The Governing Council of the European Central Bank (ECB) decided on changes to the operational framework for implementing monetary policy. These changes will affect how central bank liquidity will be provided as excess liquidity in the banking system, while remaining significant over the coming years, gradually declines.
The purpose of the operational framework is to steer short-term money market rates closely in line with the Governing Council’s monetary policy decisions.
- Governing Council to continue to steer monetary policy stance by adjusting deposit facility rate (DFR)
- Liquidity to be provided through broad mix of instruments
- Main refinancing operations (MROs) to play a central role in meeting banks’ liquidity needs and continue to be conducted through fixed-rate tenders with full allotment against broad collateral
- Spread between the rate on MROs and DFR to be reduced to 15 basis points as from 18 September 2024
- Review of key framework parameters foreseen in 2026, based on experience gained in the intervening period, or earlier if necessary
“I am pleased to announce that the Governing Council has approved these changes to its operational framework, which acknowledge the significant changes in the financial system and monetary policy in recent years,” said ECB president Christine Lagarde, in a statement. “The framework will ensure that our policy implementation remains effective, robust, flexible and efficient in the future as our balance sheet normalizes.”
Key parameters and features:
- The Governing Council will continue to steer the monetary policy stance through the DFR. Short-term money market interest rates are expected to evolve in the vicinity of the DFR with tolerance for some volatility as long as it does not blur the signal about the intended monetary policy stance.
- The Eurosystem will provide liquidity through a broad mix of instruments, including short-term credit operations (i.e. MROs) and three-month longer-term refinancing operations (LTROs) as well as – at a later stage – structural longer-term credit operations and a structural portfolio of securities.
- MROs will continue to be conducted through fixed-rate tender procedures with full allotment. They are intended to play a central role in meeting banks’ liquidity needs and their use by counterparties is an integral part of a smooth implementation of monetary policy.
- The three-month LTROs will also continue to be conducted through fixed-rate tender procedures with full allotment.
- The rate on the MROs will be adjusted such that the spread between the rate on the MROs and the DFR will be reduced to 15 basis points from the current spread of 50 basis points. This narrower spread will incentivize bidding in the weekly operations, so that short-term money market rates are likely to evolve in the vicinity of the DFR, and it will limit the potential scope for volatility in short-term money market rates. At the same time, it will leave room for money market activity and provide incentives for banks to seek market-based funding solutions. The rate on the marginal lending facility (MLF) will also be adjusted such that the spread between the rate on the MLF and the rate on the MROs will remain unchanged at 25 basis points. These changes will come into effect with the sixth maintenance period of 2024, which begins on 18 September 2024.
- New structural longer-term refinancing operations and a structural portfolio of securities will be introduced at a later stage, once the Eurosystem balance sheet begins to grow durably again, taking into account legacy bond holdings. These operations will make a substantial contribution to covering the banking sector’s structural liquidity needs arising from autonomous factors and minimum reserve requirements. The structural refinancing operations and the structural portfolio of securities will be calibrated in accordance with the above principles and to avoid interference with the monetary policy stance. In line with its monetary policy decisions, the Governing Council expects the portfolios acquired under the asset purchase program (APP) and the pandemic emergency purchase program (PEPP) to continue to be run off.
- The reserve ratio for determining banks’ minimum reserve requirements remains unchanged at 1%. The remuneration of minimum reserves remains unchanged at 0%.
- A broad collateral framework will be maintained for refinancing operations.