Monetary policy

Monetary policy instruments

To achieve its primary objective of maintaining price stability, the Eurosystem has at its disposal a set of monetary policy instruments.

Open market operations

Open market operations represent the most important instrument. They serve

• to steer interest rates,
• to manage the liquidity situation in the money market, and 
• to signal the monetary policy stance. 

They can be divided into the following four categories:

• the main refinancing operations, which are regular liquidity-providing reverse transactions with a weekly frequency and a maturity of one week; 
• the longer-term refinancing operations, which are liquidity-providing reverse transactions with a monthly frequency and a maturity of, normally, three months;
• fine-tuning operations, executed on an ad hoc basis and aimed at managing the liquidity situation in the money market and at steering interest rates, in particular in order to smooth the effects on interest rates caused by unexpected market liquidity fluctuations;
• structural operations, executed whenever the ECB wishes to adjust the structural liquidity position of the Eurosystem vis-à-vis the financial sector (on a regular or non-regular basis), for example, the amount of liquidity in the market over the longer term. These operations can be conducted using reverse transactions, outright operations or the issuance of ECB debt certificates.

Standing facilities

The Eurosystem also offers standing facilities which provide and absorb overnight liquidity. Their interest rates normally provide a ceiling and a floor for the overnight rate in the money market.

Two standing facilities are available:

• the marginal lending facility, which allows counterparties (i.e. financial institutions such as banks) to obtain overnight liquidity from the national central banks against eligible assets; and 
• the deposit facility, which can be used by counterparties to make overnight deposits with the national central banks.

Minimum reserves

Finally, the Eurosystem requires credit institutions to hold minimum reserves on accounts with the national central banks. The purpose of the minimum reserve system is to stabilise money market interest rates and create (or enlarge) a structural liquidity shortage.