In order to maintain price stability, the Eurosystem has a set of monetary instruments at its disposal that are used to affect market rates, regulate liquidity in the banking system and signal about the general stance in monetary policy. Eurosystem monetary policy is conducted in a decentralised way: the Governing Council of the ECB make the decisions and the national central banks (NBCs) carry out most of the operations.
Key ECB interest rates
The key instrument of Eurosystem monetary policy is the interest on main refinancing operations which signals about the stance in monetary policy. Changes in the interest rate on main refinancing operations are strongly reflected in the short-term money-market rates. The main refinancing operations of the Eurosystem are conducted as variable rate tenders, applying the multiple rate auction procedure. The Governing Council sets a minimum bid rate for banks (ECB key interest rate), which signals the stance of monetary policy. In addition, the Eurosystem uses the interest rates applied to the standing facilities – the interest rates on the marginal lending facility and the deposit facility – to bound overnight market rates.
Open market operations
Money market operations play an important role in the Eurosystem's monetary policy. They are used for steering interest rates, managing the liquidity situation in the market and signalling the stance of monetary policy. As a rule, open market operations are executed by the national central banks on the initiative of the ECB. Open market operations can be divided into four categories:
- The main refinancing operations are regular liquidity-providing reverse transactions with a weekly frequency and a maturity normally of one week. Main refinancing operations play a pivotal role in fulfilling the objectives of Eurosystem’s market operations and provide the bulk of refinancing to the banking sector.
- The longer-term refinancing operations are liquidity-providing reverse transactions with a monthly frequency and a maturity normally of three months. These operations are aimed at providing counterparties with additional longer-tern financing. In these operations, the Eurosystem does not, as a rule, intend to send signals to the market.
- Fine-tuning operations are executed on an ad hoc basis with the aim of managing the liquidity situation in the market and steering interest rates, in particular in order to smooth the effects on interest rates caused by unexpected liquidity fluctuations in the market. Fine-tuning operations are normally executed by the national central banks through quick tenders or bilateral procedures. The Governing Council of the ECB can decide whether, under exceptional, fine-tuning bilateral operations may be executed by the ECB itself.
- In addition, the Eurosystem may carry out structural operations whenever the ECB wishes to adjust the structural position of the Eurosystem vis-à-vis the financial sector.
Standing facilities
Standing facilities are aimed at bounding overnight market rates and signalling the general stance of monetary policy. Two standing facilities are available to eligible counterparties on their own initiative: the marginal lending facility and the deposit facility. Counterparties can use the marginal lending facility to obtain overnight liquidity from the national central banks against eligible assets. The interest rate on marginal lending facility normally provides a ceiling for the overnight market interest rate. Counterparties can use the deposit facility to make overnight deposits with the national central banks. The interest rate on the deposit facility normally provides a floor for the overnight market interest rate.
Minimum reserves
The Eurosystem's minimum reserve system primarily pursues the monetary functions of stabilising money market interest rates and enlarging a structural liquidity shortage. The ECB requires credit institutions to hold a certain amount of minimum reserves with the national central banks. Institutions' holdings of required reserves are remunerated at the rate on the Eurosystem's main refinancing operations.