Monetary policy

Instruments of the Eurosystem

In order to achieve its primary objective, i.e. price stability, the Eurosystem manages the Eurozone monetary policy through a series of instruments and procedures which make up its operational framework.

Decisions regarding monetary policy are made by the Governing Council of the European Central Bank (ECB) and are implemented by the national central banks of the countries comprising the Eurozone.

Monetary policy is implemented under uniform criteria that are valid for all by using three instruments which are accessible to the financial institutions in the Eurozone under exactly the same conditions:

1. Open market operations

These make it possible to steer interest rates, manage market liquidity and guide monetary policy.

They are divided into four categories:

• Main refinancing operations

  These are regular liquidity-providing reverse transactions with a frequency and maturity of one week, executed by the national central banks on the basis of standard tenders.

  They are the main source of financing for the credit system within the Eurosystem framework.

• Longer-term refinancing operations

  These are liquidity-providing reverse transactions with a monthly frequency and maturity of three months. They are executed by the national central banks by means of standard tenders.

  Their purpose is to provide counterparties with additional longer-term financing.

• Fine-tuning operations

  These are executed on an ad hoc basis to manage the liquidity situation in the market and temper the effects that unexpected fluctuations in market liquidity have on interest rates.

  The national central banks normally carry out these operations through rapid tenders or bilateral procedures.

• Structural operations

  These operations are carried out whenever the ECB wishes to adjust the structural position of the Eurosystem vis-à-vis the financial sector, on a regular or non-regular basis.

  They are carried by the issuance of debt certificates, reverse or outright transaction.

2. Standing facilities

The purpose of standing facilities is to provide and absorb overnight liquidity and control overnight market interest rates.

They are managed by national central banks in a decentralised manner.

The institutions that operate with the Eurosystem may, on their own initiative, use two types of standing facilities:

• The marginal lending facility

  It enables institutions to obtain overnight liquidity from the national central banks against collateral.

  Apart from the requirement to present adequate collateral, there are usually no credit limits or other restrictions placed on institutions to access this facility.

  The marginal credit facility interest rate normally provides the ceiling for the overnight market interest rate.

• The deposit facility

  Institutions may place overnight deposits with the national central banks.

  There are normally no limits or other restrictions placed on institutions' access to this facility.

  The deposit facility's interest rate normally provides the floor for the overnight market interest rate.

3. Maintenance of minimum reserves

This system is applicable to credit institutions in the Eurozone.

The purpose of minimum reserves is to stabilise money market interest rates and create (or enlarge) the structural liquidity deficit.

Their main characteristics are as follows:

• They are determined according to some of their balance sheet items.
• They are determined based on the average level of daily reserves over a maintenance period of one month.
• The interest rates applied to reserves are those of the Eurosystem's main financing operations.