Monetary policy instruments

Market operations

Market operations play an important role in steering market rates, managing liquidity in the euro area banking system and signalling the stance of monetary policy.

The Eurosystem has five different instruments at its disposal: reverse transactions, outright transactions, issuance of ECB debt certificates, monetary policy foreign exchange swaps and fixed-term deposits. The most common among these are the reverse transactions used in collateralised liquidity-providing refinancing operations.

The Eurosystem’s open market operations can be divided into four categories:

1. main refinancing operations
2. longer-term refinancing operations
3. fine-tuning operations
4. structural operations.

Main refinancing operations are regular liquidity-providing refinancing operations executed by the national central banks with a maturity and frequency of one week. Prior to the financial crisis, the main refinancing operations were the most important monetary policy instrument used by the Eurosystem, but since the crisis their relevance has changed due to, for example, the liquidity surplus created by the introduction of new non-standard measures. As these operations mature, banks are expected to again make more active use of the main refinancing operations.

Longer-term refinancing operations are used by the Eurosystem to provide counterparties with financing with a longer maturity than the main refinancing operations. Regular longer-term refinancing operations are conducted on a monthly basis and their maturity is three months. Their interest rate is tied to the MRO rate.

The Eurosystem may also conduct non-standard longer-term refinancing operations where necessary. Examples of these are the long-term operations conducted with a maturity of 36 months in 2011–2012 and the targeted longer-term refinancing operations (TLTROs) conducted in 2014–2021 with varying terms and conditions including maturities as long as 48 months.

A special feature of the TLTROs was their built-in incentive scheme, which provided incentives for banks to increase lending to the real economy (TLTROs on the ECB website)

Fine-tuning operations are executed on an ad hoc basis with the aim of managing the liquidity situation on the markets and steering interest rates, in particular in order to smooth the effects on interest rates caused by unexpected liquidity fluctuations on the markets. The fine-tuning operations are adjusted to the types of transactions and specific objectives pursued in the operations.

Structural operations may be conducted at any time there is a need to adjust the structural liquidity position of the Eurosystem vis-à-vis the financial sector. Structural operations may be executed in the form of reverse transactions, the collection of fixed-term deposits through tenders or outright purchases or sales of securities through bilateral arrangements. The Eurosystem will introduce new structural refinancing operations and a new structural portfolio of securities once the Eurosystem balance sheet begins to grow durably again.

The planned schedule of refinancing operations is announced in advance in the calendar for the Eurosystem’s tender operations. The results of refinancing operations are published on the ECB website.

Standing facilities

The Eurosystem offers its counterparties standing facilities that comprises two instruments: the marginal lending facility and the deposit facility.

The marginal lending facility is available to counterparties if they want to borrow from the Eurosystem on an overnight basis against collateral. When using the deposit facility, banks make overnight deposits with the central bank.

Together, the interest rates of the standing facilities provide an interest rate corridor which can be used to steer interest rates and signal the stance of monetary policy. Since the financial crisis, the deposit facility rate has become the key instrument in steering short-term market rates as there has been ample excess liquidity. The ECB has decided to continue to provide so ample an amount of excess liquidity that the deposit facility rate will remain the primary policy rate.

Minimum reserve requirement

The minimum reserve requirement applies to all euro area banks, which are thus required to deposit a certain amount of funds with their national central bank. By changing the size of the requirement, the Eurosystem can influence the structural demand for central bank money: the higher the requirement, the more central bank money counterparties need to comply with it.

Banks meet their reserve requirement by holding sufficient reserves on their central bank account on average over the maintenance period. This averaging mechanism helps to stabilise the shortest money market rates. A new maintenance period always begins on the settlement date of the main refinancing operation following the monetary policy meeting of the ECB Governing Council.  With effect from September 2023, no interest has been payable on the minimum reserve holdings. Since the financial crisis, minimum reserves have become less relevant in the implementation of monetary policy, as the volume of banks' deposits at the central bank has grown with the introduction of various refinancing operations and asset purchase programmes.

Asset purchase programmes 

The monetary policy toolbox also includes asset purchase programmes, which, in addition to interest rate steering, have been used since the financial crisis especially in an environment of zero or negative policy rates.

The purchase programmes have also served to promote the effective transmission of monetary policy. Within the framework of various asset purchase programmes, the Eurosystem has acquired public debt securities, covered bank bonds, asset-backed securities and corporate bonds.

As part of the Eurosystem, the Bank of Finland has taken an active part in the design and implementation of the various asset purchase programmes. Information on the assets held by the Bank of Finland is published on the Bank of Finland’s balance sheet.