Monetary Policy

Monetary policy instruments

The Eurosystem uses a number of monetary policy instruments approved by the Governing Council of the European Central Bank (ECB) to achieve its monetary policy objectives. These instruments steer short-term interest rates, manage the liquidity situation in the banking system, as well as signal the general stance of monetary policy.

The Eurosystem has three standard monetary policy instruments at its disposal, which are:

  • Open market operations

Open market operations play an important role in steering interest rates, managing the liquidity situation in the market, and signalling the monetary policy stance. They are initiated by the ECB and are conducted against collateral. There are four types of open market operations, which differ in terms of objective, regularity and procedure.

Main refinancing operations (MROs) are conducted on a weekly basis with a maturity of one week. They are normally executed by national central banks through bids and according to a pre-specified calendar. In normal times, these operations provide the bulk of liquidity to the financial sector and play a crucial role in fulfilling the objectives of the Eurosystem's open market operations. In October 2008 the ECB introduced a system of full allotment whereby all bids placed under this facility were met at a fixed rate announced by it.

Longer-term refinancing operations (LTROs) are conducted with a monthly frequency and a maturity of three months. They aim to provide counterparties with additional, longer-term refinancing. LTROs are also conducted at irregular intervals or with other maturities if exceptional circumstances warrant. In recent years, the ECB has indeed conducted a number of LTROs with maturities of more than three months and applied the full allotment procedure. All LTROs are executed by national central banks on the basis of standard tenders and according to a pre-specified calendar. These operations assumed particular importance during the global financial crisis which began in late 2007.

Fine-tuning operations can be conducted on an ad hoc basis to smooth the effects on interest rates caused by unexpected liquidity fluctuations.

Structural operations can be conducted whenever the ECB wishes to adjust the liquidity position of the Eurosystem vis-à-vis the financial sector.

  • Standing facilities

Standing facilities provide and absorb overnight liquidity, signal the general monetary policy stance, and bind overnight market interest rates. There are two standing facilities which credit institutions can use at their own initiative.

The marginal lending facility is available to credit institutions to obtain overnight liquidity against collateral. The interest rate on the marginal lending facility normally provides a ceiling for the overnight market interest rate.

The deposit facility is available to credit institutions to make overnight deposits. The interest rate on the deposit facility normally provides a floor for the overnight market interest rate.

  • Minimum reserve requirements

Credit institutions in the euro area are obliged to hold a minimum amount of deposits, called minimum or required reserves, in accounts with their respective national central banks. An increase in the required reserve ratio absorbs some of the balances held by banks that would otherwise be available for lending to the rest of the economy. Thus, an increase in reserve requirements restrains monetary expansion and vice-versa. The reserve requirement for each institution is determined as a proportion of certain liability items on its balance sheet.

The Eurosystem’s monetary policy instruments are designed to be operationally efficient and consistent with the principles of a market-oriented economy. They also aim to ensure that banks are treated equally across the euro area, irrespective of their size or location. In practice, the Eurosystem’s monetary policy operations are carried out through the national central banks of the euro area. The Central Bank of Malta, therefore, is responsible for carrying out the Eurosystem’s monetary policy operations in Malta.

Non-standard monetary policy measures

Since the intensification of the financial crisis in September 2008, the ECB introduced a number of non-standard monetary policy measures to safeguard the primary objective of price stability and ensure that the monetary policy transmission mechanism continues to work.

In July 2013, the ECB introduced forward guidance. Through forward guidance, the Governing Council of the ECB communicates its expectations about the monetary policy stance, including the key ECB interest rates and the asset purchase programmes.

As part of the non-standard measures, the Eurosystem conducts targeted longer-term refinancing operations (TLTROs) that provide financing to credit institutions for periods of up to four years. They offer long-term funding at attractive conditions to banks in order to further ease private sector credit conditions and stimulate bank lending to the real economy.

ECB Explainers