Glossary

Monetary Policy Glossary

M

M1 

A narrow monetary aggregate that comprises currency in circulation and demand deposits maintained in MFIs and the Central Government (for example, in the Post Office or Treasury).

M2 

An intermediate monetary aggregate that comprises M1 plus deposits redeemable at notice of up to three months (short-term savings deposits) and time deposits with a maturity of up to two years (short-term time deposits) held by monetary financial institutions and central governments.

M3 

A broad monetary aggregate that comprises M2 plus marketable instruments, in particular, repurchase agreements, money market fund shares and units as well as debt securities with a maturity of up to two years issued by the Monetary Financial Institutions.

Main refinancing operation 

The main single monetary policy instrument to control interest rates and money market liquidity. It is also the main liquidity supply channel for credit institutions. It is a liquidity providing operation instrumented by reverse transactions, carried out by the Eurosystem with credit institutions and executed by the national central banks by weekly standard tenders and with a maturity of one week. The ECB usually publishes a calendar of tenders and all credit institutions meeting the general requirements to be considered a counterparty can present their bids. The minimum bid interest rate set by the ECB for each tender is the main official Eurosystem interest rate as it provides the stance for monetary policy.

Maintenance period 

The period over which credit institutions' compliance with reserve requirements is calculated. The maintenance period begins on the settlement day of the first main refinancing operation following the meeting of the Governing Council at which the monthly assessment of the monetary policy stance is prescheduled. The European Central Bank publishes a calendar of the reserve maintenance periods at least three months before start of each year.

Marginal lending facility 

A standing facility of the Eurosystem which counterparties may use to receive overnight credit from a national central bank at a pre-specified interest rate against collateral (see also Key ECB interest rates).

Minimum bid rate 

The lowest interest rate at which counterparty institutions can submit bids in variable-rate tenders corresponding to the principle financing operations. It is one of the official interest rates of the European Central Bank that reflects the direction of monetary policy.

Minimum reserve requirements 

Margin deposits that counterparties must maintain in national central banks. They are a monetary policy instrument that affects the market's structural liquidity needs and enables stabilisation of short-term interest rates. In the Eurosystem, minimum reserves are calculated by applying a ratio, currently 2%, referred to as reserve ratio or cash ratio, to the month-end balances of certain credit institution liabilities, generally for less than two year terms, which jointly form what is known as a reserve base. Said reserves must be held over a one-month period and are remunerated at Eurosystem main refinancing operation interest rates. The reserve maintenance period starts as of the settlement date of the first main refinancing operation subsequent to the Council meeting where monetary policy decisions are made. An entity is considered to fulfil the minimum reserve requirements during that month if the average daily balances in its central bank account is not less than the required amount.

Monetary aggregates 

Variables that quantify the money of an economy and which central banks normally define to carry out monetary policy analyses and to make related decisions. The Eurosystem has defined three monetary aggregates for the euro area: M1, comprised of banknotes and coins in circulation (currency in circulation) and demand deposits; M2, comprised of the liabilities included in M1 plus time deposits with a maturity of up to two years and deposits redeemable at notice of up to three months; and M3, which comprises the liabilities included in M2 plus repurchase agreements, money market fund shares and units as well as debt securities with a maturity of up to two years, issued by monetary financial institutions. The M3 monetary aggregate is the most stable, and therefore has been chosen by the Eurosystem, within its monetary policy strategy, to define a benchmark value for monetary growth.

Monetary analysis 

One of the pillars of the European Central Bank framework for the thorough analysis of risks to price stability, which is the basis of the monetary policy decisions taken by the Governing Council. Monetary analysis helps to assess medium-term trends in inflation, given the close relationship between money and prices in broad time spans. Monetary analysis takes account of the behaviour of a wide range of monetary indicators, including M3, their components and counterparties, credit in particular, as well as various surplus liquidity metrics. See also "Economic analysis".

Monetary policy 

A series of actions undertaken by the central banks aimed at controlling interest rates and amount of money, in order to influence the financial conditions of an economy and achieve certain objectives. In developed economies, the objective of monetary policy is to maintain price stability.

Monetary policy instruments 

The measures available to the national central banks to regulate market liquidity and, by influencing financial conditions, achieve price stability. The Eurosystem has three groups of instruments: Open market transactions, standing facilities and minimum reserve requirements.