .

In line with its monetary policy decisions, the Governing Council foresees the continuation of the process of reducing stocks of securities held in the Asset Purchase Program (PAA) and in the pandemic emergency purchase programme, PEPP).

The coefficient used to determine the requirements of compulsory reserve of banks remains unchanged at 1%. The remuneration of mandatory reserves remains unchanged at 0%.

Next review

The ECB plans to carry out a review of the key parameters of the framework in 2026 based on the experience gained in the intervening period, or earlier if necessary.