Monetary policy instruments

The Eurosystem uses three monetary policy instruments to influence the liquidity position of the banking sector. In normal times, these instruments help maintain price stability by steering the short-term money market rate to the key policy rate determined by the ECB.

The three policy instruments are:

  • minimum reserve requirements
  • open-market operations 
  • standing facilities

Reserve requirements

Credit institutions in the euro area are obliged to maintain a specified average amount of cash reserves – the so-called minimum reserves – with their respective national banks for successive periods of six weeks. Normally the reserve requirements contribute to create a liquidity shortage in the euro area, so that banks depend on the ECB’s liquidity-providing mechanism for their liquidity needs.

Open-market operations

These are operations through which the ECB provides refinancing to help banks  meet their liquidity needs or to withdraw surplus liquidity from the system. To protect the Eurosystem from any losses, the credit facilities are only provided against collateral. Open market operations can differ in terms of aim and regularity:

  • Main refinancing operations
    The key instrument in providing liquidity to banks. Main refinancing operations are generally conducted as variable rate tenders, on the basis of bids submitted by counterparties in competition with each other. The most competitive bids are satisfied with priority until the total amount of the liquidity to be  provided by the ECB is exhausted. Main refinancing operations are conducted on a weekly basis and have a maturity of one week.
  • Longer-term refinancing operations
    In a longer-term refinancing operation, credit institutions are enabled on a monthly basis to borrow liquidity, generally for a term of three months. 
  • Fine-tuning operations
    Fine-tuning operations allow the ECB to respond quickly and effectively to unforeseen changes in the liquidity supply in the money markets, which can lead to undesirable movements in interest rates.
  • Structural operations
    Structural operations can be carried out to influence the structural liquidity position of the euro-area credit institutions. The latest information on the main and longer-term refinancing operations is posted on the ECB website.

Standing facilities

Standing facilities allow credit institutions, on their own initiative, to either borrow liquidities (until the next morning) from their national central banks using the marginal lending facility, or to deposit excess liquidities with their national central banks using the deposit facility.

Marginal lending facility
The purpose of the marginal lending facility is to provide additional liquidity, against collateral, to credit institutions which are unable to meet their liquidity needs in the money market. The interest rate paid on these overnight loans is called the marginal lending rate. This interest rate usually exceeds the minimum bid rate by 100 bps and thus serves as a de facto ceiling on short-term money-market rates.

Deposit facility
The deposit facility enables credit institutions to deposit excess liquidity with their national central banks overnight. The interest rate paid on these deposits is called the deposit rate. The deposit rate is typically 100 bps below the minimum bid rate and thus serves as a de facto floor to short-term money-market rates.

More information

A general description of the Eurosystem monetary policy instruments is provided in the document 'The monetary Policy of the ECB'.