In order to maintain the primary objective of price stability, the Eurosystem has at its disposal a set of monetary policy instruments that are used to affect market rates, regulate liquidity in the banking system and signal the general stance of monetary policy. The three monetary policy instruments at the disposal of the Eurosystem to achieve its objectives are:

• Open Market Operations
• Standing Facilities
• Minimum Reserves

Open Market Operations

Open market operations are used to steer short term interest rates, manage the liquidity situation in the market and signal the stance of monetary policy. Eurosystem open market operations can be divided into the following four categories:

• Main refinancing operations (MROs) are regular, liquidity-providing reverse transactions with a weekly frequency and maturity of one week. They are executed by the national central banks (NCBs) on the basis of standard tenders according to a pre-defined calendar. These provide the bulk of refinancing to the financial sector.

• Longer-term refinancing operations (LTROs) are liquidity-providing reverse transactions with a monthly frequency and normally with a maturity of three months. They are executed by the NCBs on the basis of standard tenders according to a pre-defined calendar. These operations are aimed at providing counterparties with additional longer-term liquidity. In these operations the Eurosystem does not as a rule intend to send signals to the market and therefore acts as a rate taker.

• Fine-Tuning Operations are executed on an ad-hoc basis to manage the liquidity situation in the market and to steer interest rates. They aim to smooth the effects of unexpected liquidity fluctuations in the market. Fine-tuning operations are primarily executed as reverse transactions, but may also take the form of outright transactions, foreign exchange swaps and the collection of fixed-term deposits. They are normally executed by NCBs through quick tenders or bilateral procedures.

• Structural Operations can be carried out by the Eurosystem through reverse transactions, outright transactions or the issuance of debt certificates. They are executed to adjust the structural position of the Eurosystem vis-à-vis the financial sector (either on a regular or non-regular basis). Structural operations in the form of reverse transactions and issuance of debt instruments are carried out by the NCBs through standard tenders. Structural operations in the form of outright transactions are executed through bilateral procedures.

As for the type of instruments used, reverse transactions are the main open market instrument of the Eurosystem and can be applied to all the above four categories whereas debt certificates may be used for structural absorption operations. In addition the Eurosystem has three other instruments available for the conduct of fine-tuning operations: outright transactions, foreign exchange swaps and the collection of fixed term deposits.

Eurosystem open market operations are normally conducted in the form of tenders. These can either be standard or quick tenders. The procedures for both types of tenders are identical except for the time frame within which they are conducted and the range of counterparties involved in them. Tenders can be either of a fixed rate (volume) or variable rate (interest) nature. In a fixed rate tender the European Central Bank (ECB) specifies the interest rate in advance and participating counterparties bid the amount of money they want to transact at the announced fixed rate. In a variable rate tender counterparties bid both the amount and the interest rate at which they want to transact with the NCB. Allocation is decided upon the competitiveness of the bids.

Standing Facilities

Standing facilities are aimed at providing and absorbing overnight liquidity, signalling the general monetary policy stance and binding overnight market interest rates. Standing facilities are administered in a decentralised manner by the NCBs. Subject to the fulfilment of certain operational access criteria, counterparties can, upon their own initiative make use of two standing facilities, namely:

• The marginal lending facility which may be used when counterparties need to obtain overnight liquidity from the Central Bank of Malta against eligible collateral. Under normal circumstances there are no credit limits or other restrictions on counterparties access to this facility apart from the requirement to provide sufficient underlying assets. The interest rate on the marginal lending facility, set at one percentage point above the Minimum Bid Rate normally provides a ceiling for the overnight market interest rate.

• The overnight deposit facility which may be used to make overnight deposits of excess liquidity with the Central Bank of Malta. Again, under normal circumstances there are no deposit limits or restrictions on counterparties’ access to this facility. The interest rate on the deposit facility, set at one percentage point below the Minimum Bid Rate normally provides a floor for the overnight market interest rate.

Minimum Reserves

The ECB requires credit institutions established in the euro area to hold deposits on accounts with their NCB. The Eurosystem’s minimum reserve system primarily pursues the following monetary functions:

• Stability of money market interest rates as reserve requirements serve as a buffer for banks’ liquidity shocks, since banks need to fulfil the reserve requirement only on average over the maintenance period.

• Creation or enlargement of a structural liquidity shortage as reserve requirements ensure a certain level of liquidity deficit in the banking sector for the Eurosystem to operate efficiently as a supplier of liquidity.

The reserve requirement of each institution is determined in relation to the reserve base. Balance sheet data referring to the end of a given calendar month is used to determine the reserve base for the maintenance period starting in the calendar month two months later. The remuneration rate on reserve holdings corresponds to the marginal rate (verified according to the number of calendar days) of the main refinancing operations during the reserve maintenance period.

The ECB discloses online the reserve maintenance period calendar for each year.

The Central Bank of Malta also publishes an indicative calendar for minimum reserve requirements procedures, indicating the time limits for notification and acknowledgment by counterparties to the Central Bank of Malta on the data relevant to minimum reserves.

PUBLICATIONS ON MONETARY POLICY

The ECB website contains additional information on monetary operations in the euro area. The following publications describing monetary policy in greater detail are available for downloading:

1. The Monetary Policy of the ECB. (1,125kb)

2. The Implementation of Monetary Policy in the Euro Area; General Documentation on Eurosystem Monetary Policy Instruments and Procedures. (893kb)

3. Central Bank of Malta Directive No. 8 on the Documentation on Monetary Policy Instruments and Procedures. (3,023kb)