Eurosystem monetary policy is the Deutsche Bundesbank’s core business area. Together with the European Central Bank (ECB) and the other national central banks of the euro area – which collectively form the Eurosystem – the Bundesbank has been given the mandate to ensure price stability. The Bundesbank President is a voting member of the Governing Council of the ECB and thus takes part in the monetary policy decision-making process. In doing so, he draws, inter alia, on the expertise of the Bundesbank’s economists, financial market experts and statisticians, who also contribute to the monetary policy decision-making process within the Eurosystem by providing statistics, analyses and forecasts.
A stable currency is a precious public good. It promotes economic growth and employment and also enables savers to build up wealth securely. The Governing Council of the ECB considers that price stability is best maintained by aiming for an annual inflation rate of 2% over the medium term. The Governing Council regards this target as symmetrical, which means that it considers negative and positive deviations of inflation from its target to be equally undesirable. Inflation is measured by the rate of change in the Harmonised Index of Consumer Prices (HICP). With the help of monetary policy measures, the Eurosystem has an indirect influence on general price developments. On the one hand, it determines the cost at which credit institutions are able to borrow additional funds from and deposit excess money with the Eurosystem by setting the policy rates. On the other hand, the Eurosystem is also able to impact longer-term interest rates in a more direct way, if needed, through monetary policy securities purchases. In doing so, the Eurosystem influences market interest rates, which, in turn, affect banks’ interest rates on loans and deposits in their business with households and enterprises. As the level of lending and deposit rates plays an important role in consumption and investment decisions, monetary policy measures affect aggregate demand and, ultimately, price developments.
In implementing monetary policy, the Eurosystem has a number of tools at its disposition; these are laid down in the Statute of the ESCB. Amongst other things, Eurosystem central banks hold current accounts for credit institutions, purchase marketable assets in the financial markets and execute refinancing operations with credit institutions. In order to obtain Eurosystem loans, credit institutions must present a sufficient amount of eligible collateral in the form of qualified securities or credit claims. Moreover, the Eurosystem requires credit institutions to maintain minimum reserves on its national central banks’ accounts.
Eurosystem credit operations in the context of conducting monetary policy include monetary policy refinancing operations. Traditionally, a key instrument here are the main refinancing operations with a maturity of seven days, which are offered on a weekly basis. The interest rate for these operations – the main refinancing rate – is one of the policy rates the Governing Council of the ECB uses to determine its monetary policy stance. Since the global financial crisis of 2008, the set of tools available to the Eurosystem has continuously expanded. The main refinancing operations have become gradually less important, being replaced by longer-term refinancing operations with different maturities or terms and conditions. Sometimes, there are only offered on an interim basis. In 2009, the Eurosystem began introducing various programmes and instruments for purchasing certain asset classes for monetary policy purposes. These should strengthen the expansionary impulse of monetary policy close to the effective lower bound by regular asset purchases and/or should ensure the effective transmission of monetary policy in all euro area countries through targeted asset purchases.
The Bundesbank contributes significantly to the implementation of Eurosystem monetary policy. It manages accounts for German credit institutions, settles monetary policy refinancing operations with monetary policy counterparties, checks and manages the securities provided for these operations and purchases securities as part of monetary policy asset purchase programmes.