Monetary policy decisions and operational framework for monetary policy implementation

The monetary policy decisions of the ECB's Governing Council concern the key interest rates and the operational framework for the implementation of the euro area monetary policy.

By such decisions, the Governing Council signals its monetary policy stance and seeks to steer interest rates and manage the liquidity situation in the interbank market.

For instance, reducing the key interest rates and easing the terms of the operational framework make monetary policy in the euro area more accommodative. This means that businesses  and citizens can borrow funds from banks at a lower cost, which supports consumption, investment and the macroeconomic environment.

The  Governing Council of the ECB meets every six weeks to take its monetary policy decisions. The Governor of the Bank of Greece participates in the meetings in a personal and independent capacity (ad personam participation).

Eurosystem key interest rates

Monetary policy decisions primarily concern the key interest rates.

The ECB’s Governing Council sets three key interest rates:

  • the interest rate on the main refinancing operations: it is the interest rate that commercial banks pay when they borrow funds from the Eurosystem for one week. In exchange, banks must provide adequate collateral, for instance government bonds, to guarantee that funds will be paid back;
  • the interest rate on the deposit facility: it defines the interest that commercial banks receive to make overnight deposits with the central bank;
  • the interest rate on the marginal lending facility: it is the interest rate that banks pay when they borrow from the Eurosystem overnight. In this case as well, banks must provide collateral to guarantee that funds will be paid back.

The rate on the deposit facility and the rate on the marginal lending facility define a corridor for the overnight money market interest rate at which banks lend to each other in the unsecured overnight interbank market of the euro area. The deposit facility rate acts as the floor of this corridor and the marginal lending facility rate acts as the ceiling.

The operational framework for the implementation of monetary policy

The ECB’s Governing Council also takes decisions on the operational framework for the implementation of the Eurosystem’s monetary policy, namely the instruments, the general rules and procedures for the conduct of monetary policy operations. The standard operational framework of monetary policy consists of a set of instruments through which the Eurosystem:

  • conducts open market operations to provide liquidity to counterparties;
  • offers standing facilities which are aimed at providing or absorbing overnight liquidity; and
  • requires credit institutions to hold minimum reserves on accounts with national central banks.

When deemed necessary, the Governing Council of the ECB adjusts the instruments, terms, criteria and procedures of the operational framework for monetary policy in order to influence funding conditions and the liquidity situation of the banking system.

Moreover, since 2008 the Eurosystem has introduced several non-standard monetary policy measures, most notably the expanded asset purchase programme, to complement   its standard operational framework.

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