Monetary policy framework
The Eurosystem’s monetary policy framework 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, 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. Institutions subject to minimum reserve requirements may access the Eurosystem standing facilities and participate in Eurosystem open market operations based on standard tenders. For outright transactions, no restrictions are placed a priori on the range of counterparties.
Pursuant to Article 18.1 of the Statute of the ESCB, 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 assets to underlie its operations and has developed a single list of eligible collateral common to all Eurosystem credit operations.
The Governing Council of the ECB may, at any time, change the instruments, conditions, criteria and procedures for the execution of Eurosystem monetary policy operations.
Temporary 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 measures. 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 foreign currency liquidity has been offered.
In 2014, the ECB Governing Council 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)). In June 2016, the APP was expanded to include a corporate sector purchase programme (CSPP). Net purchases have been adjusted regularly, varying from an initial monthly purchase pace of €80 billion per net purchase phase to a pace of €15 billion, and were even suspended for a time. Net purchases were resumed on 1 November 2019 at a monthly pace of €20 billion. They will run for as long as necessary to reinforce the accommodative impact of the policy rates. Details in English can be found on the ECB website under the link below.
In response to the COVID-19 pandemic, a new package of measures was 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 totalling €120 billion until the end of 2020. Furthermore, on 18 March 2020, the Governing Council of the ECB adopted a temporary pandemic emergency purchase programme (PEPP), the terms and conditions of which allow it to be implemented in a more flexible fashion than the APP. As announced on 10 December 2020, the PEPP has a maximum envelope of €1,850 billion and will run until at least March 2022; reinvestments will be made until the end of 2023. Details on PEPP can be found under the link below.
The first series of TLTROs was adopted by the ECB Governing Council in June 2014 and encompassed eight operations due to mature in September 2018 with the aim of supporting lending to the euro area’s non-financial sector. In order to further boost lending, in March 2016 a second series (TLTRO-II) 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 the wake of the spread of COVID-19, and three additional operations were added on 10 December 2020. Furthermore, due to the pandemic, the Governing Council of the ECB 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 and expanded until the end of 2021. Details on the TLTRO series, longer-term refinancing operations (LTROs) and PELTROs can be found on the ECB website under the respective links below.
Since April 2015, the Eurosystem has been making securities purchased under the PSPP and CBPP3 available to the market through a securities lending programme. Furthermore, it has also been possible to borrow securities purchased under the CSPP since July 2016.
In response to the repercussions of the spread of COVID-19, the Governing Council of the ECB 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. These collateral easing measures will apply until the end of June 2022. 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. The Bundesbank has also temporarily accepted additional credit claims since 12 October 2020. Details on eligible collateral and ACCs can be found under the respective links below.
In September 2019, the Governing Council of the ECB decided to introduce a two-tier system for remunerating excess reserves in the euro area on 30 October 2019. Tiering systems like this enable central banks to exempt a certain part of commercial banks’ excess liquidity holdings from negative remuneration or to pay a slightly more attractive rate of interest on this portion. By contrast, excess liquidity surpassing the exemption allowance will continue to be remunerated at the regular negative interest rate. This ends up reducing banks’ interest expenditure on balance. The aim of this measure was to support the bank-based transmission of monetary policy. At the same time, the ECB Governing Council sought to preserve the positive contribution of negative interest rates to the accommodative stance of monetary policy and thus to the continued sustained convergence of inflation to the ECB’s aim. The two-tier system is designed in such a way that euro short-term money market rates are not unduly influenced. Details can be found in the monthly report – January 2021 under the adjacent link and on the ECB website.
On 10 December 2020, the ECB Governing Council announced that the monetary policy measures taken would contribute to preserving favourable financing conditions over the pandemic period, thereby supporting the flow of credit to all sectors of the economy, underpinning economic activity and safeguarding medium-term price stability.
All non-standard monetary policy measures are explicitly of a temporary nature and can be discontinued by the Governing Council of the ECB for monetary policy reasons. The latest press releases by the European Central Bank can be found on the ECB’s website at the adjacent link.