Changes to the operational framework for implementing monetary policy

13 March 2024

• 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

The Governing Council of the European Central Bank (ECB) today 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. The review of the operational framework was announced in December 2022 to ensure that it remains appropriate as the Eurosystem balance sheet normalises.

The Governing Council agreed on a set of principles that will guide monetary policy implementation in the future:

• Effectiveness: The main objective of the operational framework is to ensure the effective implementation of the monetary policy stance in line with the provisions of the EU Treaty. This is best achieved by steering short-term money market rates closely in line with monetary policy decisions. Some volatility in money market rates can be tolerated as long as it does not blur the signal about the intended monetary policy stance.
• Robustness: The operational framework needs to be robust to different monetary policy configurations as well as different financial and liquidity environments, and consistent with the use of the monetary policy instruments set out in the ECB’s monetary policy strategy. The Eurosystem intends to provide central bank reserves through a broad mix of instruments in order to offer an effective, flexible and stable source of liquidity to the banking system, thereby also supporting financial stability.
• Flexibility: The euro area banking sector is large and diverse in terms of banks’ size, business models and geographical locations. An elastic supply of central bank reserves based on banks’ needs is therefore best suited to effectively channel liquidity across the entire banking system throughout the euro area and to contribute to flexibly absorbing liquidity shocks.
• Efficiency: An efficient operational framework implements the desired monetary policy stance and does not interfere with it, respecting the proportionality principle and taking into account net side effects, including financial stability risks. Moreover, the framework should preserve financial soundness. A financially sound balance sheet supports central bank independence and allows the smooth conduct of monetary policy.
• 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 more closely linked to the implementation of monetary policy. This favours the efficient allocation of resources, an effective price discovery mechanism and the smooth transmission of monetary policy.
• Secondary objective: To the extent that different configurations of the operational framework are equally conducive to ensuring the effective implementation of the monetary policy stance, the operational framework shall facilitate the ECB’s pursuit of its secondary objective of supporting the general economic policies in the European Union – in particular the transition to a green economy – without prejudice to the ECB’s primary objective of price stability. In this context, the design of the operational framework will aim to incorporate climate change-related considerations into the structural monetary policy operations.

In line with these principles, the Governing Council agreed on the following set of key parameters and features for its operational framework:

• 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 incentivise 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 programme (APP) and the pandemic emergency purchase programme (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.

As financial markets, institutions and counterparties adapt to changes in the liquidity environment alongside the reduction of the Eurosystem balance sheet, the Governing Council will carefully monitor the evolution and distribution of excess liquidity, the formation of money market rates, the evolution of banks’ demand for reserves, and the functioning of money markets and broader financial markets within the parameters announced today. On the basis of the experience gained, the Governing Council will review the key parameters of the operational framework in 2026 and stands ready to adjust the design and parameters of the framework earlier, if necessary, to ensure that the implementation of monetary policy remains in line with the established principles. An in-depth analysis of the design of the new longer-term refinancing operations and the new structural portfolio will also be conducted.

For media queries, please contact Lena-Sophie Demuth, tel.: +49 162 2952316.

Notes

• Whereas 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, monetary policy is guided by the Governing Council’s monetary policy strategy.