Eurosystem Monetary Policy Instruments and Money Market
The Money Market and Monetary Policy
The European Central Bank and monetary policy only. Since 1 January 1999, monetary sovereignty in eleven EU Member States was transferred to the Economic and Monetary Union (EMU) and to the European System of Central Banks (ESCB). The primary and ultimate objective is to maintain price stability, and monetary policy should be designed to achieve that objective. Price stability should be understood as a medium-term aim; monetary policy should not respond to every specific shock or unforeseen social event, accepting normal short-term volatility in inflation.
Monetary Policy Instruments
The monetary policy instruments are the means available to the Eurosystem and national central banks to provide liquidity in regular markets and to influence financial conditions so as to achieve price stability.
The Eurosystem has three groups of instruments:
Open Market Operations
These are operations in financial markets initiated by the central bank in order to inject or absorb market liquidity; they are the main instrument of monetary policy. Operationally, the main financing operations are used to control interest rates and money market liquidity. These are cash transactions: liquidity-providing injection instruments and liquidity-absorbing reverse transactions. The Eurosystem conducts these operations with credit institutions and national central banks through standard auctions with weekly periodicity and various maturities.
Standing Facilities
Standing facilities are single-day monetary policy operations offered by national central banks that allow institutions an option to obtain or place overnight liquidity at any time. There are two types:
- Marginal lending facility: allows institutions to obtain one-day credit at a predefined marginal lending rate against eligible collateral.
- Deposit facility: allows institutions to make overnight deposits remunerated at a predetermined deposit rate.
Standing facilities serve to keep market rates within a corridor defined by the deposit facility rate (floor) and the marginal lending rate (ceiling). The interest rates applied to these facilities are considered the official interest rates of the Eurosystem.
Minimum Reserves
Minimum reserves are deposits that counterpart institutions must maintain with the national central banks. They are an instrument of monetary policy that affects the structural liquidity needs of the market and stabilizes short-term interest rates. Minimum reserves are calculated by applying a reserve coefficient — e.g., 2% — to month-end balances of certain liabilities of credit institutions with maturities of less than two years to form the so-called bank reserves.