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Monetary policy instruments

The operational framework of the Eurosystem consists of the following set of instruments:

  • Open market operations
  • Standing facilities
  • Minimum reserve requirements for credit institutions
  • Forward guidance

Open market operations play an important role in Eurosystem monetary policy in steering interest rates, managing the liquidity situation in the market and signaling the monetary policy stance. Standing facilities aim to provide and absorb overnight liquidity, signal the general monetary policy stance and bound overnight market interest rates. Last but not least, the Eurosystem requires credit institutions established in the euro area to hold minimum reserves on accounts with the national central banks. The intent of the minimum reserve system is to pursue the aims of stabilizing money market interest rates and creating (or enlarging) a structural liquidity shortage. Forward guidance provides information about its future monetary policy intentions which helps to achieve the main objective.

The Eurosystem monetary policy framework serves to ensure the participation of a broad range of eligible counterparties. An institution may access the Eurosystem’s open market operations based on standard tenders and standing facilities only through the national central bank of the Member State in which it is established. For other open market operations, a national central bank may select counterparties from among the Eurosystem monetary policy counterparties.

Liquidity management

Eurosystem liquidity management means supplying to the market the amount of euro liquidity consistent with a desired level of short-term interest rates. This is achieved through open market operations and requires daily analysis and forecasting of the liquidity situation in the euro area. The liquidity needs of the banking system result from the minimum reserve requirements imposed on euro area credit institutions and from autonomous factors, which are normally beyond the direct control of the ECB. The most important autonomous factors are banknotes in circulation and government deposits with some national central banks.