Monetary policy framework
The monetary policy framework of the Eurosystem comprises the general rules for Eurosystem monetary policy instruments and procedures, which are used to implement decisions made by the Governing Council of the ECB on monetary policy in the euro area in a decentralised manner. Its monetary policy operations are executed under uniform terms and conditions in all Member States. Eurosystem monetary policy is implemented in Germany by the Deutsche Bundesbank in collaboration with German counterparties.
The monetary policy framework consists of a set of monetary policy instruments. The Eurosystem conducts open market operations (primarily monetary policy refinancing operations), offers standing facilities and requires credit institutions to hold minimum reserves on accounts in the Eurosystem. Its monetary policy framework is formulated with a view to ensuring the participation of a broad range of counterparties. Credit institutions subject to minimum reserve requirements may access the Eurosystem standing facilities and participate in Eurosystem open market operations based on standard tenders.
Pursuant to Article 18.1 of the ESCB Statute, all Eurosystem credit operations (i.e. liquidity-providing monetary policy operations and intraday credit) have to be based on adequate collateral. The Eurosystem accepts a wide range of collateral for its operations and has compiled a single list of eligible collateral common to all Eurosystem credit operations.
The ECB Governing Council may, at any time, change the instruments, conditions, criteria and procedures for the execution of Eurosystem monetary policy operations.
Non-standard monetary policy measures
Since the onset of the banking, financial and sovereign debt crisis in 2007, the ECB Governing Council has taken a series of non-standard monetary policy measures and has thus changed the way in which the monetary policy framework is used to implement monetary policy. Within this framework, all regular monetary policy refinancing operations are currently being conducted as fixed rate tender procedures with full allotment. In addition, the minimum reserve requirements have been lowered, the collateral framework has been expanded and liquidity has been offered in foreign currency.
In 2014, the ECB Governing Council also decided to implement temporary monetary policy purchase programmes as well as targeted longer-term refinancing operations (TLTROs) in addition to the existing monetary policy framework.
The asset purchase programme (APP) includes the third covered bond purchase programme (CBPP3), the asset-backed securities purchase programme (ABSPP) and, since January 2015, a purchase programme for bonds issued by euro area central governments, agencies and European institutions (public sector purchase programme – PSPP). Furthermore, the APP was expanded in June 2016 to include a corporate sector purchase programme (CSPP). Net purchases have been adjusted regularly, and were temporarily discontinued altogether between January and October 2019. As of 1 July 2022, no net purchases take place under the APP. On 15 June 2023, the ECB Governing Council confirmed to discontinue reinvestments under the APP as of July 2023, thereby declining the APP portfolio. Further details on the APP can be found under the corresponding link in the “Further information” section.
In response to the COVID-19 pandemic, additional measures were adopted to contain the economic fallout. In addition to the monthly purchases, on 12 March 2020 the ECB Governing Council announced a temporary expansion of net purchases under the APP until the end of 2020. Furthermore, on 18 March 2020, the ECB Governing Council adopted a temporary pandemic emergency purchase programme (PEPP), the terms and conditions of which allow it to be implemented with greater flexibility than the APP. It was announced on 10 December 2020 that the PEPP would have a maximum envelope of €1,850 billion. Net purchases under the PEPP were discontinued as of the end of March 2022 with maturing principal payments being reinvested until the end of 2024. Further details on the PEPP can be found under the corresponding link in the “Further information” section.
Via its securities lending programme, the Eurosystem makes securities purchased under certain monetary policy purchase programmes available to the market. These include the PSPP, the CBPP3 (both since April 2015), the CSPP (since July 2016) and holdings of certain asset classes in the PEPP (since March 2020).
The first series of TLTROs was adopted by the ECB Governing Council in June 2014 and comprised eight operations maturing in September 2018 aimed at supporting lending to the euro area’s non-financial sector. In order to further boost lending, in March 2016 a second series was adopted with a total of four operations, each with a four-year maturity. On 7 March 2019, the ECB Governing Council adopted a third series of TLTROs with seven operations. The terms and conditions of these operations were modified in response to the spread of COVID-19, and three additional operations were added on 10 December 2020. Furthermore, in response to the pandemic, the ECB Governing Council announced additional longer-term refinancing operations on 12 March 2020 and a new series of non-targeted pandemic emergency longer-term refinancing operations (PELTROs) on 30 April 2020, which on 10 December 2020 were extended until the end of 2021 and expanded.
In response to the repercussions of the spread of COVID-19, the ECB Governing Council decided to temporarily ease the conditions for eligible collateral on 7 April 2020, which was followed by the decision to grandfather the eligibility of marketable assets on 22 April 2020. In addition, the scope for accepting additional credit claims (ACCs) has been extended for national central banks, and many of them have made use of this option. The easing measures will now be gradually ended by March 2024. The Bundesbank, too, has been temporarily accepting ACCs from October 2020 to June 2022. Further details on eligible collateral and ACCs can be found under the corresponding links in the “Further information” section.
Owing to the negative remuneration of credit institutions’ excess liquidity until 26 July 2022, the ECB Governing Council decided in September 2019 to introduce a two-tier system for remunerating excess reserves in the euro area, effective from 30 October 2019. Tiering systems like this enabled central banks to exempt a certain part of the excess liquidity that credit institutions held with them from negative remuneration or to pay a somewhat more attractive rate of interest on this portion. The non-exempt tier of excess liquidity holdings and liquidity held at the deposit facility, on the other hand, continued to be subject to the normal negative remuneration. This reduced credit institutions’ interest expenditure. The ECB Governing Council adopted this measure to support the bank-based transmission of monetary policy, while preserving the positive effect that negative rates can have on the accommodative stance of monetary policy, and towards the sustained convergence of inflation to the ECB’s aim. The two-tier system was designed in such a way that euro short-term money market rates are not unduly influenced. Following the raising of the deposit facility rate above zero, the ECB Governing Council decided at its meeting on 8 September 2022 to suspend the two-tier system by lowering the tiering multiplier to zero. Therefore, all excess reserves will be remunerated at 0.00%. Further details on excess reserves can be found under the corresponding link in the “Further information” section.
At its meeting on 21 July 2022, the Governing Council approved the creation of a transmission protection instrument (TPI). The instrument is designed to support an effective transmission of the monetary policy stance and to ensure the singleness of monetary policy across the euro area.
Please refer to the ECB’s latest press releases for more information.