Europe | The ECB redefines its monetary operations

Summary

A few days ago, the European Central Bank (ECB) announced the first revision of its operational framework, designed to guide short-term interest rates into line with its monetary policy decisions and provide liquidity in a context of gradual balance sheet reduction.

Key points

• Key points:
• Post-pandemic inflation, the normalization of monetary policy and the need to begin withdrawing these extraordinary measures have prompted the ECB to reassess and adjust its operating framework, thus mapping the key elements of its future monetary strategy. Principally, the deposit facility interest rate will continue to be the main monetary policy rate.
• In an effort to foster greater activity in money markets and improve the transmission of monetary policy, the spread between the main refinancing rate and the deposit facility interest rate will be reduced to 15 basis points, from the current 50 basis points, as of September 2024.
• The liquidity provision will be diversified, combining short-term credit operations with traditional longer-term (three-month) refinancing operations. Both types of transactions will continue to be executed through fixed-rate auction procedures with full allocation.
• The ECB has also announced the introduction of new long-term structural refinancing operations and a structural portfolio of securities—bond purchases—at a later stage, once the Eurosystem's balance sheet begins to expand in a sustainable manner.
• It has also decided that the reserve ratio for determining banks' minimum reserve requirements will remain unchanged at 1%, and reserve remuneration will remain at 0%, after speculation that it could be raised to 2%.

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