In March 2024, the ECB Governing Council approved changes to the Eurosystem’s operational framework for implementing monetary policy. The Bundesbank’s economists provide an overview of the adjustments and an outlook for the review of the technical design in 2026 in the current issue of the Monthly Report. 

The Eurosystem’s operational framework for implementing monetary policy comprises the tools, instruments and procedures to be used by the national central banks in order to implement the ECB Governing Council’s decisions. The main instruments are open market operations, standing facilities and the minimum reserve system. Since 2014, non-standard measures such as asset purchase programmes (APP, PEPP) and targeted longer-term refinancing operations have been introduced to combat low inflation at the lower bound. These measures led to substantial excess liquidity and to the Eurosystem’s balance sheet expanding significantly.

Adjustment of the operational framework for implementing monetary policy

Now that these non-standard measures are being scaled back, the Eurosystem’s excess liquidity and thus its balance sheet have shrunk considerably. In May 2025, excess liquidity amounted to €2,754 billion. This means that it has declined by around one-third since its peak at the end of 2022. However, according to the Bundesbank’s experts, it remains at a highly elevated level. 

In the light of the balance sheet reduction, the ECB Governing Council concluded the review of its operational framework for implementing monetary policy, agreeing in March 2024 that the monetary policy stance would continue to be steered through the deposit facility rate (DFR). This is the interest rate that banks receive when they invest excess liquidity with their national central bank. 

The spread between the rate on the main refinancing operations (MRO) and the DFR was reduced from 50 to 15 basis points in mid-September 2024. The narrower spread is supposed to provide greater incentives for bidding in refinancing operations, so that short-term money market rates are likely to evolve in the vicinity of the DFR. According to the report, over the medium to long term, the amount of excess liquidity would therefore be determined by bank demand.

As a result of this, the MRO rate is likely to play a bigger role over the longer term compared with the DFR.

Greater importance of structural operations

The report states that structural operations, such as longer-term refinancing operations and a structural portfolio, will cover the banking system’s liquidity needs in future. The precise design and timing of these measures are still unclear. From the Bundesbank’s perspective, suitably designed structural operations will be able to cover the bulk of the banking system’s structural liquidity needs in future. However, operations like these are unlikely to be introduced until a later date because the banking system looks set to have a structural liquidity surplus vis-à-vis the Eurosystem for some years to come, the authors explain. 

Review of the operational framework in 2026

Based on the experience gained, the ECB Governing Council will review the key parameters of this operational framework in 2026, the economists write. The Bundesbank is actively monitoring the design of the operational framework and participating in the Eurosystem’s bodies. In addition, the Bundesbank analyses how the financial system develops as excess liquidity declines and consults with market participants on the effects of using monetary policy tools and instruments. According to the economists, the aim is to continue to implement monetary policy effectively and in line with the Eurosystem’s principles.